Learn Guide
Understanding the Capital Stack (Properly)
Control, alignment, and timing across the capital stack layers.
Senior debt controls the stack
The senior lender has first priority, enforcement rights, and the ability to dictate terms for everything below them. Understanding this control is essential. No junior capital works without the senior lender's explicit consent, and that consent can come with conditions that reshape the deal.
Stack layers
Mezzanine realities
Mezzanine debt sits behind the senior, which means it absorbs losses first. Mezz providers require higher returns to compensate for this risk, and they need clear enforcement rights. If the senior lender can block or override mezz enforcement, the mezz position becomes significantly weaker.
Preferred equity
Preferred equity is not debt — it sits below all debt in the stack but above true equity. It has different tax treatment, different enforcement mechanisms, and different risk characteristics. Treating it as "just another layer of debt" is a common and costly mistake.
True equity
The borrower's equity is the foundation of the stack. Insufficient equity creates fragility — every layer above becomes more exposed to valuation movements, cost overruns, and timeline slippage.
Why behind-senior is fragile
Any capital behind the senior position is inherently fragile because it depends on two things: the senior lender's consent, and the deal performing well enough that there is enough value to service and repay all layers. When either fails, the behind-senior position is first to suffer.
Common broker errors
Assuming consent will be granted automatically. Ignoring maturity mismatches between layers. Not confirming enforcement rights for junior capital. Failing to plan for timeline slippage. Each of these creates risk that surfaces late in the process.
How credit management fixes stack risk
We validate the entire stack before submission: consent requirements, priority positions, enforcement rights, maturity alignment, and contingency plans. If the stack does not work, we restructure before approaching funds.
Key takeaway
Capital stacks fail on control, alignment, and timing. Get these right and the stack holds. Get any one wrong and the deal is fragile.
Apply this to a real deal
Why: Capital stack misalignment is a leading cause of deal failure post-approval.
Do: Confirm each alignment check for your deal's capital stack.
Output: A stack alignment score that highlights gaps to address before submission.
Capital Stack Validator
Step 6 of 8 — Validate stack alignment and control.
Senior consent confirmed for any junior capital?
Terms aligned across layers (maturity mismatch)?
Control/enforcement rights defined?
Clear plan if timeline slips (buffers/step-in)?
Security package clear and enforceable?