Citicorp And Merrill Team Up to Make Loans

Citicorp is teaming up with Merrill Lynch to provide borrowers with $1 billion in short-term loans that will not show up on the banking company's balance sheet.

The unusual financing technique will allow Citicorp to arrange loans for its customers without having to set aside as much capital as usual.

The loans will be made by a special purpose corporation controlled by Merrill Lynch. The unit, Premium Funding Inc., will issue commercial paper backed by a top credit rating awarded on the basis of guarantees provided by Citicorp's lead bank.

Up to $1 billion of the proceeds will be used to fund loans for investment-grade customers whose short-term credit ratings nonetheless hamper access to the commercial paper market.

In addition, other banks may use Premium, which is expected to be authorized to issue up to $3 billion in commercial paper.

Merrill Lynch will be the dealer for Premium's commercial paper program and collect dealer fees. No other fees were disclosed. Citicorp will collect the difference between Premium's borrowing rate and its lending rate.

The new facility sharply reduces the amount of capital Citicorp would have to keep against these loans. As an example, say Citicorp had a client wishing to borrow $100 million. Under the 1992 risk-based capital standards, Citicorp would have to reserve $8 million in capital against the loan.

But if the lender is Premium Funding, Citi only has to reserve capital against the purchase commitment backing the loan. For a $100 million loan, the capital requirement would likely be less than $2 million.

"We're providing an alternative source of funding to our borrowers," said Ken Wormser, a vice president in asset securitization at Citicorp. "One of the reasons may be the lower capital requirements. The returns to Citicorp of having some of those things on the books may not be tremendous."

"It certainly makes sense for the banks to make these loans off balance sheet, so we wouldn't be surprised to see more banks doing it," said Avi Oster, a vice president at Standard & Poor's Corp.

Already, Mellon Bank Corp. is said to be gearing up for a similar program to make up to $500 million in loans. Officials at Mellon could not be reached for comment.

Special-Purpose Corporations

Banks have used special-purpose corporations before -- Citicorp, in fact, is the largest user -- but mostly to purchase corporations' trade receivables and other assets and fund them with low-cost commercial paper. The handful of programs that have been established to make corporate loans have typically targeted smaller corporations.

Moreover, although other special-purpose corporations have been structured with 100% credit enhancements, the rating agencies apparently accepted the lower amount for Premium because its borrowers will be large investment-grade companies and the loans will be short term.

Under its program, Citicorp can refer corporate clients to Premium Funding to borrow up to $1 billion in loans with maturities up to 120 days. Only investment-grade companies are eligible to use the program.

Premium, in turn, will fund the loans by issuing commercial paper of exactly the same maturities. The so-called matched funding is intended to eliminate interest-rate risk.

Premium has been awarded the top commercial paper ratings by Standard & Poor's Corp. and Moody's Investors Service because Citibank, N.A., Citicorp's principal bank subsidiary -- which itself boasts top short-term credit ratings -- is providing a purchase commitment as credit enhancement.

The size of the commitment -- a guarantee by Citibank that it will purchase commercial loans that go sour -- will vary based on the amount and quality of loans Premium has outstanding. But the commitment will generally be roughly 20% of the amount of the loan. And Citicorp can manage its capital requirements by limiting the number of borrowers it refers to Premium.

"Citibank can determine how much capital they want to put against this program by who they refer into it," said a source close to the deal.

The impetus for the program arose last year when new SEC regulations made it harder for many large commercial paper buyers to invest in less-than-top-rated commercial paper. Corporations with investment grade, long-term ratings, but commercial paper ratings below the top level, found themselves shut out of the commercial paper market or forced to pay painfully high rates. Many of them tapped their backup credit lines with banks such as Citicorp, placing a new strain on the banks' capital.

Vital Statistics: Premium Funding Inc.Size: $3 billionCitibank share: $1 billionCredit Purchaseenhancement: commitment from Citibank

Ratings:

Moody's Investors Service P1 Standard & Poor's Corp. A1+ Source: American Banker

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