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What is mezzanine debt?
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6th Dec 2009 by Amelia Timbers
Let's begin with the core concept. A mezzanine is the area of a theatre that is just above the ground floor, below the main balconies. A second concept is the hierarchy of capital; in a bankruptcy, the more senior debts are repaid first. Loans are repaid, then bonds (which have their own hierarchy), then preferred stock, then common stock. In the same tiered sense, mezzanine debt is the last layer of debt to be repaid before the common stock in the event of a bankruptcy or liquidation. Since in many bankruptcies, assets run out before covering all the debt, mezzanine debt and stock is at risk for losing 100% of its value. Thus mezzanine debt is regarded as risky, is generally unsecured and often comes at a higher cost than higher tiered debt that is more likely to be repaid.
Let's begin with the core concept. A mezzanine is the area of a theatre that is just above the ground floor, below the main balconies. A second concept is the hierarchy of capital; in a bankruptcy, the more senior debts are repaid first. Loans are repaid, then bonds (which have their own hierarchy), then preferred stock, then common stock. In the same tiered sense, mezzanine debt is the last layer of debt to be repaid before the common stock in the event of a bankruptcy or liquidation. Since in many bankruptcies, assets run out before covering all the debt, mezzanine debt and stock is at risk for losing 100% of its value. Thus mezzanine debt is regarded as risky, is generally unsecured and often comes at a higher cost than higher tiered debt that is more likely to be repaid.
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4th Dec 2009 In Finance
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