in finance, mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares. mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or preferred stock. mezzanine capital is often a more expensive financing source for a company than secured debt or senior debt. the higher cost of capital associated with mezzanine financings is the result of its being an unsecured, subordinated (or junior) obligation in a company's capital structure (i.e., in the event of default, the mezzanine financing is only repaid after all senior obligations have been satisfied). additionally, mezzanine financings, which are usually private placements, are often used by smaller companies and may involve greater overall levels of leverage than issues in the high-yield market; they thus involve additional risk. in compensation for the increased risk, mezzanine debt holders require a higher return for their investment than secured or more senior lenders. ==structure== mezzanine financings can be completed through a variety of different structures based on the specific objectives of the transaction and the existing capital structure in place at the company. the basic forms used in most mezzanine financings are subordinated notes and preferred stock. mezzanine lenders, typically specialist mezzanine investment funds, look for a certain rate of return which can come from (each individual security can be made up of any of the following or a combination thereof): * cash interest â a periodic payment of cash based on a percentage of the outstanding balance of the mezzanine financing. the interest rate can be either fixed throughout the term of the loan or can fluctuate (i.e., float) along with libor or other base rates. *pik interest â payable in kind interest is a periodic form of payment in which the interest payment is not paid in cash but rather by increasing the principal amount by the amount of the interest (e.g., a $100 million bond with an 8% pik interest rate will have a balance of $108 million at the end of the period, but will not pay any cash interest). *ownership â along with the typical interest payment associated with debt, mezzanine capital will often include an equity stake in the form of attached warrants or a conversion feature similar to that of a convertible bond. the ownership component in mezzanine securities is almost always accompanied by either cash interest or pik interest, and, in many cases, by both. mezzanine lenders will also often charge an arrangement fee, payable upfront at the closing of the transacti
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