Citicorp Plans to Launch Funding Unit with a Twist

A subsidiary of Citicorp is about to launch a special-purpose corporation that adds new twists to off-balance-sheet financing.

Triple-A Funding Corp., a $1 billion funding vehicle established by the Citicorp subsidiary Capital Markets Assurance Corp., will commence operations in September, according to someone familiar with the start-up.

Like other special-purpose corporations, Triple-A will provide a method for banks to arrange loans without stretching their own capital requirements - because banks will be able to refer customers to Triple-A.

Interest Rate Arbitrage

But unlike previous ventures, Triple-A will enable banks to conduct interest rate arbitrage. That means banks will be able to sell securities to Triple-A which will then obtain funds at a lower cost in the commercial paper or medium-term note market.

The spread - less a fee - will go to the bank that provided the securities. Moreover, Triple-A's credit quality will be boosted by a credit enhancement provided by a bank holding company subsidiary.

Uses for Proceeds

Triple-A will issue commercial paper and use the proceeds in three ways: making loans to would-be bank borrowers, buying trade receivables from corporations, or purchasing securities.

Capital Markets Assurance Corp. is expected to use a portion of the facility to serve its own customers. But other banks are also likely to be heavy users of Triple-A, in order to satisfy demand for new loans while keeping down their capital needs. They will pay CapMAC a fee to tap the venture's lending capacity.

"It will enable a broad range of clients to get access to the market," the source said.

A New Breed

The new unit is the latest in a series of so-called special-purpose corporations established by banks. Citicorp is the largest user of special-purpose corporations, but Chemical Banking Corp., Continental Banking Corp., First Chicago Corp., Mellon Bank Corp. have also established such structures.

Triple-A is expected to secure top credit ratings that will allow it to issue commercial paper at rates far below those it will earn on loans and investments.

A spokeswoman for Capital Market Assurance declined to comment.

Merrill Lynch & Co. will be the dealer for Triple-A's commercial paper.

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