---
title: "Capital Structure"
url: "https://mahouse.world/glossary/capital-structure"
type: "glossary term"
topic: "Corporate finance"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Capital Structure

Capital structure is the mix of debt and equity that funds a company's assets — senior loans, junior and mezzanine debt, preferred and ordinary shares — and the order in which those claims are paid. It sets the cost of capital, the risk the equity bears and the room to grow; a buy-out rewrites it in a day, and for a bank or a licensed fintech the regulator has already written the lower bound.

**Also known as:** Capital stack, Funding structure, Debt-to-equity mix

## Key facts

- **Used at:** every financing decision, every acquisition (the buyer's structure and the target's), every valuation (the discount rate), and the lender's covenants
- **Binding:** yes, in the instruments — loan agreements, intercreditor deeds, share classes — and, for regulated firms, in capital rules that set minimum equity against risk
- **Typical measures:** net debt to EBITDA (leverage), debt to equity, interest cover; for banks, capital ratios against risk-weighted assets
- **Typical trade-off:** debt is cheaper than equity (interest is deductible and lenders bear less risk) until leverage makes the equity riskier and the debt dearer; the optimum is where the total cost is lowest and the covenants survive a bad year
- **Parties:** the shareholders, each class of lender, the board that sets the policy, and the regulator where there is one

## How capital structure works in practice

A company with €100m of assets can fund them with €100m of equity, or €60m of debt and €40m of equity, or any mix the lenders and the shareholders will accept. More debt raises the return on the equity when things go well — the same profit spread over less equity — and the risk of losing it when they do not, because interest is owed whatever the profit. The lenders price that risk: the first €30m of debt is cheap and senior; the next €20m is dearer and junior; beyond that, only mezzanine lenders and equity. The board's job is to find the mix that keeps the cost of capital low without making a bad year fatal.

Acquisitions are where structures change fastest. A private equity buyer replaces a founder's all-equity company with 50–60% debt overnight; a strategic buyer funds a deal with its own debt and inherits the target's. The intercreditor agreement then ranks every claim — senior first, then mezzanine, then vendor notes, then preferred equity, then ordinary — and the ranking is what decides who is paid in a restructuring.

For a licensed fintech the structure has a floor the board did not choose: regulatory capital that must be equity, held in the regulated entity, unavailable to service the group's debt. Buy-out debt therefore sits above the regulated entity and is serviced from dividends the regulator permits — a structure the regulator reviews before approving the buyer.

## Example

A payments company with €20m of EBITDA and no debt is bought for €200m. The buyer's structure: €90m of senior debt at 7%, €30m of mezzanine at 12% with warrants, €10m of vendor loan note, €70m of equity. Interest is €9.9m a year against €20m of EBITDA — cover of 2×, the lenders' floor. The regulated e-money subsidiary must hold €6m of own funds, which the structure leaves untouched in the entity; the debt is at the holding company and serviced from the subsidiary's dividends, which the regulator's approval letter caps at 80% of profit. In year two EBITDA falls to €15m: interest cover drops to 1.5×, the senior covenant is breached, the mezzanine lender's warrants become the price of a waiver, and the equity holders learn what the ranking meant. The company was worth the same €200m under either structure; the equity was worth €200m under one and €70m under the other, and the lenders' patience decided the rest.

## Common mistakes

- Leverage set on a forecast, so one bad year is a breach.
- Ignoring the ranking until the restructuring, when it is the only thing that matters.
- Debt at the regulated entity that the regulator will not let its capital service.
- Treating the target's cheap equity as free; it has a cost, and it is higher than the debt's.
- A structure that is optimal on the spreadsheet and unfundable in the market.

## Related terms

- [Senior Debt](https://mahouse.world/glossary/senior-debt.md)
- [Mezzanine Debt](https://mahouse.world/glossary/mezzanine-debt.md)
- [Leverage Ratio](https://mahouse.world/glossary/leverage-ratio.md)
- [Weighted Average Cost of Capital](https://mahouse.world/glossary/weighted-average-cost-of-capital.md)
- [Regulatory Capital](https://mahouse.world/glossary/regulatory-capital.md)
- [Leveraged Buy-Out](https://mahouse.world/glossary/leveraged-buy-out.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov