First Union Corp. unveiled plans this week to enter the red-hot market for collateralized bond and loan obligations.
The Charlotte, N.C., banking company this week established a new subsidiary, First Union Institutional Debt Management, dedicated to packaging CLOs and CBOs.
The products, which back a pool of investment-grade debt with tiers of leveraged loans or high-yield bonds of varying credit riskiness, have skyrocketed in popularity in recent years because they give buyers of leveraged investments a way to diversify their portfolios.
There have been 7,245 CLOs issued so far this year, a 22% rise from a year earlier. These deals were valued at $793.8 billion, up 58% from a year earlier, according to Securities Data Co.
The CBO market has enjoyed a similar bull market, rising to 7,343 new issues this year, up 22% from last year. The issues were valued at $800.8 billion, a 59% rise.
No stranger to asset securitization, First Union Capital Markets Inc., the bank holding company's securities subsidiary, began securitizing mortgages and commercial real estate loans in 1994. Mark Mahoney, a managing director and head of investment banking in the unit, will now be president of First Union Institutional Debt Management.
Mr. Mahoney said the new funds will harness some of the deal flow from First Union's high-yield and loan syndications groups. But the individual CBOs and CLOs will probably incorporate debt underwritten by several investment banks.
"They will have a diversified portfolio that is not on the high end of the risk spectrum," he said.
So far this year, First Union has syndicated 145 loans valued at $24.6 billion, ranking it 14th among loan syndicators, according to Securities Data.
First Union Capital Markets, which got power from the Federal Reserve to underwrite high-yield debt in 1995, has done five junk bond deals this year valued at a total of $580.1 million.
It was ranked 20th in the junk bond market at Aug. 26, according to Securities Data.
Mr. Mahoney said he plans to hire 12 or 13 professionals for the new unit soon.
He will report directly to Don McMullen, the executive vice president in charge of the bank's capital management group, which manages $143 billion of assets.
First Union Capital Markets will be a primary distributor of the new funds.
In February the investment banking subsidiary bought Wheat First Butcher Singer Inc., a Richmond, Va., securities firm, for $491 million. The deal brought more distribution muscle to its securities operation.