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Debt Capital Markets (DCM)

Guide to Understanding the Debt Capital Markets (DCM)

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Debt Capital Markets (DCM)

Debt Capital Markets (DCM): Product Group Primer

The debt capital markets (DCM) is a product group within the investment banking division that offers capital raising services in the form of corporate bonds and government bonds on behalf of their clients.

The clients served by the debt capital markets group are typically corporations and governmental entities.

The term “product group” in investment banking refers to deal teams that specialize in a particular type of transaction.

On that note, the debt capital markets product group specializes in assisting their clients with raising capital in the form of investment-grade debt securities, such as bonds and loans.

While there are exceptions, most DCM groups are usually industry agnostic. Thus, their capital raising services can be offered to a wide range of clients, irrespective of the sector.

The issuance of debt is one method for corporate and government entities to raise capital to fund their ongoing operations and strategies to achieve growth and expansion.

Learn More → Investment Banking Guide

Debt Capital Markets (DCM): Investment Banking Services

The transactions the debt capital markets (DCM) group advises on are predominantly related to the origination, structuring, and marketing of investment-grade debt issuances.

The debt capital markets (DCM) group also works on debt refinancing transactions, where the issuer is advised on the replacement of an existing debt obligation with a new issuance.

The structure of a debt instrument—i.e. the terms attached to the security—are specific to the type of financial product being offered and the credit profile of the issuer, among other factors.

The most common types of debt issuances include the following:

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Debt Capital Markets vs. Equity Capital Markets

Generally speaking, capital can be raised in the form of either equity or debt.

  • Equity Capital Markets (ECM) → The ECM group offers advisory services to corporations raising equity capital, most notably through initial public offerings (IPOs) and secondary offerings. The client raises funds by issuing shares of itself to the market, i.e. the selling of partial ownership stakes in the company in exchange for capital. Other services include structuring hybrid securities like preferred stock, as well as advising on private placements and private investment in public entities (PIPEs) and special purpose acquisition vehicles (SPACs).
  • Debt Capital Markets (DCM) → The DCM group advises clients raising funds through the issuance of debt securities, namely bonds and loans, in which interest expense must typically be paid throughout the borrowing period and the original principal must be paid back in full at maturity.

The types of transactions worked on by the equity capital markets (ECM) groups include IPOs and secondary offerings, as well as divestitures (e.g. spin-offs), private placements, private investment in public equity (PIPE) transactions, and special purpose acquisition vehicles (SPACs).

The ECM group tends to receive more publicity and press coverage for that reason, and thus arguably carries more prestige (and better exit opportunities) compared to the DCM product group.

Debt Capital Markets vs. Leveraged Finance (LevFin)

The debt capital markets (DCM) product group is closely tied to the Leveraged Finance (LevFin) group. In fact, the LevFin product group is categorized under DCM at most investment banks.

In practice, however, the LevFin groups tend to be recognized as a separate group.

The distinction between the DCM and LevFin product group comes down to the credit rating of the debt issuers and the circumstances of the use of debt proceeds.

  • Debt Capital Markets (DCM) → The DCM group structures and markets investment-grade debt issuances that are of lower-risk (and thus lower yield), i.e. fixed income securities.
  • Leveraged Finance (LevFin) → In contrast, the LevFin group works on non-investment grade debt issuances characterized by greater risk, such as high-yield bonds, loan syndication, and hybrid securities like convertible debt.

Usually, DCM clients are raising capital for more general purposes, whereas LevFin clients are actively involved in obtaining riskier forms of financing for complex, high-stakes transactions, such as acquisitions (e.g. leveraged buyouts, or “LBOs”) and leveraged recaps.

Both the DCM and LevFin group advise on the issuance of debt securities, which unlike equity, represent contractual borrowings that come with periodic interest payment obligations as part of the financing arrangement along with the return of the original principal at maturity.

Should these obligations not be met, the issuer has defaulted on the debt and is at risk of financial distress, in which restructuring becomes necessary, and the borrower might need to file for bankruptcy protection in-court if the issues cannot be settled with creditors out-of-court.

The most common catalyst for corporate restructuring and bankruptcies is an unsustainable capital structure—wherein the debt burden exceeds the capacity that the borrower can handle—which reflects the risks associated with an over-reliance on debt.

Therefore, while credit analysis and risk diligence are critical parts of the DCM and LevFin groups, the circumstances of LevFin transactions make the role more strenuous and demanding from a technical standpoint.

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