The Case for Junior Capital (Part One)

It’s been a while since we felt the need to reiterate the case for junior capital.

Back in December 2015 the senior debt market was in full swing recovery from the Great Recession. Interest rates were at rock-bottom lows, and senior spreads were near their post-GFC tights. Unitranche financings were growing in popularity and size with mega-tranches, sporting leverage over seven times Ebitda for the better issuers.

“Mezz is dead,” we heard repeatedly. Not for the first time, and probably not the last.

In our four-plus decades of private debt participation and observation, this is a regular occurrence. When senior debt managers are putting extra foam on the latte, it’s assumed no one is drinking coffee black. We made that point in our first “Why Mezz Matters” column over seven years ago (link).

Long-time junior lender practitioners spoke of the benefits for all parties having junior capital layered between sponsor equity and first lien debt.