Mezzanine capital

What the layer is for

A project financing rarely covers total investment cost. The senior piece is capped by the coverage ratio: no lender advances more debt service than cash flow carries with headroom. Whatever remains between that amount and total cost has to come from own funds, and that is where mezzanine sits.

The layer is subordinated to the bank facility and senior to equity. It therefore costs more than the senior piece and less than a share in the project itself. Common forms are the subordinated loan, the silent participation and convertible structures; the choice drives the accounting treatment and how the bank credits the layer in its own analysis.

The price and what sets it

The price is rarely just a coupon. A running rate, a deferred portion payable at repayment, and a performance-linked element are all common. What drives it is the position in the ranking and the timing: capital that goes in before planning consent and grid connection is more expensive than capital that goes in after both, because it carries a different loss profile.

When it pays

Mezzanine pays when the alternative is dearer, which happens more often than the headline rate suggests. The benchmark is not the bank facility; it is the share of the project an additional equity provider would want. Where an intermediate layer prevents shares being given away, its price is the cheaper one.

It does not pay when it is being used to bridge a funding gap that came from an optimistic model. Then it raises debt service exactly where debt service is already thin.

In practice the question arrives at the same moment every time: the project is developed, the bank offer is in, and between that offer and total cost there is a gap larger than the available own funds.

What matters for the pack at this point is the ranking, written down. Who gets paid when, which distribution locks apply, and how the layer behaves if a covenant is breached belong in one schedule that every party sees before commitment. An intermediate layer introduced after credit approval reliably reopens negotiations with the senior lender.

Timing matters too: capital that enters after planning consent and grid connection costs less than capital that enters before them. The order of the project steps is itself a pricing factor.