Capital Absorption Risk · Debt service
Mezzanine Debt and Subordinated Notes
Definition
For the borrower, a costly layer of capital whose interest and principal must be paid after senior debt service but before any distribution to equity, raising the total debt the project must carry. The agreed ranking behind senior debt holds in bankruptcy to the extent the subordination agreement is enforceable under nonbankruptcy law[1].
Federal law
A market and contract term. No Act of Congress defines it; the federal laws below apply as described.
- Bankruptcy Reform Act of 1978, Pub. L. 95-598, § 101 (enacting 11 U.S.C. § 510), 92 Stat. 2549. Enforces subordination agreements in bankruptcy to the same extent as under nonbankruptcy law (11 U.S.C. § 510(a)); it does not create or define mezzanine debt. Official text: govinfo.gov, U.S. Government Publishing Office.