Disintermediation, generally a worry for retail outfits, may soon become a concern for one of the more protected cubbyholes of finance, the world of the bond mutual fund manager.
Bank of America Corp., working through a joint venture with the Chicago investment banking firm Incapital, has for the last couple of weeks sold about $385 million of fixed-income securities. It has bypassed institutional investors and is pitching the notes in bite-size denominations straight to retail customers.
On the surface, the launching of the program, called Internotes, was a breakthrough for retail customers, who gained access to a new investment option. But B of A, which has interests as an issuer and a part-owner, clearly is hoping that corporate treasury offices, particularly at financial companies, will jump at the chance to tap a new market for their paper.
Were active funders, said John Mack, senior vice president and head of corporate funding at Bank of America. The company could channel as much as one-third of its long-term issuance, which recently has come to about $6 billion a year, through Internotes, he said.
If we can find a way to issue a billion to $2 billion into a new investor segment, a segment that we think will be there year in and year out, theres a real benefit to us, he said. The benefit to us is in the diversification of funding sources.
In practice, the program is not quite direct marketing. Major brokerages, including Merrill Lynch & Co., PaineWebber Inc., and Charles Schwab Corp., handle the actual distribution. Issuance, borrowing a bit from modern manufacturing practices, resembles a just-in-time process in which brokers report to the issuer what kind of demand they have from their customers. Paper is produced accordingly.
Brokerages dont have to position paper, well fill whatever orders they get, Mr. Mack said. This addresses a key concern for the brokers, particularly when financial firms are reluctant to deploy capital. Thats an advantage to them. They never have to use their balance sheets.
In some ways the notion is not new. General Motors Acceptance Corp. designed a program in the mid-1990s it calls Smartnotes, through which it plans to issue $5 billion of debt in varying maturities and terms.
Incapital president Thomas Ricketts was one of several ABN Amro and GMAC executives who worked on Smartnotes, then departed in 1999 to form their own company around the debt issuance platform. To really maximize the value of the retail market, and in order to get the most out of our product, we felt we had to be independent, Mr. Ricketts said. To be honest, a big bank is stifling at times.
Though not specifically designed for financial services companies, the platform, at least early on, is likely to draw whatever interest it does generate from the industry, he said.
It does lend itself naturally to those companies that have a constant need for funds, but just because a company comes to the market just a couple of times a year doesnt mean they cant use the product, Mr. Ricketts said. Its our goal to have a variety of issuers so that investors can build a diversified portfolio.
Issuer No. 2, a finance company, is in the documentation phase of an offering that could come in March.
But like so many debt markets in these less than tranquil times, the market will be an option open only to a select group of investment-grade companies a credit blowup in a new product like this would spell near doom for the venture.
It will be household names, plain-vanilla instruments for plain-vanilla investors, said Mr. Ricketts.
If the system catches on, Bank of America gains more than a balance sheet option. As part owner of the investment company, it also has a new marketing tool. An obvious benefit to us is to market this product to corporate clients that B of A already has a relationship with on the debt origination side, said Gennell Jefferson, a principal at Banc of America Securities.