What distinguishes Mezzanine Debt from traditional term loans?

Mezzanine debt is characterized by its ability to provide an equity stake in the company, which makes it distinct from traditional term loans. This form of financing often comes with warrants or options that allow mezzanine lenders to convert their debt into equity, offering them an opportunity to share in the company's upside potential. This feature is particularly appealing in leveraged finance as it aligns the interests of the lender with those of the equity holders, given the potential for higher returns in successful ventures.

In contrast to traditional term loans, which generally do not have an equity component, mezzanine debt is seen as a hybrid form of capital that sits between equity and senior debt in the capital structure. This unique aspect contributes to its role in financing growth and acquisitions, where lenders are looking for additional returns beyond just interest payments.

The other options do not accurately capture the distinguishing features of mezzanine debt. While some forms of mezzanine debt may involve cash payments, they are not exclusively cash-based, as they can also include interest payments in the form of additional equity or as deferred payments. Regarding risk, mezzanine debt is typically considered riskier than senior notes due to its subordinate position in the capital structure, meaning it carries a higher chance of loss if the company encounters financial difficulties. Lastly