First Union Corp. is diving headfirst into the growing mutual-fund lending market.
Robert W. Beatty, vice president of money finance in First Union's financial institutions group, said Thursday that his division hopes to tap into mutual fund companies' need for cash-flow financing, particularly to finance brokers' sales commissions.
Most mutual funds are sold with up-front fees. But increasingly, fund companies are giving customers the option of deferring the payment of commissions. Brokers, however, still need to be paid at the time of sale, so fund companies must obtain financing to advance these commissions.
Mutual funds with deferred fees - known in industry jargon as B-shares or back-end loads - held $218.8 billion in assets at yearend, according to Lipper Analytical Services, Summit, N.J.
First Union executives said B-share financing volume in the market as a whole could reach $1 billion this year.
There "has been explosive growth over the past several years and these companies represent an important client sector for First Union," said Catherine Dolan, managing director and head of First Union's financial institutions group.
The expansion puts First Union in competition with a growing number of banks that serve the mutual fund industry, including Citicorp, Chase Manhattan Corp. and NationsBank Corp.
Mutual fund financing has increased steadily for the last five to seven years, and not only because of B-shares, said Richard H. Klein, managing director, Chase Securities Inc. The fund industry is also undergoing consolidation.
Chase, which has been active in the area since June 1988, provided $360 million in financing in 1992 for Franklin Resources's acquisition of the Templeton Funds.
Chase Securities also does B-share financing and provides liquidity credit facilities for mutual fund companies, including Nicholas Applegate, San Diego; United Asset Management, Boston; and Alliance Capital, New York.
Anthony Davis, an analyst at Dean Witter Reynolds, said First Union expects pretax income from its capital markets group to increase to $350 million this year, from $243 million in 1995. The bank's aggregate income last year was $2.8 billion.