Incapital LLC's plan to buy the LaSalle broker-dealer services division from Bank of America Corp. would give the Chicago underwriter a two-thirds share of the retail corporate bond business, but more importantly perhaps, it is a chance to sell fixed-income products to individual investors just as they have started looking for these products.
Tom Ricketts, Incapital's president and chief executive, said in an interview Monday that in addition to adding scale the deal would help his company broaden its product offerings, cut expenses, and increase distribution.
Incapital, whose 54% share makes it the largest underwriter and distributor of corporate bonds to individual investors, distributes through a network of 1,000 banks, brokers, and dealers. It would manage roughly 67% of the retail corporate bond market once the deal closes this quarter. LaSalle is the second-largest underwriter, with a 13% market share, he said.
Mr. Ricketts said the Charlotte banking company decided retail corporate bonds was not a "core business." Louise Hennessy, a B of A spokeswoman, said it decided to sell because it has an exclusive agreement with Incapital to continue services for its customers.
InterNotes, a joint venture between Incapital and the banking company's Banc of America Securities unit, and Direct Access Notes, which was run by LaSalle, were both included in the deal and are to keep supplying corporate bond products and services to B of A's customers. (B of A will retain a minority stake in Incapital.)
Mr. Ricketts, whose father, Joseph, founded what is now TD Ameritrade, said the deal would make it easier for individual investors to participate in the institution-dominated fixed-income marketplace, a move that analysts said could prove to be particularly timely because fixed-income products have returned to favor.
"This is a market that is attractive for fixed-income products," Mr. Ricketts said. "For the first time in years, we have a yield curve that is in our favor, and people that have their money sitting in money market products will begin to extend to fixed-income markets. We want to take advantage of this opportunity as people look to build a ladder portfolio once again."
Analysts said investors are interested in fixed-income and conditions are improved since the yield curve has improved and the Federal Reserve has cut interest rates.
"Many of our competitors have gotten away from the basic blocking and tackling of fixed-income products," Mr. Ricketts said. "We want to get as many products on the shelf for individual investors as we can this year."
Incapital, which started the first retail bond program in 1996, offers retail corporate bonds for B of A, Boeing, CIT Group, Dow Chemical, GE Capital, HSBC, Prudential Financial, and Sears. LaSalle offers retail corporate bonds for GMAC, Caterpillar Inc., and United Parcel Service.
"AAA corporate bonds may not look very sexy," Mr. Ricketts said, "but, for example, an AAA-rated GE Capital bond that matures in 12 years sells with a coupon of 5%. On a percentage basis, it is 150 basis points, 1.5 percentage points, above U.S. Treasuries, and the company has a real solid balance sheet."
He said he does not think Incapital will need to do more deals since it has such dominant share. The next largest competitor is Merrill Lynch & Co. Inc., but its share (13%) is significantly smaller.
Robert Little, a managing director at Merrill who runs its retail bond business, said it remains competitive because, unlike Incapital, which relies on a broker-dealer distribution network, Merrill can sell through an in-house network to private clients.
"We still have a number of issuers that we represent in this market, and we see continued opportunities to expand this very profitable business," he said. "This is a good relationship-building business." Incapital's LaSalle deal "doesn't do anything to diminish our position in the market where we plan to continue to grow," he said.
