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Pioneer obtaining B-share financing


In an effort to reduce its debt, The Pioneer Group in Boston has arranged for B-share financing through Putnam Lovell, de Guardiola & Thornton. Pioneer will receive a premium of approximately $62 million in return for granting Putnam Lovell the rights to the ongoing 12b-1 revenue stream from Pioneer's mutual funds' B-shares received prior to September 30. As of September 30 that revenue stream was valued at $54 million.

The deal also gives Putnam Lovell the rights to receive future 12b-1 fees for a period of three years beginning September 30. According to Timothy T. Frost, vice president for corporate development and communications at Pioneer, the firm will use the proceeds to reduce its debt.

The B-share financing, announced Oct. 13, is one of a number of steps the company has taken to reduce its debt. Recently, Pioneer reorganized into three separate business units (see related story on page 1). The goal has been to reduce expenses in each unit, each of which has performed poorly this year.

Putnam Lovell is among a handful of firms that have, in recent years, created a niche business in financing B-shares sold under a fund adviser's 12b-1 distribution plan. Fund companies have imposed 12b-1 charges to cover their marketing and distribution expenses since the Securities and Exchange Commission approved their use in 1980.

Under 12b-1 plans, advisers pay up-front commissions to broker/dealers who agree to distribute a fund. A few well-endowed fund advisers can afford to pay these commissions themselves. Other advisers finance these initial commission payments through third-parties. Then, advisers typically charge fund shareholders a 12b-1 fee of up to 1.00 percent of the invested assets. The typical 12b-1 fee includes two components: a 0.25 percent service fee which is paid back to the selling fund adviser and a 0.75 percent fee which is paid to the financing firm.

Historically, companies that financed B-shares, like CitiGroup, Constellation Financial Management and Putnam Lovell, advanced commission payments to intermediaries distributing the funds. These firms -- the financiers -- put the debt on their books, relieving distributors of having to carry it.

Though financing firms buy the rights to capture future revenues- the 12b-1 fees derived from B-share assets under management, they also assume all of the risks. Since the 12b-1 fees are a function of assets, the financiers incur the risk of net assets declining, thereby reducing the ongoing 12b-1 revenues generated. There is also the risk that the independent trustees of a fund, who must re-approve 12b-1 fees annually, will not do so.

Recently, fund advisers have increasingly sought outside financing for B-shares. This is in part because fund companies that have stepped up their marketing efforts and consequently attracted new assets, are faced with the task of financing the ever greater commissions they are incurring.

But, financing B-share commissions is very attractive because fund companies would rather use assets to finance systems or strategic plans than to finance B-share commissions.

Putnam Lovell bundles the cash streams it acquires from the multiple mutual fund sponsors it serves, securitizes them and sells them to institutional investors, such as insurance companies, said Bill Henson head of Putnam Lovell's one-year-old capital markets division. Putnam Lovell has securitized a total of $1 billion.