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Debt Capital Markets (DCM)

Step-by-Step Guide to Understanding the Debt Capital Markets (DCM)

Last Updated December 6, 2023

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Debt Capital Markets (DCM)

In This Article
  • The debt capital markets (DCM) is a product group within the investment banking division.
  • The function of the debt capital markets (DCM) product group is to structure and arrange the issuance of investment-grade bonds and loans to borrowers with strong credit profiles.
  • The DCM investment banking group services clients that include corporations, institutional investors, and governmental entities.
  • The difference between the DCM and LevFin product group is that DCM specializes in investment-grade debt issuances, while LevFin focuses on speculative-grade debt.

What is the Definition of Debt Capital Markets (DCM)?

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.

Usually, the clients served by the debt capital markets group (DCM) are investment-grade corporations with high credit ratings 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 (DCM) 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 frequently industry agnostic. The DCM group’s capital raising services can therefore 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 Primer

What Does an DCM Investment Banking Analyst Do?

So, what sort of analytical work does an investment banker in the debt capital markets (DCM) group perform on the job?

The analysis performed by the debt capital markets (DCM) investment banking product group while structuring issuances are based around the following parameters:

  • Credit Quality → Credit Rating by Credit Agencies (S&P, Moody’s, Fitch) and Credit Ratio Analysis to Estimate Debt Capacity
  • Debt Sizing → Size of Requested Financing and Liquidity (or Illiquidity) of Securities in the Open Markets
  • Debt Maturity → Shorter Maturities Coincide with Less Risk and Longer Maturities Correspond to Higher Risk (i.e. More Uncertainty = Riskier Offering)
  • State of Credit Markets → Current Conditions of Credit Markets (and Interest Rate Environment) are Determinants of the Pricing of Debt Issuances
  • Yield (Coupon Rate) → Interest Rate Pricing is a Function of Credit Quality of Borrower, Market Supply/Demand, Comparables, Market Interest Rate, Track Record of Borrower (or Past Transactions), etc.

What is the Function of Debt Capital Markets (DCM)?

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 core focus of the DCM product group is the issuance of investment-grade bonds syndicated and sold to institutional investors.

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 – is specific to the type of financial product offered and the credit profile of the issuer, among other factors.

Debt Capital Markets (DCM) Example

Investment Grade Capital Markets (Source: Goldman Sachs)

What are the Different Types of Debt Security Issuances?

The most common types of debt issuances that the debt capital markets (DCM) product group works on include the following:

  • Investment Grade Corporate Bonds → Bond issuances to corporate borrowers with high credit ratings and low risk of default.
  • Commercial Paper (CP) → Unsecured short-term debt instruments issued to qualified corporate borrowers to finance with near-term maturities.
  • Government Bonds (Treasury Bonds) → Government debt issuances backed by the full faith and credit of the U.S. government (and thereby risk-free in theory).
  • Municipal Bonds → Municipal bonds (or “munis”) are debt securities issued by governmental entities at the state, city, or county level to fund public projects most often related to infrastructure (e.g. highways, roads, sewer systems, educational institutions, airports).
  • Emerging Markets Bonds → Debt securities issued by governments or corporations located in developing nations, which are subject to more geopolitical and economic risk (e.g. currency fluctuations).

DCM vs. ECM Investment Banking: What is the Difference?

Generally speaking, capital can be raised in the form of either equity or debt, which the DCM and ECM investment banking product groups facilitate.

  • 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 to raise 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.

DCM vs. LevFin Investment Banking: What is the Difference?

The debt capital markets (DCM) product group is closely tied to the Leveraged Finance (LevFin) group.

In fact, the LevFin product group is classified under DCM at most investment banks.

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

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 raise capital for more general purposes, while LevFin clients actively participate 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.

Given those circumstances, 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 – where 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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