04 May 2012, Richard Jory, Structured Products
Incapital had a most powerful year. As other distributors nursed falling volumes and scratched their heads over the tweaks they could offer on certificates of deposit (CDs) and plain vanilla notes, Incapital innovated big time, won over trophy clients and cemented a reputation for being close to the heart of structured products education and aftersales.
The big win was a reacquaintance with General Electric Capital Corp. (GE), the corporate powerhouse that rules the minds of issuers and distributors alike, and a name that Incapital took most successfully to an avid retail audience. In an improving but rocky market, the distributor displayed great opportunism with the quality and timing of its offers of callable yield notes, income generators and cliquets.
In 2011, Incapital transacted with 36 different issuers and distributed or underwrote more than $4 billion in notional, the most since the group's inception. "They are exceptional at what they do," says a head of structured products at a New York-based US bank. "They have a large sales force and are on a different plane. We get lots of enquiries around pricing various products; we get a never-ending stream of good advice about what we can do to improve our offerings. They did a billion dollars of callable step-ups as the agencies are going away and as the corporate callable market replace it to some small degree."
The diversification into non-bank corporate credit alternatives and the fear of an eventual back-up in rates led Incapital to bring GE to the retail callable step-up market for the first time since 2006. "It was the right structure at the right time," says Adam Friedman, vice-president and head of registered investment adviser sales at Incapital in Boca Raton.
In the first two months, issuance exceeded $500 million. "The GE trade turned into an interesting show with the big wire houses," says Glenn Lotenberg, managing director at Incapital in Boca Raton. "They do billions upon billions of dollars of deals with GE on the private bank side and institutional deals with GE, and GE chose us. We have been pitching to GE for five years, and one of the reasons they chose us is they wanted to know who was getting their bonds."
During 2011, Incapital recorded sales of roughly $1.5 billion of callable-step up notes from 13 different corporate issuers. "We have worked with Incapital for the past three years, primarily where they have focused on distributing our market-linked CDs to the broker dealer community," says Mark Valentino, director, structured products at Union Bank in Los Angeles. "They have been a tremendously valuable partner for our business and we have been very pleased with the results they have delivered. They have been successful for us across all asset classes, with the greatest focus on our equity and commodity-linked products."
The distributor's pathway through 2011 and early this year has seen it take a more active role as an intermediary, especially in education, as issuers shift more from Federal Deposit Insurance Corporation-backed paper to more corporate and non-principal protected paper. The willing issuers in 2011 included Bank of America Merrill Lynch (BAML) and Goldman Sachs, which offered Incapital exclusivity. "BAML gave us sole exclusivity within the US on callable yield notes, one of the most popular structures in the private bank channel," says Deryk Rhodes, vice-president, structured products trading at Incapital in Boca Raton.
A 30-year trade with BAML for retail was a notable success. "Bank of America relies on us for education," says Lotenberg. "Their compliance department was intrigued about what we do here and took our information we create to downstream dealers to impose [the same standard] internally on their wealth management. They felt we would take ownership of the product, educate on it correctly and could support the distribution."
Experience and prominence also helped. "Incapital is strong on client education and product expertise and is extremely supportive of the structured products industry," says Ray Doherty, a director in the structured products team at BAML in New York. "The company has the balance and ability to take down deals greater than others."
Incapital also partnered with Goldman Sachs for the investment bank's first structured CD programme, which was launched in the fourth quarter of 2011. It also worked with JP Morgan to put together geared inverse floaters. "It is not a traditional structure that is bought by retail," says Patty Cohen, vice-president, structured products at Incapital in Boca Raton. Incapital then combined the structure with a range accrual to further enhance the yield.
Notional sales reached $204 million across 21 notes and CDs, with 63 dealers across the country participating. It underwrote or distributed more than $150 million of leveraged steepener CDs and notes through 24 different deals. "We were the only ones to do this in the US, and both trades sold out really quickly and we did well on both," says Rhodes.