Within investment banking offerings, debt markets often fall pale in comparison with the comparatively glamorous Mergers and Acquisition (M&A) activities. Although M&A focus on long term relationships, the DCM team generates a substantial volume of transactions rather than big-ticket deals.
What is a DCM (debt capital market)?
Before we delve into what DCM teams do in investment banking, we need to understand what a debt capital market is. A debt capital market enables both governments and companies to raise funds by trading debt securities.
Incidentally, those working in DCM teams end up advi sing companies, sovereigns, agencies as well as supranationals that are looking to raise debt.
By raising ‘debt’, an entity borrows a certain amount of funds and pays interest on the borrowed funds as compared to raising equity funding where the entity has to part with a certain percentage of stake to raise capital. It is cheaper to raise funds by issuing debt securities rather than offering equity.
An excellent example of that would be borrowing $100,000 at 10% interest rate costs much lesser than raising equity for the same amount. That is because it will require giving more than 30% of the firm.
As per the International Capital Market Association, the size of the global debt market is around $ 128.3 trillion . 68% of this forms SSA (Sovereigns, Supranationals and Agencies) bonds whereas the remaining 32% consists of corporate bonds.
Why is DCM (debt capital market) crucial for investment banking?
The DCM debt capital market forms a crucial part for DCM investment banking service as they can push cash into the hands of the right people. These people have the capability of moving the economy in the right direction.
Why invest in debt capital markets?
One can consider investing in the debt capital markets because of the flexibility that it provides to the investors and creditors. We will take a look at some of the types of bonds to get a broader picture of the investment modes.
One must understand that bonds are security that is sold by the debt capital market. The DCM team is responsible for selling the different kinds of bonds that are available in the market.
A bond comes with a barrage of security measures. Most of them come with a different risk-return feature.
Let us take a look at some of the most commonly used bonds by the DCM teams in the market.
- Investment-grade bonds
The investment-grade bond is made up of the market that comes with low-interest rates. Likewise, they come with low risk when compared to other kinds of bonds. This type of bonds is used for raising money as capital or for business operation.
- High-yield bonds
As the name implies, this is a kind of high-yield bond that comes with high returns. However, these bonds also come with high risks.
- Government bonds
The government of any country issues bonds to the investors to fund operations. In the US, they are known as Treasuries. Other countries also have their own department that is responsible for issuing the bonds. The returns of the bonds depend on the market condition. These bonds are officially backed by the government and are usually safe.
- Emerging markets bonds
The emerging market bonds are issued by the government of developing countries. Due to political and financial strains from within, the credit ratings are generally lower and thus the returns are a bit higher.
- Municipal bonds
The United States has one of the largest markets for these types of bonds. They are mostly issued by government-run institutions like counties, districts, and cities.
Significance of a DCM (debt capital market) team in an investment banking firm
The DCM investment banking team is primarily responsible for advising clients on raising debts for refinancing, acquisitions, and restructuring. They work closely with clients to help them borrow money tactfully.
Besides, the team also helps them with the technical know-how on convincing investors or creditors. Like mentioned earlier in the post, debt is cheaper and comes with low risk when compared to equity.
A DCM team in an investment banking firm works with the risk and treasury departments of a client. The DCM team can either be the originator of debt deals and also be involved in syndication where it brings together those who are deal originators and the secondary market. Therefore a DCM team is critical within an investment bank as they can either make or break deals. These deals brokered the right way can generate significant and regular income for an investment bank.
They deal with bonds that are issued for a longer repayment period. Once the bond has matured, they help clients to raise new funding modes. The debt capital market team plays a vital role in the well-being of organizations.
Thanks to the ongoing pandemic, debt capital markets are experiencing an uptick in their issuances. Both corporates and sovereigns are looking to access cheaper sources of funds and one may see these entities gravitate towards debt capital for some more time to come. Since the possibility of a robust deal pipeline seems imminent, it may be prudent for investment banks to consider working with external partners who can provide bespoke support to their DCM teams. One can simply search for DCM investment banking on search engines to get a list of such firms.
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