Intermediate debt is a type of loan where the lender has a low priority claim on a company’s assets in the event of liquidation. It can be provided through subordinated debt or preferred stock, and carries higher costs for the lender due to the higher risk. Specialized lenders offer mezzanine investment funds for this type of debt.
Intermediate debt is a type of public company loan in which the lender has a particularly low claim on the company’s assets in the event it goes into liquidation before the debt is paid off. In this situation, the lender’s claim will be of lower priority to all other creditors except the holders of common shares. As a result, this type of debt tends to carry higher costs for the lender than other types of loans.
The phrase intermediate debt simply refers to the low priority of the lender’s claim on the assets and can encompass two different ways in which the loan works. One is like a subordinated debt. This means that an existing lender lends more money to the borrower, with the specific agreement that this new debt is subordinated, meaning that he does not have the same claim on the assets.
The second main way to provide mezzanine debt is through preferred stock. This differs from common shares in that their holders have a greater claim on assets and priority in receiving dividend payments. In the event of liquidation, holders of preferred shares will be entitled to receive the par value of their shares, assuming they have any money left. Only once all preferred stock holders receive this settlement payment will common stock holders have the right to get some of their money back.
In reality, most people who lend money in a form classified as intermediate debt usually receive money if the company goes into liquidation. This is because the debts that forced the liquidation will usually be so high that all assets will be consumed by claims from other creditors who have a higher priority claim. Due to this higher risk, mid-tier debt lenders often require a higher yield. This would be through higher interest payments on subordinated debt, or higher dividend payments on preferred stock. There will often be a settlement fee attached to the intermediate debt.
Because intermediate debt has such distinctive characteristics, it is often provided by specialized lenders. Some of these offer mezzanine investment funds. These are inherently riskier but with a higher potential return than many other types of mutual funds. In many cases, an intermediate debt will be set up so that all interest payments are withheld until the principal of the loan is repaid. This can be useful for businesses that borrow in this way, particularly those borrowing to alleviate cash flow problems.
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