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Building Bonds For The Little Guy


Thomas S. Ricketts jokes he's the black sheep of the family. His father, J. Joe Ricketts, founded the online brokerage Ameritrade Holding Corp. (AMTD). Older brother J. Peter, the firm's chief operating officer, is rumored to be in line for the top spot if it stays independent. But other than spending a summer giving customers stock quotes over the phone, Thomas hasn't had much to do with running the business. He is an Ameritrade director, but the 39-year-old prefers bonds to stocks. Like Dad, though, he's quietly becoming a force for ordinary investors.

In the mid-'90s, when the world was crazy for stocks, Thomas pioneered the idea of having companies sell their investment-grade bonds to retail investors, rather than just to institutions. Today, his six-year-old investment bank, Incapital Holdings LLC, employs just 30 at its Chicago headquarters. But he battles Merrill Lynch & Co. (MER) and ABN AMRO (ABN) to a draw -- each underwrote roughly a third of the $100 billion outstanding in such bonds. Incapital sells retail debt for nine companies, including Bank of America (BAC), GE, and Prudential (PRU).

This growing retail market addresses a long-running problem for individual investors. Before, they could buy investment-grade corporate bonds only through a mutual fund or from the market. Both have drawbacks: Funds often carry high management fees and don't provide a consistent income, while bonds on the market can be costly and difficult to purchase in small quantities.

Now, retail investors can have their broker buy the bonds directly from Incapital, Merrill, or ABN AMRO in digestible $1,000 increments. The firms put new issues on the market weekly, with different yields and maturities. A recent 15-year DaimlerChrysler (DCX) bond from Incapital paid 6.40%. And even if interest rates rise and push down the bond's price, investors will recoup their original investment if they hold it to maturity, unless the company goes bust.

DIALING DUO

Retail investors have been able to buy junk bonds since the early '90s, so Ricketts and a partner at a boutique firm set out in 1995 to copy that model for investment-grade corporate bonds. "We would go to a city and call every company in the phone book," says Ricketts. The duo finally found interest in selling retail debt at General Motors Acceptance Corp. (GM) ABN AMRO got into the business by buying the shop, and Ricketts stayed on until 1999, when he set up Incapital.

These days, Ricketts faces a tough environment as rising rates cooled interest in bonds. Incapital sold $7 billion worth of notes last year, down from $11 billion in 2002, and this year looks equally weak. But he says the long-term trends are favorable. Baby boomers nearing retirement are spurring demand for fixed-income securities. Then there's the potential of Europe and Asia, where Incapital has sold $2 billion worth of bonds to increasingly wealthy investors seeking stable, safe yields.

So Ricketts is expanding overseas operations and pushing ahead with new products. One bundles 11 bonds into a single security -- giving investors a diversified stream of income at a low cost. And in the next month or so, Incapital will roll out the first retail bond issued by a foreign government. "It's by no means the ideal time to launch a bond product," says Ricketts. "But more and more people need steady income." It seems the black sheep of the family is doing pretty well for himself.

By Adrienne Carter in Chicago


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