AUSTRIA Law and Practice Contributed by: Philipp Baubin and Stefan Weber, Weber & Co
3.2 Mezzanine/Payment-in-Kind (PIK) Loans In Austrian acquisition finance, mezzanine and payment-in-kind (PIK) loans are commonly used to bridge the gap between senior debt and equity. These instruments are particularly attrac- tive in LBOs, where flexibility in repayment and structural subordination are essential to preserv- ing the senior lenders’ position. Mezzanine or PIK loans are typically provided in the form of unsecured or subordinated loans ( Nachrangdarlehen ) and issued at the holdco level. They sit above the operating or acquisition vehicle in the group structure. This creates struc- tural subordination, meaning that in the capital structure mezzanine lenders rank behind senior lenders in terms of access to assets and cash flow, but above equity holders. The intercredi- tor agreement clarifies the structural relationship between mezzanine creditors and other credi- tors by way of contractually subordinating the claims of the mezzanine creditors. The holdco is usually funded by equity and mezzanine, while the senior loans are raised at the level of the opco. In PIK loans, instead of paying interest in cash, the borrower may capitalise interest, adding it to the principal, which defers actual payment until maturity or refinancing. This structure eases short-term cash flow pressure on the operating business, which is a key consideration in highly leveraged deals. In both mezzanine and PIK loans, security and guarantees are generally not provided by the opco or its subsidiaries, both to preserve the priority of senior lenders and to comply with Austrian capital maintenance rules.
debt must be paid back first before other credi- tors receive payment. Senior loans are often arranged either as bilat- eral facilities for smaller transactions or as syn- dicated loans in larger deals. In most cases, the financing includes a term loan to fund the acqui- sition and a revolving credit facility for the ongo- ing working capital needs of the borrower group (including the target). The various tranches usu- ally have different maturities. Senior loans are typically collateralised by assets. The lending is usually made directly to the operating company or the acquisition vehicle (opco structure), giving lenders access to the cash flow and enabling them to take direct security over assets. Holdco lending, where senior financing is granted on the level of the operating or acquisition vehicle in the group structure, is generally avoided by senior lenders, as it is structurally subordinated and offers less direct recourse in enforcement scenarios. A key feature of senior loan structures is a comprehensive Austrian law security package, typically including share pledges, account and receivables assignments, asset and IP pledges, and, where applicable, real estate mortgages. In syndicated loan transactions, these securities are typically held by a security agent on a parallel debt basis, which ensures enforceability under Austrian insolvency law. Guarantees are com- monly required from material subsidiaries. All securities must comply with strict capital main- tenance rules in Austria. This means upstream or cross-stream guarantees must offer a demon- strable corporate benefit to the guarantor and be subject to appropriate limitations. Senior loans typically have the lowest cost of capital compared to other tranches in the capital structure.
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