Europe's retail investors are about to be inundated with securities that claim to put them on a par with the most prized funds.
In December, Landesbank Baden-Württemberg (LBBW) was planning to become the first AAA issuer of continuously offered bonds in Europe. LBBW was due to join Bank of America and FCE Bank, the European funding arm of Ford Motor Credit, in issuing InterNotes.
InterNotes are fixed-income instruments that investors can buy or sell in denominations of just $1,000, £1,000 or e1,000. They have an all-in fixed par price and a flexible coupon structure, so the investor can select monthly, semi-annual or annual coupon payments. The bonds are offered every week.
InterNotes were developed in the US by specialist investment bank Incapital, which is 25% owned by Bank of America.
Tidy fee
With a typical bond, two or three banks cream off a tidy fee and run the book, backed by a further four or five banks acting as co-leads. With InterNotes, however, Incapital structures the product for a small fee and then puts around 300 banks into the syndicate.
As an incentive, those 300 banks earn a large fee for selling the instruments. "We are not just turning the syndicate structure on its head; we are turning the fees on their head," says Roy Fraser, managing director of Incapital Europe. Incapital takes 20% of the fee, leaving 80% to the distributors. "We are bringing the market back to where it started, with a vast distribution base," says Fraser. Incapital has no contact with retail investors.
"Retail investors have always had access to Eurobonds through the Belgian and Swiss private banks, but those distributors would mark up the bonds and investors would not know by how much," says Bank of America's Felicity Buchan, head of European debt capital markets for corporates. With InterNotes, all the private banks and brokers that deal directly with investors commit themselves to sell the bonds at par. "That means retail investors get a fair and consistent deal," says Buchan. As well as their fee, distributors get guaranteed access to product.
Since January 2001, over $25 billion-worth of InterNotes have been sold to US retail investors. Developing the European market has been tougher, but Incapital could have first-mover advantage.
"The principal barriers to entry are the legal due diligence needed to sell notes to retail investors in different European jurisdictions, and building the relationship with the distributors," says Buchan. "We initiated the programme in Europe with Ford in May 2003, but we had been working on the issuer and dealer relationships for 12 months before that."
But Incapital was never likely to keep such a potentially large market to itself. In November, Deutsche Bank launched a new-issue platform for retail investors - Continuously Offered Investor Notes (Coins). Coins are issued by investment-grade borrowers off their EMTN programmes. Like InterNotes, Coins are offered weekly at a fixed price. European retail banks act as intermediaries, selling the instruments to retail investors in increments of 1,000 units of the currency of issue. Banca Intesa, KfW, and Rabobank have signed up to issue.