Mezzanine Capital: Forms, Cost and Balance Sheet Treatment

Mezzanine capital is not a legal term but a collective name for subordinated capital sitting between equity and debt. It counts as balance sheet equity only where all four criteria in AFRAC 40 Rz (8) are met cumulatively — the market-standard subordination to the bank alone is not enough. Published prices exist only for state-backed programmes: the German Mikromezzaninfonds III costs 8.0 per cent fixed plus a maximum of 2 per cent profit-linked. For Austria there is no programme with published terms at all.

How a structured, discreet search works in practice is described under finding an investor.

Owners who look at mezzanine usually do so for one of two reasons. Either equity is missing for a growth financing, or a successor buying the business needs the layer between the bank loan and his own money.

In both cases the same promise is sold: capital without giving up shares, which strengthens the balance sheet. The first half of the promise is true. The second is true less often than the brochures suggest.

This article sorts the instruments, tests the equity effect against the primary sources, lists the terms that are actually published, and says plainly where no data exists.

Mezzanine is not a legal term

The term appears nowhere in the German HGB (commercial code), the Austrian UGB (business code), the AktG (stock corporation act), the KStG (corporation tax act) or the InsO (insolvency code). There is no statutory definition, no prescribed minimum specification and no provision that turns a financing into mezzanine.

The Austrian Financial Reporting and Auditing Committee avoids the word. AFRAC 40 speaks instead of hybrid financial instruments. Rz (4) names them expressly: "Beispiele für hybride Finanzinstrumente sind Genussrechte, stilles Gesellschafterkapital, partiarische Darlehen und Perpetual Bonds."

The list of instruments is therefore not a marketing construct but something set out in a professional pronouncement. Four forms, four different sets of legal consequences.

Instrument	Short classification	Detail
Silent partnership capital	internal partnership with a profit share, no register entry	silent partnership
Genussrecht (participation right)	purely contractual, terms freely structurable	participation rights
Partiarisches Darlehen (profit-participating loan)	loan with profit-linked remuneration, no common purpose	silent partnership
Nachrangdarlehen (subordinated loan)	loan with a subordination undertaking, no profit share	subordinated loans
Perpetual bond	undated bond with no final maturity	named in AFRAC 40 Rz (4)

The WKO (the Austrian Federal Economic Chamber) describes mezzanine as a hybrid between equity and debt: unsecured, with profit-linked interest, subordinated, and with a term of four to eight years. Typical volumes lie between EUR 500,000 and EUR 7.5 million.

The WKO names growth and changes of ownership as the use cases — and expressly excludes start-ups. On the growth side, growth capital sets out the alternatives; on the succession side, financing an MBO does the same.

Equity treatment: four criteria, and all of them

This is where the popular story falls apart. Mezzanine is not equity because it is subordinated. It is equity where four conditions are met at the same time.

AFRAC 40 in its version of 10.09.2024 requires, for presentation as equity: subordination, capital maintenance in respect of the remuneration, capital maintenance in respect of repayment, and the absence of a fixed term. Rz (8) puts it in terms: "Diese Kriterien sind nachfolgend definiert und kumulativ zu erfüllen."

One note on the sources: TPA states three criteria in its commentary, while the primary source names four. The primary source governs. Whether AFRAC 40 replaces KFS/RL 13 is described inconsistently by GRS and TPA and cannot be asserted as settled.

First application under Rz (37) is for financial years beginning after 31.12.2024. Presentation follows § 224 Abs 3 lit A UGB.

The decisive detail is in Rz (10): "Nicht ausreichend ist eine vertraglich vereinbarte Nachrangigkeit gegenüber nur einzelnen Gläubigern oder einer Gruppe von Gläubigern." Subordination agreed in favour of individual creditors or a group of creditors is not enough.

That is precisely the market standard. Mezzanine normally ranks behind the acquisition bank, not behind all creditors. This relative subordination does not satisfy the criterion — and equity presentation fails, whatever the paper is called.

Point	Austria	Germany
Standard	AFRAC 40, version of 10.09.2024	IDW HFA 1/1994, WPg 1994 p. 419
Number of criteria	four, cumulative (Rz 8)	four, cumulative
Criteria	subordination, capital maintenance on remuneration, capital maintenance on repayment, no fixed term	subordination, performance-linked remuneration, participation in losses, longer term of two to ten years
Subordination to individual creditors	expressly not sufficient (Rz 10)	subordination required
Presentation as equity	§ 224 Abs 3 lit A UGB	§ 265 Abs 5 HGB
Presentation as debt	liability	§ 266 Abs 3 C HGB
First application	financial years from 01.01.2025 (Rz 37)	since 1994
Source position	primary source	secondary sources only

The difference between the two frameworks is striking. AFRAC 40 requires the absence of a fixed term, in effect undated capital. IDW HFA 1/1994 accepts a term of two to ten years, but requires participation in losses in return.

An instrument can therefore be presented as equity-like in Germany and not in Austria. In cross-border structures this is regularly overlooked.

At the Vienna state level the point is settled in any case: the WKBG FAQ states of silent partnerships that they do "jedoch nicht als bilanzielles Eigenkapital" count — that is, they do not qualify as balance sheet equity.

The Basel III claim is wrong

One sentence from the advisory literature is remarkably persistent: that Basel III forces banks to recognise mezzanine as equity. It cannot be substantiated.

Art. 28 CRR governs which instruments a credit institution may count towards its own common equity tier 1 capital. The provision addresses the bank, not its borrowers. Nothing follows from it for how a mezzanine tranche is treated in the rating of a mid-sized company.

Anyone selling you mezzanine on that argument has either not read the provision or is relying on you not reading it.

The equity effect melts away as maturity approaches

The most robust public rating finding comes from KfW and the German banking association, dated May 2011. It concerns programme mezzanine and it is uncomfortable.

Once the remaining term falls below one year, and in some cases already below two, programme mezzanine is no longer recognised as economic equity in balance sheet analysis. The effect is therefore not static but depends on the remaining term.

In practice: the equity effect is strongest when you need it least, and weakest when refinancing is due. In the final one to two years before maturity the analysed capital structure deteriorates without anything at all having changed inside the business.

Anyone taking on mezzanine to improve a rating must therefore address the follow-on financing two years before maturity, not three months before.

Terms: only these figures are published

The table below contains only programmes with published terms. Anything else would be guesswork.

Programme	Country	Volume	Terms	Maturity
Mikromezzaninfonds III	DE	up to EUR 100,000, target groups up to EUR 150,000	8.0 % p.a. fixed (11 % nominal less a 3 % interest subsidy), plus max. 2 % profit-linked, plus a 3.5 % arrangement fee	10 years, repayment from year 7 in three instalments
MBG Schleswig-Holstein	DE	EUR 10,000 to EUR 2.5 million	4.25 to 9.00 % p.a. plus 1.50 to 2.50 %	not published
MBG Sachsen	DE	not published	years 1 to 3: 6.75 %, from year 4: from 8.4 %	not published
KfW programme 058	DE	up to EUR 500,000	not published	15 years, of which 7 repayment-free
KfW programme 077	DE	up to EUR 500,000	not published	not published
aws guarantee	AT	SME guarantee up to 80 %, max. EUR 2 million per project	arrangement fee of 0.25 % or 0.50 %, running fee of at least 0.30 % p.a.	up to 20 years, valid 01.01.2024 to 30.06.2027
EIF mezzanine fund of funds Germany	DE	EUR 600 million fund volume	currently fully invested	—

The Mikromezzaninfonds III has a fund volume of EUR 75 million and a funding period from 01.03.2025 to 31.12.2029. It is the only programme on the list whose total cost can be calculated in full from public information.

Other Mittelständische Beteiligungsgesellschaften (regional German participation companies) publish volumes but no prices: MBG Rheinland-Pfalz EUR 50,000 to EUR 1.5 million over five to ten years, MBG Sachsen-Anhalt up to EUR 1 million and in individual cases EUR 2.5 million over ten to 12.5 years, MBG Baden-Württemberg for succession cases up to EUR 750,000 and in individual cases EUR 1.5 million, MBG Brandenburg EUR 50,000 to EUR 1.5 million.

Note the order of magnitude. The published programmes cover the lower end of the mid-market. For a succession financing in the single-digit millions, none of them is sufficient on its own.

What is not published — and what does not exist in Austria at all

This section is among the most important in the article, because it marks the limit of the available information.

For private and institutional mezzanine in the mid-market, no reliable public pricing exists. Neither funds nor banks publish term grids. Any figure you find online on this point is an assertion with no verifiable data behind it.

The most frequently quoted range of 10 to 15 per cent p.a. cannot be verified. It may be accurate in individual cases. It is useless as a planning assumption, because nobody discloses the sample.

For Austria there is a second negative finding: no public Austrian mezzanine programme publishes terms. Anyone seeking mezzanine in Austria negotiates bilaterally, with no reference price.

Three Austrian programme claims that circulate in guides also need correcting.

A programme called "aws Doppelnutzen" does not exist. What is meant is aws Double Equity, with a maximum credit volume of EUR 2.5 million or a guarantee exposure of EUR 2 million; tourism is excluded.

The aws guarantee for mezzanine financings has expired. It can no longer be applied for.

The aws Mittelstandsfonds ceased its investment activity on 31.12.2020. References to it as an active source of finance are out of date.

What the contract actually says

The model agreement used by MBG Sachsen is public and serves well as a reference for what mezzanine means day to day. The relevant clauses are identified.

§ 17 contains the qualified subordination undertaking. § 12 governs consent reservations, and § 16 requires half-yearly management accounts. § 18 Abs 2 grants an extraordinary termination right. § 19 Abs 2 provides for an early repayment penalty of 2 per cent for each year or part year.

The claim that mezzanine brings capital without a say is therefore not tenable in that form. Consent reservations and half-yearly reporting are a say, even where no share in the company is transferred.

The most important finding, though, is in § 9 Abs 4 of the same agreement: the contribution does not participate in current losses. That materially qualifies the resemblance to equity, because capital at risk without loss participation is economically closer to a loan than to equity.

And "unsecured" applies only to security over assets. A personal guarantee from the shareholders is regularly a condition. Anyone who believes mezzanine keeps his private assets out of the liability chain is usually mistaken.

On the insolvency side, the German position is framed by § 19 Abs 2 InsO, § 39 Abs 2 InsO for contractual subordination, and § 39 Abs 5 InsO with the small-shareholder privilege at ten per cent or less combined with a non-managing role. The leading decision on the qualified subordination undertaking is BGH 05.03.2015 – IX ZR 133/14 = BGHZ 204, 231. The reference "BGH IX ZR 238/12" that circulates in guidance literature does not exist. In Austria, § 67 Abs 3 IO applies.

The cautionary tale of the standardised mezzanine wave

Standardised mezzanine was placed widely in a single wave and fell due in a bundle. The maturity figures are the best available evidence of what happens when a refinancing date arrives for many companies at once.

At maturity, 20 to 25 per cent of the companies were regarded as at risk of failing to refinance. That equates to 100 to 140 companies and a volume of EUR 500 to 700 million.

The median revenue of the users was EUR 48 million. It was not micro-businesses that were affected, but established mid-sized companies.

The lesson is not a warning against mezzanine, but against bullet mezzanine with no planned follow-on financing. The repayment date belongs in the plan the moment the contract is signed.

Common mistakes

Budgeting mezzanine as equity before the auditor has tested the four criteria. Presentation is decided by the contract wording, not by the product name.

Agreeing relative subordination and expecting equity presentation. AFRAC 40 Rz (10) rules out exactly that construction.

Ignoring the maturity-dependent effect. Anyone building a bank financing on a mezzanine-supported equity ratio has a rating problem in the final two years before maturity.

Using the 10 to 15 per cent range as a costing basis. It cannot be verified; cost with the terms actually offered, or not at all.

Underestimating consent reservations. A catalogue like the one in § 12 of the MBG Sachsen model reaches into investments, changes of shareholder and distributions.

Overlooking the early repayment penalty. At 2 per cent for each year or part year, early redemption becomes expensive when the remaining term is long.

Talking to only one capital provider. With no market prices available, there is no benchmark for the terms without a competing offer; how a parallel approach works is shown under finding an investor.

Choosing the instrument before the objective. Whether an atypical silent partnership, a subordinated loan or a participation right fits is decided by balance sheet effect, governance rights and exit — the contractual points are dealt with in the silent partnership agreement.

This article is not a substitute for legal or tax advice.

How IGCP helps

International German Capital Partners (IGCP) has been advising on capital raisings and succession transactions for more than 20 years, across more than 100 completed transactions, and is 100 per cent independent of banks, funds and buyers. With mezzanine, that independence is precisely the point, because there are no public reference prices for the instrument.

Structure before approach. The first question is whether mezzanine is the right instrument at all — and in which of the four forms. Whether equity presentation under AFRAC 40 or IDW HFA 1/1994 is achievable is tested in advance with your auditor, not afterwards.

Terms through parallelism. Without published market prices, a defensible price emerges only from several simultaneous conversations. What gets negotiated is the interest, the consent reservations, the reporting obligations, the early repayment penalty and the repayment path — the last of these with the maturity-dependent rating effect in mind.

Our typical remit covers companies with revenues between EUR 300,000 and EUR 15 million, with a focus on niche businesses and scalable business models in the DACH region. An IGCP process runs three to six months rather than the six to twelve common in the market. How this fits into a business succession, and what to watch for in the later settlement balance, we clarify at the same time.

Next step: send your financing structure and planned capital requirement to office@igcp.at. You will receive an assessment of whether mezzanine carries the case and which instruments are genuinely in contention.

FAQ

Is mezzanine capital equity or debt?

Legally it is debt; in the balance sheet it depends on how it is structured. Under AFRAC 40 Rz (8), subordination, capital maintenance on remuneration, capital maintenance on repayment and the absence of a fixed term must all be present cumulatively. If they are not all met, presentation as a liability is mandatory.

Why is subordination to the bank not enough for equity presentation?

Because AFRAC 40 Rz (10) expressly excludes it: subordination agreed in favour of only individual creditors or a group of creditors is not sufficient. The market-standard relative subordination to the acquisition bank therefore does not satisfy the criterion.

What does mezzanine capital cost?

Only funding terms are reliable. The Mikromezzaninfonds III costs 8.0 per cent p.a. fixed plus a maximum of 2 per cent profit-linked plus a 3.5 per cent arrangement fee; MBG Schleswig-Holstein 4.25 to 9.00 per cent p.a. plus 1.50 to 2.50 per cent. For private and institutional mezzanine in the mid-market there is no reliable public pricing.

Is the frequently quoted range of 10 to 15 per cent accurate?

It cannot be verified. There is no public source with a disclosed sample supporting that range for mid-market mezzanine. Do not use it as a costing basis.

Which mezzanine programmes exist in Austria?

No public Austrian mezzanine programme publishes its terms. The aws guarantee for mezzanine financings has expired and the aws Mittelstandsfonds ceased investing on 31.12.2020. What is available includes the aws guarantee with an SME guarantee of up to 80 per cent, and aws Double Equity with a maximum credit volume of EUR 2.5 million.

Does Basel III force banks to recognise mezzanine as equity?

No. Art. 28 CRR governs which instruments a credit institution may count towards its own common equity tier 1 capital. The provision applies to the bank, not to its borrowers, and says nothing about how a mezzanine tranche is treated in a mid-market rating.

How long does mezzanine improve a rating?

Not until the end of the term. On the finding of KfW and the German banking association from May 2011, programme mezzanine is no longer recognised as economic equity in balance sheet analysis once the remaining term falls below one year, and in some cases below two. The effect melts away towards the end of the term.