As the equity market and economy continue a downward slide, investors’ interest in bonds is on the upswing. And advisors and their clients can now get first dibs on original-issue corporate bonds through Incapital’s InterNotes, corporate bonds designed specifically for retail investors. Tom Ricketts, co-founder, president, and CEO of the year-old Chicago-based investment bank (he’s also the son of Ameritrade founder Joe Ricketts), noticed a demand for corporate bonds among individual investors while working in ABN AMRO’s bond department, where he helped to develop the GMAC SmartNotes. As SmartNotes grew in popularity among individual investors, Ricketts and his colleagues decided to open their own shop, Incapital (www.incapital.com), so they could focus their efforts exclusively on providing individual investors with first-issue bonds. “There’s always been a latent demand for corporate bonds in the retail market,” Ricketts says, but individual investors and advisors haven’t known how to access them. Most investors and advisors have had to resort to buying less attractive bonds from the secondary market, a process that’s confusing and complex. InterNotes, which are issued at par ($1,000) and in denominations of $1,000, are rated A or higher, and are offered weekly on an ongoing basis. Incapital has three issuers so far–Bank of America, Household Finance Corporation (HFC), and DaimlerChrysler–and has sold $3.4 billion in bonds this year.
Ricketts says advisors can’t afford to ignore the corporate bond market. “For a long time it was enough to be experts in equity,” he says. “That’s no longer the case. There’s not going to be this equity euphoria again for a long time.” New York Bureau Chief Melanie Waddell sat down recently with Ricketts at IA’s New York office to discuss InterNotes.
How does the InterNotes program work? The InterNotes program is a process whereby corporate bonds are offered on an ongoing basis in a way that makes them accessible to individual investors through their advisors. So whether it’s an independent advisor or a Merrill Lynch broker, the [client] can have access to original issue corporate bonds.
What’s the advantage of offering bonds on an ongoing basis? Every Monday we take bonds from our three issuers that have a variety of maturities, from two years to as long as 25 years, some callable, some not, and we offer those to the brokerage/advisor community. From one Monday to the following Monday, the advisor has time to discuss the bond and the suitability of the investment with the client. They have until the following Monday to come back and tell us if they want the bonds, and if so, how many.
Unlike a traditional process that happens very quickly and doesn’t give individual investors a chance to participate, our process slows down the underwriting so that individuals have time to put their orders in. So the individual investor gets an original-issue corporate bond at par.
So bonds traded in the secondary market are not at par and are confusing to get? The only alternative [advisors and their clients] would have right now save for this program would be to go and buy bonds in the secondary market. And while that’s possible, it’s often confusing and unnecessarily complex. If an individual asks his advisor to buy an IBM bond, the individual has to go back to whatever desk the advisor deals with to get access to that market. The advisor has to make a bunch of phone calls, and by the time they get that bond they can’t say, “Give me a five-year.” It’s going to be a 4.1-year or a six-year [bond]. The bond is going to finally get down to them after it has been marked up a couple times and then the price is going to be 1023&Mac218;4 or 91, so you’re going to have a tax implication of amortizing that premium (or discount) over the remaining life of the bond, and there’s accrued interest to explain. If investors don’t pay par (100) for their bond, they have to account for any discrepancies between the price they pay and par on the personal taxes. So it’s relatively complicated if you buy secondary bonds for most people.