Subordinated loans, also known as mezzanine capital, are a form of financing for companies that typically come with higher interest rates. The risk associated with this type of financing lies in the possibility of repayment, which is typically at the end of the loan term, unlike regular loans that are usually repaid on a quarterly basis. In the event of insolvency, the lenders of subordinated loans are ranked lower in priority compared to senior loans (often provided by banks), but still ahead of the company's equity capital.
The timing of interest payments and repayment varies depending on the specific terms of each investment project. You have the option to choose between cash interest and interest in kind, such as interest in the form of vouchers or other non-cash benefits. The repayment and interest schedule can also vary from project to project, ranging from quarterly, half-yearly, or annually to a bullet repayment, where the principal is repaid in full at the end of the term.
In some cases, a subordinated loan may offer a success-based interest, making it a participating subordinated loan. This means that the interest payment is linked to certain revenue scenarios or the overall success of the project. If a project offers a success-based interest, it will be clearly indicated as such.