It didn’t seem this lunch was going to happen.
Tom Ricketts, president and CEO of Incapital, was taking a morning flight from Chicago, where the private investment bank is headquartered. On top of widespread delays and cancellations plaguing the airlines last summer, Chicago had fog conditions that temporarily shut down the airport. New York, meanwhile, was being lashed by one of those rainstorms that had been bringing its traffic to a standstill.
To add insult to injury, financial markets were going through their worst turmoil since 1987. The day before the yield on one-month Treasuries fell below 2 percent.
But in the end Ricketts made it to Midtown at 12:30 sharp — beating out both his host and the photographer. Nor was he overly concerned about selling on Wall Street. Actually, he envisions a better environment for bonds, especially for investment-grade corporate bonds, going forward.
Who: Tom Ricketts, President & CEO, Incapital
Where: Artisanal, 2 Park Ave. New York, Aug. 21, 2007
On the Menu: Watermelon salad, fondue du jour and investor education.
“The yield curve has been flat for a long time,” he explains. “This meant that investors incurred no opportunity cost by holding short-dated instruments or keeping their money in short-maturity CDs and money market accounts. Now that the yield curve has steepened, we are seeing extension trades, or a move to longer maturities.”
In recent years, markets have been so receptive to risk that spreads between corporate bonds and U.S. Treasuries became too thin to attract investors. Demand for corporate bonds declined as some of the relative value left the product, admits Ricketts. This too is likely to change as markets return to more normal conditions.
Finally, callable bonds — which allow the issuer to redeem some or all of the outstanding securities before their maturity date — become more attractive when volatility goes up. That’s because the embedded call options get more expensive in a volatile environment, giving investors a greater return.
Callable bonds should be even more attractive to retail investors, who make up Incapital’s main market, than to institutions. True, if their bonds are called they risk being forced to sell and lose their income in a low interest-rate environment. However, unlike bond funds, they are not obligated to reinvest their money into other fixed-income securities. They can look around for more attractive opportunities in other markets.
Education ProcessThis is the kind of education process Incapital has had to do to build and maintain its business, which focuses on issuing and distributing fixed-income and structured securities primarily to individual investors.
Ricketts started the firm with one partner in the mid-1990s, after a career that included eight years as a market-maker on the Chicago Board Options Exchange. The business model was to get solid investment grade issuers to issue bonds the way that a retail investor would buy them. In other words, to make new-issue bonds as easy to purchase as stocks for an individual investor.
It took about a year, and a hundred presentations, to persuade its first issuer, GMAC, to gear a bond to the retail market. Since then, Incapital has co-launched a branded product, InterNotes, with Banc of America Securities and has underwritten some $50 billion worth of notes for top-notch issuers such as GE Capital, JP Morgan Chase and Lehman Brothers. Placed by Institutional Investor among its e-finance Top 40 firms, it now competes in its market niche with LaSalle and Merrill Lynch.
Ricketts doesn’t claim Incapital created a new market segment, but he admits that it was the first willing to put elbow-grease into educating issuers and undertaking a large-scale marketing effort.