A type of mezzanine capital in which the mezzanine borrower is not required to issue warrants, options, or conversion rights to the mezzanine lender (mezzanine capital provider). These instruments usually provide less of a cash interest coupon and a much larger pay-in-kind (PIK) return. The higher PIK return is a source of risk-adjusted income which, along with the fixed-payment component, ranks before stockholders’ payout in terms of priority. The main advantages of the warrantless mezzanine capital are:

• It results in a lower all-in effective cost of capital than a standard mezzanine capital.
• It never dilutes the equity interests of stockholders.
• It is particularly a flexible mode of financing as mezzanine borrowers can opt for prepayment of the return component.
• Finally, unlike warrant-based mezzanine capital, it helps reduce the debt service cost the mezzanine funding because it is tax deductible (both its components, the cash interest and PIK expense, are tax deductible).