Performing Credit vs Mezzanine Credit: What Is the Difference?

Imagine a company that owes money to several different lenders. If something goes wrong, the lenders get paid back in a specific order, not all at once. Senior, performing credit usually sits near the front of that line.

Mezzanine credit sits further back, closer to the company's own owners. It gets paid after senior lenders, but before the company's shareholders, which makes it riskier than senior credit, but usually less risky than owning shares outright.

Mezzanine credit is often used by companies that need more money than a senior lender is willing to provide, filling the gap between what a bank-style lender offers and what the company's owners are willing to put in themselves.

In exchange for taking this extra risk, mezzanine lenders are usually paid a higher interest rate, and sometimes also receive a small additional right to share in the company's future growth.

Straightforward performing credit generally offers steadier, more predictable returns, with stronger protection if something goes wrong, since it is repaid first.

Mezzanine credit generally offers a higher potential return to compensate for its riskier position, since it is repaid only after other lenders, and can lose more value if the company runs into serious trouble.

For any credit investment, ask exactly where it sits in the repayment order, what happens to your money if the company struggles, and how that compares to the interest rate being offered.

A higher interest rate on a mezzanine deal is not a free reward. It exists specifically because the investor is accepting a riskier position in the repayment order.