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ACCA Strategic Professional · Advanced Financial Management · Business re-organisation

In an MBO, mezzanine finance is usually used to fill the gap between senior debt and equity. Which statement about mezzanine finance is correct?

Mezzanine finance ranks behind senior debt but ahead of equity. Because of this greater risk it carries a higher return than senior debt, often supplemented by warrants or conversion rights that give the lender some equity upside.

  1. AIt ranks behind senior debt but ahead of equity, and carries a higher return, often with warrants or conversion rightsCorrect
  2. BIt ranks ahead of senior debt and carries a lower interest rate
  3. CIt is always unsecured ordinary equity with no fixed return
  4. DIt is provided only by the target's trade creditors

Explanation

Mezzanine is subordinated to senior debt but senior to equity, so lenders demand a higher return, often including an equity kicker such as warrants. It is therefore costlier than senior debt and cheaper than equity.

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