Question

Explain the difference between a High Yield Bond, a Mezzanine piece and a B-note? Where would you rather be in the capital stack with your risk tolerance?

Answer 1

High yield bonds are similar to mezzanine debt but lower in capital structure. Mezzanine debt offers a higher rate of return than high yield bonds which means mezzanine debt is lower in the capital structure as it yields higher risk and return.

High yield means sub investment grade but is applies to debt that could be secured, senior unsecured or subordinated. Mezzanine as a term which generally can refer to any security below 1st lien.

Mezzanine debt capital generally refers to that layer of financing between a company's senior debt and equity. Mezzanine dwbt may take the form of convertible debt, senior subordinated debt or private "mezzanine" securities. Mezzanine fills the gap between senior debt and asset based lending and equity.

The yields in the high yield market are the highest in the public bond market and reflect the non investment grade quality of the companies and the riskiness of the bonds. Mezzanine financing is a similar to the high yield market in that the loans are risky and the companies are not investment grade. The mezzanine financing is a form of high yield market for private companies that aremiddle market sized.

The size of the companies are much smaller in the mezzanine market than the high yield market.

Mezzanine financing lacks the liquidity of high yield bonds which are very liquid and traded on a daily basis.

B notes are described as a subsequently created mezzanine loan