Oak Hill Partners and a new incarnation of the Robert M. Bass Group - Keystone Inc. - have formed a $1.75 billion fund to invest in bank loans, high-yield bonds, and distressed securities.

Controlled by high-profile investors who expect to commit as much as $500 million or more to bank loans, the fund underscores the progress syndicated lenders have made in generating liquidity.

"Investors are increasingly recognizing that bank loans offer attractive risk-reward characteristics in their own right," said Michael Zupon, a managing director at NationsBanc Capital Markets, the securities subsidiary of NationsBank Corp.

Glenn R. August, a well-known investor in the high-yield and leveraged loan markets, will run the new fund, which several banks helped get off the ground with infusions of equity, debt, and loans.

Chase Manhattan Corp. and Wells Fargo & Co. arranged a $1.2 billion revolving credit, and Chase led a $150 million subordinated debt issue with a number of banks including NationsBank.

"The exciting part about having the banks play such a prominent role is that we'll be purchasing leveraged bank loans from many of the banks who came into our deal," Mr. August said.

"This is testimony to the close relationship the Bass organization has had with its banking group over the last decade," he said.

"Our goal is to identify attractive relative-value opportunities," Mr. August said. "Both the bank loan market and the high yield markets are particularly attractive today."

Institutional investors have become increasingly important in the leveraged loan market in the last few years. They bought $8.4 billion of loans in the first half of this year, accounting for 30% of the market, according to Loan Pricing Corp./Gold Sheets.

Until now, however, prime rate mutual funds had been virtually the only investors in bank loans.

Although institutional volume during the first six months of this year is already 10% greater than that for all of last year, the percentage of loans earmarked for investors has remained constant.

At the same time Oak Hill was expressing confidence in the loan market, participants in that market returned the favor.

"Oak Hill Securities Partners are some of the smartest money managers in the business and some of the most successful," said Tom Bunn, the head of loan syndications at NationsBank.

Previously, Oak Hill had secured a $1.1 billion bank loan for its $1.8 billion Acadia Partners fund, which is expiring in 1997.

Mr. August anticipates investing $400 million to $500 million in the loan market, and said that could easily increase as conditions warrant.

Bankers said that because Oak Hill is funding with floating rate debt, it would likely remain invested in the floating rate loan market.

The institutional portions of loans have become a staple of the leveraged loan market only in the past few years. Typically these investments yield the London interbank offered rate plus 3% to 4%, appealing to investors, and longer maturities, providing greater financial flexibility for borrowers.

"The challenge in today's market for relative-value investors is to identify opportunities to purchase bank loans because the demand for longer-term-funded term loans currently outweighs the supply of the asset class," said Michael H. Rushmore, vice president of loan syndication and trading research at BankAmerica Corp.'s securities unit.

Bankers said they wouldn't expect such investors to account for much more of the market. But they said the absolute volume of institutional tranches will increase as the market continues to grow.

"This commitment may encourage other institutions to pursue similar vehicles," added a syndicate official at a major money-center bank.

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