In light of last week's acquisition of Wachovia Corp. by First Union Corp., market observers are closely watching each bank's ABCP conduits to monitor whether there will be any changes in administration, personnel or other merger-related ramifications. So far things are status quo, market sources said, but things can change depending on how the merger turns out.
Wachovia Bank acts as administrator for Centric Capital Corporation and Blue Ridge Asset Funding Corp., both of which were started in 1997, and First Union acts as administrator for Centre Square Funding Corporation and a large conduit known as Variable Funding Capital Corp.
At the end of October of 2000, Wachovia's Centric, a medium-size loan-backed conduit, had outstandings of $4.6 billion, while Blue Ridge had $6.1 billion of authorized facilities, but less in outstandings, according Moody's Investors Service. First Union's Variable Funding had outstandings of $14.4 billion by the end of last year, and the much smaller Centre Square program had $157 million, according to Standard & Poor's.
Last week, however, S&P placed it's A-1-plus' rating on Centric's ABCP program on CreditWatch with negative implications.
"The only reason we took action is because Wachovia Bank's short-term rating was put on CreditWatch negative by our bank analyst, and it is sponsor bank, referral bank and credit-support provider to the Centric conduit," said W. Eric Hedman of Standard & Poor's.
Still, the timing of the downgrade seems to coincide with the acquisition by First Union, and while bank mergers have typically not, up to this point, led to any terminations of programs, there are many factors affecting the future of these conduits, including how the Wachovia/First Union merger shakes out, sources say.
"The banks must look at how they want to divvy up the business and see what the merger is going to look like before they make decisions about their conduits," said Rodney Brown, a vp and senior analyst at Moody's. "In the case of the merger between Deutsche Bank and Bankers Trust, for instance, BT just became a subsidiary, but was still the administrator of its conduits. In another scenario, if Bank A and Bank B merge, creating another entity, that entity would become the administrating agent for the conduit. There are many issues that need to be considered, such as taxes, state law, federal law, and how big the entity is. The banks generally want to leverage economies of scale in these situations."
Additionally, the banks can potentially have problems integrating staffing, underwriting and servicing within the conduits, S&P's Hedman noted.
Another relevant factor which must be considered, sources said, is that there might be some overlap on Wachovia and First Union's client base. Both banks primarily market to regional companies in the south.
"Sponsors go through the effort to differentiate their conduits from themselves, like it's another investment," said James McDonald, a vp and senior analyst at Moody's who has rated the Centric conduit. "But fund managers have to decide whether a conduit has good enough volume to warrant doing the credit work. Large investors want to write big tickets, but the conduits have to have the size to do it, giving the managers a reason to do the credit work.
"At this point I think those conduits will keep going for awhile, as they have good volume."
S&P's Hedman agreed: "At least for Centric, this is probably a staple of the corporate finance products and services that [Wachovia] offers clients."
Conduit managers at both Wachovia and First Union declined comment.