Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 6, 1994 TAG: 9402040026
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
Take the case of a deal with a Georgia company, a valued, longtime client of First Union's Georgia bank.
First Union isn't sharing names in this example. In some ways, the customer had outgrown the bank. It still needed five-year secured loans, but now it also required $140 million in long-term financing over 10 to 15 years.
This was for more money and for more time than First Union could commit to a single customer. Even as one of the Southeast's major institutions, First Union generally lends commercial customers $3 million to $50 million and, in some exceptional cases, up to $100 million for short periods.
Not too long ago, the client who needed more money would have turned to Wall Street for help, calling on investment firms such as Goldman Sachs and Salomon Brothers, or to money center banks such as J.P. Morgan and Chemical Bank.
This time, however, First Union identified two other banks with an interest in splitting the business. First Union kept $40 million of the deal and divided the rest between the other banks.
The customer got the financing without having to visit the unfamiliar environs of Wall Street. All three of the banks found a nice piece of business.
But it needn't have been other banks with whom First Union placed the business. It might find an outside investor willing to lend corporate capital.
In such a case, First Union earns a placement fee for acting as broker between borrower and lender, while satisfying - and keeping - its customer. Fees run from 1 percent to 3 percent of the amount borrowed.
Growth in the size of commercial loans is the reason that banks' share of the total credit market is about half of what it was in 1980, declining from 65 percent to 33 percent.
Such deals explain why First Union last month created a new entity, the Capital Markets Group. It ties together the Corporate Banking and Funds Management functions to focus on the customer.
Dan Mathis and Jerry Schmitt are the joint managing directors of the Capital Markets Group, which is composed of a dozen people working together at the corporation headquarters in Charlotte, N.C.
They are going head-to-head with the large Wall Street investment houses and major banks, including, in this region, NationsBank.
The new unit has so far handled deals for clients worth as much as $750 million.
First Union Chairman Edward Crutchfield, President John Georgius, Mathis and Schmitt are now on the road stressing the importance of the reorganization to bank employees.
The 11-city, 21-day tour included Roanoke last month, when they spoke to about 300 commercial loan officers from the region.
The purpose of the visits is to inform local bank officers about availability of the financing alternatives through the center in Charlotte. It stresses new ways for commercial loan officers to deal with large customers. Mathis estimated that about 90,000 companies in First Union's eight-state market are candidates for the creative financing services. These are large corporate customers with annual sales of $3 million to $20 million.
Many of these products are hard for the layman to understand. Many are also outside the everyday vocabulary of commercial bankers who are used to lending only their own institutions' money.
They are also relatively new in the money marketplace. Mathis said Goldman Sachs has estimated that it earns 85 percent of its income from products that didn't even exist a decade or two ago.
A few examples are:
Asset-based financing or revolving lines of credit secured by inventory, accounts receivable or other fixed assets.
Mezzanine and equity capital, which are transactions typically used to finance leveraged buyouts, company recapitalization, acquisitions and other business expansions.
Foreign exchange, or trading currencies and developing currency strategies for customers. First Union, for instance, was able to help a utility in another state deal with receivables it had accumulated in Russia.
Asset securitization, or the pooling and underwriting of receivables and other assets that are then sold as securities to investors.
Derivative products, which are used for managing interest rate sensitivity.
Syndicated loans, which are large loans originated by First Union and then distributed to other banks and institutional investors. The bank, for instance, recently lent a customer $3,350,000 by placing $50,000 each with 67 banks.
First Union has announced that it plans to apply soon for expanded capital markets powers, including the underwriting of corporate debt.
These products are not new to First Union - nor to any other large bank.
For nearly a decade, First Union had a Specialized Industries Division to deliver sophisticated corporate finance products. It provided customers with financial solutions in such fields as communications, health care, insurance, energy, leasing, finance, transportation and mortgage banking.
In March 1993, First Union established a derivatives desk to provide interest rate risk management tools to corporate customers. The company had used these instruments for about seven years in management of its own interest rate risk.
In December, First Union announced formation of a loan syndication group to assist the company's commercial lenders in originating, structuring and distributing large, complex credits for corporate customers.
Although the syndication business wasn't new to First Union either, the establishment of the syndication unit strengthened the company's ability to take the lead on large transactions.
What is new is the massive effort to make commercial loan officers in Roanoke and throughout the system aware of these alternatives for their large customers.
It also melds the existing experience of the bank's staff into a new team that can focus on serving the bank's largest customers - companies that might otherwise turn to money center banks and Wall Street.
"Commercial loan officers bring loans" to customers, Mathis said.
"We bring solutions. . . . We will be judged on how well we take care of customers."
by CNB