In the fall and early winter of 1990 I spent a few months working with the commercial bankers of our Main Branch in Vancouver. My official training period was complete, and I was in limbo, waiting for a position, probably up north.
I loved it there at Royal Centre. The brisk pace of downtown was exhilarating, and the branch had some of our best and brightest colleagues of the region. But I was stuck between years of education and a real job. Fittingly, my desk was in a cubicle on the Mezzanine level - a sort of half-story between the first and second floors, neither up nor down. This platform had a balcony overlooking the busy centre lobby of our flagship downtown branch.
One hectic December afternoon the bank hired a singing group to entertain our weary clients with Christmas carols as the staff laboured to keep up with heavy seasonal volumes at the teller wickets. The singers, dressed in Dickens era garb, stood by a large festive tree in the lobby just below us and sung beautifully all afternoon, significantly brightening everyone's day.
The view and acoustic ambience from our vantage point at the balcony wall of the mezzanine floor was perfect. It was neither upstairs nor downstairs. This half-floor between floors allowed for a grand high ceiling in the main lobby which we could gaze over. It was a stunning spectacle, and for a moment I nearly reconsidered leaving all this splendour for the North.
As I leaned over the balcony I once again yearned for something real. I imagined myself climbing down the sidewall, grabbing a light fixture, and swinging across the vast lobby out the front doors. Instead I quietly blew the eraser shavings off my calculator and watched them drift on the floor below, whispering to myself... "Geronimo."
Around this time, the manager offered me a position in his prestigious branch. I was truly honoured, and seriously considered it, but declined. I had already mentally left all this grandeur to lend money in some tiny town in the nether regions of BC where the fish still swam in local rivers.
Years later a client ran up against hard times and needed an injection of cash to survive, but the bank was not willing to extend him more credit. He was stuck between a rock and a bad financial statement, but his business still had excellent potential to rebound. The owner sought out a Mezzanine Debt lender.
Like a floor between floors, Mezzanine Debt is in-between debt and equity for small business markets. A "Mezz-debt" lender will consider granting credit on generous terms, in exchange for a much higher interest rate and a share position if the loan should default.
In public markets, Preferred Shares reside in a middle ground between debt and equity, but are by no means an indication that the issuing company is in distress. Preferreds are a well-regarded method of raising funds for legitimate businesses on terms somewhere between borrowing and ownership.
Want to lend money to a bank, rather than the other way around? A little less risky than preferred shares, Capital Trust securities (also known as Hybrids) are another method of in-between financing, commonly used by banks today to satisfy regulators that they have flexible funds on hand. A Hybrid is drawn up like a bond (i.e. a loan from an investor) but when payment is due, the bank has the ability to refinance rather than repay. In exchange for the increased risk, the investor gets a guaranteed higher rate of return and a commitment that their yield will be paid before any other dividends, preferred or common.
Whatever investment floor you want to be on, remember that in an efficient market, there will always be a relationship between risk and expected return. If your financial elevator is stuck between floors, waiting for either better returns on bonds and GIC's or for more promising times in stock markets, there is probably an elevator stop on the risk continuum that suits you.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
