Law360, New York (April 23, 2009) -- With banks making fewer senior loans, and the market for traditional second-lien financing all but gone, mezzanine loans have increasingly been used to bridge the financing gap.

Though mezzanine loans originally gained popularity in the real estate context, in the past couple of years companies have turned to mezzanine lenders to provide term loans for acquisitions and other corporate needs, in larger amounts and in greater numbers than ever before.

As with all types of debt financing, mezzanine loans have been negatively impacted by the economy in recent months. Still, as these types of loans continue to be available, they can provide a helpful alternative form of financing.

Basics of Mezz Lending

But let’s start at the beginning. What exactly is a mezzanine or “mezz” loan, and how is it different from other types of loans?

Mezz loans are a distinct type of capital, situated on the middle ground between equity and senior debt. Though structured as a debt investment, mezz loans were traditionally unsecured, and in many ways were expected to look and act a lot like an equity investment. This remains the case for many real estate mezz loans even today.

However, in the corporate lending context, these days mezz lending bears little resemblance to the traditional and has expanded to include everything between senior loans and equity — from unsecured financings that closely resemble preferred stock all the way to second-lien loans that look and act much like senior credit facilities.

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