Mezzanine Debt Covenants

Summary

Like other financings, mezzanine deals can have positive, negative, and financial covenants. But most common in mezzanine deals are covenants found in high-yield debt deals. These covenants are mostly incurrence-based covenants (as opposed to financial maintenance covenants—note that maintenance covenants require the borrower to comply with certain financial metrics. One such example is the debt service coverage ratio or the current ratio. By contrast, incurrence-based covenants are covenants designed to limit the borrower's ability to take on additional debt or make certain payments that would be detrimental to the mezzanine provider). However, if the mezzanine facility is issued contemporaneous with a senior facility, the mezzanine facility may mirror the covenants in the senior credit facility; however, if maintenance covenants are included, they are generally 25% to 30% more permissive.