Mezzanine Finance Structures and Participations

The mezzanine financing forms at a glance

All mezzanine forms have in common the position between bank loans and equity and the subordination behind the first-rank creditors. Differences exist in remuneration, balance sheet effects and legal structure – from pure debt capital to equity-like forms of investment.

• subordinated loan: Fixed interest rate, clearly calculable – the standard form.
• profit-participating loan: Basic interest rate plus profit share, without loss share.
• Silent participation: Participation in the project sponsors, invisible to the outside; close to equity in the balance sheet.
• Entitlements to participate: securitised non-shareholder remuneration.
• Equity kicker: Success component, can be combined with any basic form.

Mezzanine participation: shaping close to equity

The term “mezzanine participation” emphasizes the equity-related side of the spectrum – such as silent partnership or profit-related structures. The more the remuneration is linked to the success of the project, the more equity-like the effect of the capital: lower current burden, but participation of lenders in profit.

For project sponsors, it is crucial that the forms of participation also work without the giving of voting rights and control. The choice follows a bank contract, balance sheet objectives and risk sharing – details on the pricing structure in the guide Equity Capital and Mezzanine Finance Interest Rates.

What form for which goal?

When it comes to maximum planning, the subordinated loan is the first choice. If the construction phase liquidity is to be spared, shareholder or success-dependent structures are suitable. Silent participation is considered for accounting policy objectives. In practice, we structure the form that fits the overall financing – and calculate the variants for your project.

Legal form of the forms

Mezzanine structures differ in their legal basis as well as their economic effects. Subordinated and profit-participating loans are loan agreements under the German Civil Code (BGB), supplemented by subordination and, where applicable, profit-sharing provisions. A silent partnership is a partnership under the German Commercial Code (HGB), in which the silent partner participates in the project sponsor’s business. Profit participation rights (Genussrechte) are contractual rights that can be structured flexibly. These distinctions affect security, termination rights, insolvency treatment and tax assessment.

For the project sponsors, it is crucial that all forms work without giving voting and control rights – the management remains in his hands. The choice of legal form therefore pragmatically follows the objectives: bank compatibility, balance sheet impact and desired risk sharing.

Which form lenders prefer

Also from the point of view of the investor, the forms have different profiles. Debt funds often work with standardized subordinated loan because they are efficient to check and manage. Family offices and entrepreneurial investors are more open to profit-related or participation-related structures because they want to participate in the success of the project. The appropriate form thus results from the interaction of project goal and investor profile – another reason why the targeted selection of the right the lender is so important.