Can the average investor level the playing field by focusing more on the bond market?
Are the IFC's Impact Notes better alternative to securities issued by Government Sponsored Enterprises, or GSE?
Given that the IFC has triple-A rating, is this enough to eased the risks associated with this program?
When it comes to investing, there is a general sentiment that the retail, or individual investor, gets the short end of the stick. It's believed the markets' offerings are skewered toward institutional investors, thus creating an uneven playing field.
A bond program rolled out this week by International Finance Corporation (IFC), a global development institution, seeks to address such concerns by specifically targeting mom and pop investors with securities that offer higher yields than what they may typically find.
This new financial instrument, known as IFC Impact Notes, is intended to be an alternative to securities issued by Government Sponsored Enterprises, or GSEs. Furthermore, they have the potential to offer more attractive yields than U.S. Treasuries with equivalent maturities.
Made Just for the average investor
Individual investors have seen a very limited supply of the highest rated issuers during the past couple of years. They had to look to GSEs like Freddie Mac (OTCQB:FMCC) and Fannie Mac (OTCQB:FNMA) for triple-A rated credit offerings. However, both organizations suspended their retail bond programs years ago, leaving mom and pops out of the loop.
IFC Impact notes are being offered to fill that market gap, according to Louise Herrle, managing director of capital markets at Incapital. Her firm, an underwriter and distributor of fixed-income securities, is partnering with IFC in launching the notes program.
Projects financed by IFC are in emerging markets, which generally carry more investment risks than markets in developed countries. For example, emerging markets can be less liquid than markets in developed countries. That lays the ground for investors not being able to get out of their positions without losing money.
This, along with other risks, can make for huge turn offs for many retail investors. Unlike institutional investors, retail investors are less likely to take on huge risks and sacrifice what is essentially their hard-earned money. They are often referred to as being risk averse.
Such worries can be eased with this debt program from the IFC because it is triple-A rated. While ratings are less impactful these days as they were prior to the 2008 financial markets meltdown, issuers who have high ratings give peace of mind to investors buying debt that they issue.
Consider this. IFC's triple-A rating is better than that of the U.S. government and all but four U.S. corporations. Those are Johnson & Johnson (NYSE:JNJ), Microsoft (NASDAQ:MSFT), Automatic Data Processing (NASDAQ:ADP) and Exxon Mobil (NYSE:XOM).
Who is the IFC?
The IFC is a member of the World Bank Group. It boasts being the largest global development institution focused on providing financing for projects in emerging markets. Also, this program is being hailed as its first-ever retail bond program.
IFC provides financing for small and medium private enterprises. This includes connecting rural households to electricity for the first time, improving access to health care, and fighting climate change by improving energy efficiency.
Its global portfolio includes debt and equity exposure in 126 countries and nearly 2,000 companies. Its current annual funding program is $16 billion across a range of markets and currencies, with U.S. dollar borrowings accounting for most of the funding activity.
IFC and Incaptial officials note that U.S. institutional investors have consistently participated in IFC bond issuances. By opening up the issuances to retail investors, the funding program will grow.
The Offerings' Terms
The notes are offered in $1,000 increments. They are five-year, non-call 6-month step up callable notes, with a coupon of 1% in year one and then growing to about 4% in year five. This return may not sound impressive. But there are other alternatives out there - albeit somewhat limited.
For instance, given that the Fed's policy on short-term interest rates remain conservative, investors might look to corporate bond such as the SPDR Barclays Capital Short Term Corp (NYSEARCA:SCPB), which has low duration. And it's possible to earn 1% annually in 2 to 3 years. This is based on the assumption that the Fed will keep short-term rates at zero.
Floating rate corporate bonds have also become popular, especially for investors that are looking for flexibility with fixed income allocation. For these investors, the PowerShares Senior Loan Port (NYSEARCA:BKLN), which pays a floating coupon, stands out. Because of this feature, investors are protected from any rise on long-term rates.
As with any investment, however, we advise that everyone checks with her/his broker/dealer to find out if these notes are ideal for their investment goals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's financial sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.