INVESTING IN ICAP Michael Spencer
INTRODUCTION • The world’s largest voice and electronic interdealer broker • Daily average transaction volume in excess of $550 billion, 40% of which is electronic • 2800 staff operating from 21 offices worldwide • One of the UK’s 130 largest quoted companies. A FTSE 250 company with a INTRODUCTION market capitalisation of circa £1.4bn (US$2.3bn) • The Total Shareholder Return since the merger (Sept 99) up to the close on 23 Sept 03 has been 463% 2
IDB SERVICE • Wholesale intermediary • Anonymity/execution/liquidity/information • No principal trading • Where settlement systems are established, operates as “matched principal” • In markets where credit risk exists INTRODUCTION between counter parties, “name give up” • Similar to an exchange 3
HYBRID CLARIFICATION • Many different definitions • ICAP is committed to a truly hybrid model based on - Combined voice and electronic liquidity - Customers choice of either voice or electronic deal execution 4
INDUSTRY DEVELOPMENTS • Rapid consolidation of previously fragmented industry driven by: - Impact of the Euro - Merger of customers - Increasing impact of technology - The emergence of e-broking - Weakness of some balance sheets - Operational leverage and economies of scale • Continued belief that further consolidation will result INTRODUCTION in the emergence of 2 or 3 global interdealer brokers with a small number of niche players 5
MARKET SIZE ESTIMATE* GLOBAL INTERDEALER BROKING 2002 - $4.3 billion ICAP plus BrokerTec Collins Stewart Tullett Tradition Other Voice brokers Prebon Cantor/Espeed THE INDUSTRY GFI Other Electronic brokers Other Energy brokers * Total revenues not including equities. Where no public information is available, estimates have been used. 6
MARKET SIZE ESTIMATE* GLOBAL INTERDEALER BROKING 2002 - $4.3 billion Electronic Broking - Voice Broking Securities 88% 7% Electronic THE INDUSTRY Broking - FX & other 5% *Total revenues not including equities. Where no public information is available, estimates have been used. 7
INTERNATIONAL BONDS AND NOTES AMOUNTS OUTSTANDING (US$ billions) 10000 9000 8000 7000 DRIVERS FOR GROWTH 6000 5000 4000 3000 2000 1000 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: BIS 8
MARKET GROWTH INTEREST RATE SWAPS OUTSTANDING (US$ trillions) 80 70 60 50 DRIVERS FOR GROWTH 40 30 20 10 0 D D D D D D D D D D D D D e e e e e e e e e e e e e c c c c c c c c c c c c c - - - - - - - - - - - - - 9 9 9 9 9 9 9 9 9 9 0 0 0 0 1 2 3 4 5 6 7 8 9 0 1 2 Source: BIS 9
ELECTRONIC BROKING VOLUMES ALL PRODUCTS (average $ billion/day) 250 ICAP/ETC MTS Group 200 BrokerTec eSpeed ELECTRONIC BROKING 150 100 50 0 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 Sources: BrokerTec, ICAP, estimates from eSpeed and MTS websites - counting only trades executed electronically 10
INVESTING IN ICAP Steve McDermott
AMERICAS • American operations - 35+% of ICAP’s global profit - 116% profit growth for the region between 2002 and 2003 BUSINESS ANALYSIS - Growth has been both organic and through acquisitions - The larger ICAP acquisitions have been in North America. 12
AMERICAS • The merger between Garban and the Intercapital Group. - Garban brought a leading American presence - Intercapital a leading European presence BACKGROUND - The combination created the world’s largest interdealer broker. 13
AMERICAS • 9/11 was another key—albeit tragic—event in our evolution - We were based in the World Trade Center - Had market leading positions in a number of products - And, in the midst of developing and rolling out E-initiatives BACKGROUND - Suddenly we were dispersed, and conducting business with nothing more than pads, pencils and outside phone lines 14
AMERICAS • Background - We survived and succeeded. - In the two years since the attacks on the Trade Center we have achieved growth in every measurable way. BACKGROUND 15
AMERICAS • Background - In the past 18 months, we have completed three major acquisitions • First Brokers in April 2002 expanded • APB (now ICAP Energy) in October 2002 • BrokerTec in May 2003 - Headcount in all US operations is 1170 BACKGROUND - New North American headquarters is a state of the art facility, which can be expanded. 16
AMERICAN MANAGEMENT • Ron Purpora is CEO of our Securities business in North America. This includes products such as: - US Treasury products - U.S. Repo agreements - U.S Mortgages INTRODUCTIONS - U.S. Agencies - U.S. Corporates - Credit Derivatives - Equity NYSE floor business 17
AMERICAN MANAGEMENT • Doug Rhoten, CEO, Garban Capital Markets. Doug is responsible for - Money Markets - Spot and Forward Foreign Exchange - Emerging Market Derivatives INTRODUCTIONS - Derivatives, including options and Interest Rate Swaps - Energy 18
AMERICAN MANAGEMENT • Hal Hinkle, Global CEO, ICAP Electronic Broking Division and Former CEO of BrokerTec - Hal joined as part of the acquisition - In addition to the BrokerTec system, Hal is responsible for our ETC product INTRODUCTIONS and several other system and electronic initiatives. 19
INVESTING IN ICAP Ron Purpora
AMERICAN SECURITIES MARKETS • Core Divisions • Treasury Products • Mortgage Securities • Federal Agency Issues • Corporate Products including – Corporate Bonds – Emerging Markets INTRODUCTION – Credit Derivatives – Equity and related 21
AMERICAN SECURITIES MARKETS • 350 Brokers servicing • Voice and Electronic Capabilities • Market leading positions in all core divisions • 67% revenue increase from fiscal 2001 to fiscal 2003 INTRODUCTION 22
OVERVIEW – RECENT EVENTS • Cemented dominance in Corporate Bonds with First Brokers purchase • Expanded Credit Derivatives group • Rolled out new technologies to exploit STP capabilities across products • Historically strong performances related to overall growth in Fixed Income arena OVERVIEW 23
TREASURIES - HYBRID BROKING Estimated Market Share – US Treasury Trading 3% 1% 11% 41% ICAP-BTEC E-Speed TTL Maxcor Hill 44% MARKETS Source: Federal Reserve Bank of New York Data, ICAP estimates 24
TREASURIES — ACTIVE ISSUES • Trading of Bench- Estimated Market mark Issues Share - Active Issues • 70% of all trading • Commodotized, 33% Highly Liquid • Virtually all brokered 67% electronically MARKETS ICAP-BTEC E-Speed Source: Federal Reserve Bank of New York data, ICAP estimates 25
TREASURIES — OFF-THE-RUN’S • Off-the-run’s, swaps, Estimated Market strips, Bills, Basis Share - Off-the-run's • “value added” 4% 9% component to service • Less commodotized • Higher commission structure accepted 55% 32% • ICAP accounts for all electronic trading ICAP-BTEC • Critical core liquidity to TTL MARKETS Hill Farber build from Maxcor Source: Federal Reserve Bank of New York data, ICAP estimates 26
TREASURIES - PERFORMANCE Average Daily Volume US Treasury Securities MARKETS 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 source: Federal Reserve Bank of New York 27
MORTGAGE SECURITIES • ICAP has strongest presence across product base - TBA Collateral market - Specified Pools - Collateralized Mortgage Obligations - ARM’s, ABS and Commercials • 36 Brokers servicing these products • Strong operating margin MARKETS 28
MORTGAGE SECURITIES Long Term Issuance - US Bond Markets First half 2002 First half 2003 MARKETS Mortgage Federal Corporate Treasury Related Agency source: Bond Market Association 29
MORTGAGE SECURITIES Estimated Market Share - Trading All Products 5% 3% 34% ICAP-BTEC 33% TTL Hill Farber Chapdelaine Tradition MARKETS 25% Source: ICAP estimates 30
MORTGAGE SECURITIES • Electronic participation • Trading volumes up strongly - Explosion in refinancing activity - Unprecedented market volatility • Offer full suite of mortgage products MARKETS 31
AGENCY ISSUES • Government Sponsored Enterprises – FNMA and FHLMC -Notes and bonds -Callables • Staff of 30 brokers offering screen- based voice execution • ICAP is by far the leading broker -Voice capabilities MARKETS -Electronic capabilities 32
AGENCY ISSUES Estimated Market Share – Agency Trading 5% 1% 23% ICAP-BTEC TTL Maxcor Tradition 71% MARKETS Source: Federal Reserve Bank of New York data, ICAP estimates 33
CORPORATE PRODUCTS • With Acquisition of First Brokers established dominance in this sector • Traded in a voice environment • Staff of 176 Brokers • High technology deployment - Straight Through Processing Initiatives - Regulatory Requirements - Market data dissemination MARKETS 34
CORPORATE PRODUCTS – CORPORATE BONDS • Corporate Bonds Estimated Market primary component Share - Corporate • Growth through Bonds acquisition 6% • Market growth 17% • Characterized by 40% lower level of 3% liquidity • No electronic 18% ICAP-BTEC players in IDB MARKETS 16% TTL Market Chapdelaine Source: ICAP estimates Murphy SGCowen Others 35
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