First Union Corp. this week joined an elite group of U.S. banks with the ability to underwrite debt and equity securities.
The Federal Reserve Board on Wednesday approved the North Carolina company's application for enhanced Tier 2 section 20 powers, putting it on a par with 17 other banks - including Chase Manhattan Corp., First Chicago Corp., Chemical Banking Corp., Citicorp, J.P. Morgan & Co., and NationsBank Corp..
"It kind of moves us in the direction that we think corporate banking needs to go, which is toward being able to offer securities-type products to our customers," said Louis A. "Jerry" Schmitt Jr., a managing director of First Union's capital markets group.
In addition to granting the Tier 2 underwriting powers to Charlotte- based First Union, the Fed allowed it to engage in advisory activities for commodity and index swap transactions.
A broader universe of 37 banks has the more common section 20 powers, which include underwriting municipal revenue bonds, mortgage-related securities, commercial paper, and consumer receivables-related securities.
First Union is unusual among the section 20 banks in that it plans to market its debt underwriting powers mainly to middle market, as opposed to large corporate customers.
"There's real demand among our customer base for these products," Mr. Schmitt said. "We already have customers who have expressed solid interest in talking to us about this."
Mr. Schmitt added that First Union was interested only in the debt underwriting piece of the expanded powers at this point. The nation's ninth-largest bank, which has $80 billion of assets, does not expect to begin exercising its equity underwriting and dealing authority until next year, pending further regulatory review.
Mr. Schmitt said debt underwriting could provide a useful alternative to customers that need to raise, for example, fixed-rate debt that matures in 10 years - a kind of financing that is not normally available from a bank. Some of these companies cannot securitize their assets and don't like the covenants that normally are associated with private placements, Mr. Schmitt pointed out.
Now, he said, First Union can float its customers' debt in the marketplace.
Mr. Schmitt said that while the new products would not provide First Union with a competitive advantage over NationsBank, they would help it compete against smaller rivals that lack Tier 2 powers.
"Our guy is going to be able to show the customer a much wider range of things to satisfy his needs," Mr. Schmitt said. "If he just needs a loan, and that's all he needs, it may be done on a price basis. But if he needs some creative corporate finance work, this is a great help."
First Union will offer the debt underwriting and dealing through its broker dealer subsidiary, First Union Capital Markets Corp., which is part of the company's capital markets group headquartered in Charlotte.
First Union said it expects to begin trading and underwriting corporate debt issues within 30 days.