Sectors explained: Debt Capital Markets

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Debt Capital Markets

The fast-paced world of government and corporate bonds

If a company wants to expand but doesn’t want to sacrifice private ownership, it’s more likely to turn to debt capital markets (DCM) rather than issue equity in order to finance it.

DCM teams deal with saleable units of debt in the form of bonds. DCM is also called the fixed-income market. This is because bonds typically pay a fixed amount in interest until their redemption date (i.e. when the original issuer has to pay back the money on the bond to whoever owns it at that time).

For example, a bond worth $100 might pay out $10 a year, making the interest rate, or yield, 10%. The yield on the bond is inversely related to the price the bond is bought or sold for, meaning if the price of the bond falls, then its yield rises. Even though its price on the market may fluctuate, its face value remains the same and at the end of the fixed period it can be redeemed for the price it was issued at, in this case $100.

Bonds come in all shapes and sizes, including treasury bonds issued by governments,investment grade bonds issued by companies, and so-called ‘high-yield bonds’ (which are more likely to default so pay a higher rate of return). Some are ‘plain vanilla’, offering a fixed rate of interest and single principal repayment at maturity. Others may be exceptionally complex structured products.

Banks may advise if, say, a company needs money to expand, or is reissuing (or refinancing) debt after the initial bond has reached maturity. Bond markets dwarf equity issuance – there were $6.5 trillion-worth of debt deals globally in 2012, according to Dealogic, versus $662bn in equity markets.

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Roles and career paths

As we mentioned, DCM markets are a lot bigger than ECM markets and as a result those working on this side of the business can be busier. DCM is a high-volume, but low-margin, business for the banks, meaning that teams need to work on more deals in order to generate the same level of profits. The good news is that a lot of companies issue debt frequently, so there’s less of a need to pitch to investors than during equity issuance.

Some debt teams are separated into government and corporate debt issuance, while others will divide their teams between public companies and private placements. Within this, like ECM, debt bankers will focus on a particular sector, such as aerospace or mining. Financial institutions account for around 50% of all debt issuance, so banks tend to have a separate team focusing on different elements of the financial sector.

Junior DCM bankers will spend much of their time creating financial models and drafting pitch books, much like their counterparts in ECM and M&A. However, you’ll also be required to obsessively keep track of market trends – new issues, demand drivers and rumours – and may occasionally be asked to attend deal roadshows with more senior bankers.

As banks are essentially offering similar services, they have to convince clients that their firm is the one to use. So before debt-related products can be created, deal ‘originators’ are deployed to bring in new business. These are senior bankers, usually director and managing director level, who spend a lot of time travelling to clients to gain an insight into their financing needs.

You may also work in syndication – coming in at the end of the process and ensuring the deal goes to market. This involves giving pricing and a guide to live market trends to investors and, once

the deal goes live, marketing it.

Skills sought

Like most front-office investment banking roles, firms expect their analysts to be highly numerate and to have an understanding of the technicalities of company financing. However, while most investment bankers are very focused on individual deals, DCM bankers need to be able to develop relationships with clients over time.

“DCM bankers cultivate and develop relationships with clients by providing them with relevant market information at regular intervals,” says Patrick Quinn, managing director, debt capital markets, Americas at Nomura. “DCM bankers are also involved in every aspect of structuring and executing transactions - working with clients to determine the right structure for a transaction, working with legal counsel to properly document a transaction, and working with the syndicate team, sales force, and trading desks to price and distribute a transaction.”

The fast pace of the DCM desks means that not only must you have a knowledge of corporate finance, but you also need to develop an obsession with the movements of capital markets and keep up with both legal and regulatory developments related to the financial sector.

“Analysis of business trends also becomes increasingly important as you progress in your career, as sophisticated clients will expect you to present new ideas and solutions to them on a regular basis as you advise them on large and strategic transactions,” says Marco Buganza, director in the DCM team at Credit Suisse in London. “You will also need a strong determination to succeed, and good

people skills.”

Analysts in investment banks’ DCM teams are expected to be more “well-rounded” than ever, says Sarah Schell, executive director, DCM, J.P.Morgan in Hong Kong. “Command of the traditional core analyst skill set is only a baseline. In addition, an analyst is required to be conversant with the daily fundamentals, technicals, market issuance and execution processes across three segments: the high-grade and high-yield bond markets as well as the traditional loan market.

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