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Mezzanine Financing: Tools, Applications and Total Performance by Luc Nijs

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5

The Mezzanine Product Group and the Financial Industry

So far we have been looking at mezzanine applications in corporations where our concern was related to the dynamics of the product, the return target and the intrinsic risk embodied in the level of subordination of the mezzanine product and/or the risk nature of the transaction being financed, whether that was an acquisition, recapitalization, internationalization or otherwise. Our understanding of risk and corporate governance did the trick.

There are, however, industries where the regulator doesn't leave it completely up to the shareholders or management team to decide how the activities of the firm need to be financed. This often happens because the regulator considers that the public deserves protection when engaging with these firms and the claims they potentially have against the firms (as these firms have built up a liability towards that public). Many types of legislation try (and some manage to a certain degree) to protect the audience against potential issues which might arise at these firms.

We are talking here about the financial sector, and to a large degree as well about the insurance sector. Since they either raise raw material (deposits) from the public or insure them against certain risks and agree to provide a payment in case that risk materializes, the regulator thought it was wise to regulate how the structure of the balance sheet of those institutions should look given the type of risk they are exposed ...

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