FINANCING GUIDE
How to Model Mezzanine Debt
Mezzanine debt combines a subordinate principal claim with current-pay interest, PIK accrual, fees and exit recovery.
In this guideWhat the analysis measuresCalculation frameworkUnderwriting reviewHow to use the result
What the analysis measures
Track opening principal, new advances, current coupon, PIK interest, repayments and closing claim. PIK compounds on the contractual balance.
Calculation framework
At exit, pay senior debt before mezzanine according to priority. Cap mezzanine recovery at available proceeds rather than assuming the claim is always paid.
Underwriting review
Calculate lender IRR and MOIC from actual cash flows, including fees and recovery. A high contractual rate can coexist with a low realised return in downside.
How to use the result
Review intercreditor terms, maturity, remedies and common-equity cushion alongside the model. Legal priority matters as much as spreadsheet priority.