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Wachovia Entity to Fund Clients' Holdings
Asset Backed Alert, Harrison Scott Publications Inc. (November 22, 2004)

Wachovia has put the finishing touches on a unique vehicle that will fund clients' investments in structured products and corporate debt.

The $10 billion entity, called Atlas Capital Funding, serves some of the same purposes as a collateralized debt obligation. It also sports many features that are characteristic of structured investment vehicles. But unlike a CDO or SIV, Wachovia's clients - and not the bank - will pick the assets supporting the top-rated liabilities that the vehicle will issue. Wachovia is calling the entity a "structured-finance vehicle."

The idea behind Atlas is to create a quicker and easier source of cash for asset managers, hedge fund operators and other buysiders that would usually issue CDOs or turn to bank lines of credit as they amass investments.

Atlas is slated to start selling asset-backed commercial paper next week via Citigroup, J.P. Morgan Chase and Wachovia. It will also have the capacity to issue medium-term notes and - in a highly unusual step - enter repurchase agreements with outside lenders.

Wachovia's clients will use the proceeds from those offerings to create pools of investments in CDOs, asset-backed securities, commercial mortgage bonds, leveraged loans and unsecured corporate bonds. The clients would be indirectly responsible for paying off Atlas' maturing paper, generally using the returns from their investments.

Wachovia is already talking to several hedge fund managers about participating in the new vehicle. Much of the initial interest is in portfolios of syndicated bank loans to U.S. corporations. It's likely that some of the firms that end up doing business with Atlas would eventually take out their revolving facilities by repackaging the underlying credits into collateralized debt obligations.

In any case, the fund managers would probably use Atlas in addition to the CDOs, bank loans and repurchase agreements that traditionally fund their investments. One reason: The vehicle could give them more flexibility to hunt for bargains over longer periods of time, which could translate into fatter returns when they sell or securitize the underlying assets.

Issuers of CDOs are usually limited to prescribed periods for building up collateral, unless they set up bank lines of credit or repurchase agreements to fund those purchases in advance. But even repurchase agreements expire more quickly than the facilities Atlas would supply.

Bank loans also usually come with a catch, since the managers must agree to hire the lenders to underwrite their future bond offerings or broker sales of the assets down the line. But the banks willing to lend may not offer the best underwriting rates and distribution capabilities.

Atlas may also appeal to money managers who need temporary funding, but don't want to devote the time, effort and money involved in issuing a CDO. Atlas also would save them some of the collateral-diversification requirements typical of CDOs.



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