Mezzanine debt: cost, equity kicker and Belgian lenders

Mezzanine debt is a subordinated loan, repaid after the bank and often in one go at maturity, that also gives the lender a right to buy into the share capital. It costs far more than a bank loan and far less than a fund taking equity. In Belgium, it mostly serves tickets above €2.5m.

What is mezzanine debt?

It is the middle floor. At the bottom of the balance sheet sits bank debt, repaid first. At the top, the shares, paid last. Mezzanine slips in between.

Luxembourg's public business portal defines it as a medium-term subordinated loan, usually 7 to 10 years, most often repaid in one go at maturity. Three things set it apart from an ordinary subordinated loan: a higher rate, part of the interest sometimes capitalised instead of paid, and a "kicker", meaning warrants or an option to convert into shares.

The word overlaps with others. finance&invest.brussels, the Brussels regional investment company, calls its subordinated loan "also known as mezzanine debt". A specialist fund uses mezzanine for a much heavier structure. The contract decides, not the label: rank, term, return, access to the capital.

How much does mezzanine cost compared with a bank loan?

A mezzanine lender targets a return of 12 to 20% a year, according to the Swiss Confederation's SME portal. Keep that range in mind. It breaks down into three parts, and the third is the one that surprises.

I worked through a constructed example: €1m over 6 years for an SME worth €10m at exit. Typical mezzanine: 9% cash interest each year, 3% capitalised interest (PIK), and warrants worth 4% of the capital. Against it, the Wallonie Entreprendre subordinated loan, priced at the bank's rate minus 2%, with a floor at the swap rate (IRS) for the term plus 1.25%: I used 3.75%, assuming an IRS of 2.5%. And a fund taking 20% of the capital for the same million.

In percentage terms: in this scenario, mezzanine costs more than the equity fund. It takes only 4% instead of 20%, but it is paid in cash, every year, whatever happens. If the company is worth €20m at exit, the order flips: the fund collects €4m, the mezzanine about €1.53m.

The public subordinated loan is not mezzanine. It has no kicker, it is capped at €1m per project and it requires a joint bank loan of at least the same amount. But for a mid-sized SME, it is often the instrument that plays the part.

What is the equity kicker, and how much capital do you give up?

The kicker is the slice of growth the lender keeps for itself. It takes the form of warrants exercisable at a price set at signing, or an option to convert part of the loan into shares.

It weighs more the better the company does. In the example above, 4% is worth €400,000 at €10m and €800,000 at €20m. The stake you give up is invisible on signing day. So price it at three exit values.

Four points to get in writing:

• the maximum percentage of fully diluted capital the warrants can represent;
• the warrants' exercise price, set on today's valuation and not on the exit valuation;
• the right to buy the warrants back from the lender at an agreed price if the loan is repaid early;
• what happens to the warrants on a full sale: tag-along, or buy-out by the acquirer at the same price per share.

Above 10% of the capital, I no longer call it debt with a bonus. It is a minority shareholder that has secured a lender's rank.

Who provides mezzanine in Belgium, and from what ticket?

Few players, and nearly all above €2.5m. The terms below are those published by each funder or reported by the specialist press, with the date of the check.

Mezzanine Partners 2 is registered with the FSMA, the Belgian financial markets regulator, as a small self-managed Belgian alternative investment fund, since 20 February 2018, in Brussels. Its rate is not published. Nor is Muzinich's.

ORSA, this site's featured partner, publishes the only Walloon product that resembles SME mezzanine: a partly variable return indexed to EBITDA, reserved for profitable companies. It carries no warrants; conversion into capital at maturity is by mutual agreement, according to the page checked on 15 October.

Mezzanine or unitranche: what is the difference?

Unitranche merges senior and subordinated debt into a single loan, from a single lender, at one blended rate. No intercreditor agreement to negotiate, one counterpart. The debt fund Kartesia granted one in 2021 to P. Van De Velde, a Belgian packaging group, to refinance its existing debt.

Mezzanine keeps two floors and two lenders. The bank stays in first rank. It is the most common structure when an SME already has a bank behind it and wants to keep it.

When does mezzanine make sense?

To compare the invests and funds active in Wallonia and Brussels on these instruments, the SME fund comparison and the ranking list their published tickets.

Three regions, three front doors

In Flanders, mezzanine has an identifiable public player: PMV, the Flemish regional investment company, co-founded Mezzanine Partners in 2014. In Wallonia, there is no public mezzanine fund in the strict sense. The role is filled by the Wallonie Entreprendre subordinated loan, the provincial invests and, on the private side, ORSA. In Brussels, finance&invest.brussels uses both words for the same product.

A Walloon SME with a site in Flanders can knock on both doors. The difference between a subordinated loan and mezzanine shows in the contract, not in the brochure. The final structure is decided with your accountant and a lawyer: a badly drafted kicker is paid for on the day of the sale.