DCM Investment Banking

How Do Investment Banks Operate In Debt Capital Markets?

Investment banks may be a part of a full-scale bank or a standalone financial company and assist government entities, corporates, start-ups, and high-net-worth individuals to understand the potential and risks of the proposed project; if the project is viable, these banks also help create or get advance capital from the market. They earn their profits by charging a fee for each transaction or execution.

Investment banking segments

Within investment banking, there are two key segments – the debt capital market (DCM) and the equity capital market (ECM). Both help clients raise money, albeit in different ways. The DCM raises money for the client through debt issuances, and the ECM raises capital through equity.

Debt capital market – Divisions

In investment banking, the DCM department usually provides services under the following three major heads:

  • Originator

This division communicates with the client and provides accurate market data, with their recommendations on when and how to issue new bonds to fulfil clients’ goals. Here, a comprehensive study of the market and a thorough understanding of market trends and future scenarios play a major role. The planning has to cater to the near future and ensure that the said proposal does not hamper the company’s growth. Hence, it becomes mandatory for investment banks to understand the pros and cons of debt securities. It is also vital for them to regularly update information.

  • Structuring

As the name suggests, this division lays out the plans on how clients’ goals can be fulfilled. As the debt market is a high-volume, low-margin business, investment banks would need to pay attention to minute details. The division also periodically reviews existing debt, restructuring them if required.

  • Syndicate

This division administers an effective structural product that involves multiple lenders funding different portions of a large loan to a single borrower – the reason could be a takeover, merger or acquisition. Syndicates are formed to reduce future risk by spreading it among the lenders; these also take necessary action to combat adverse scenarios.

Investment banking DCM – A Primer

Investment banking DCM, also known as the fixed income market, is the place to trade in debt securities. In DCM investment banking, a client looking for borrowed capital gets access to a hoard of investors looking for funding opportunities. This is known as a fixed income market because investors receive interests or dividends, mandatory in nature, at regular intervals over and above the maturity value.

Debt securities are negotiable debt or financial instruments that come with a pre-defined maturity date, discounted maturity value, completed maturity value and issue date. In simple terms, they are funds borrowed from the market, which need to be repaid in prescheduled amounts within a stipulated period.

There are two ways of dealing in debt securities: the primary and secondary markets. The primary market involves the direct issuance of bonds by government or corporate entities. The secondary market involves individuals who are looking to trade in the acquired bonds, depending on market supply and demand.

Most common debt securities in investment banking DCM

The most common debt securities in investment banking DCM are discussed below:

Government Securities

The largest borrower in the Indian debt market is the government. The federal government issues treasury bills and bonds primarily to finance government deficits and government activities such as infrastructure development and general development, or accumulating disaster management funds. These bonds are highly secure as the government guarantees them.

Corporate Bonds

Private and public corporates issue these bonds. The bonds promise to return the maturity value or principal on a defined date with prescheduled interest payments for a decided tenure. These may be secured by assets or collaterals.

Certificate Of Deposit

This is an agreement between a financial institution or authorised bank and a depositor to invest an amount for a specific tenure, with interest earned on the invested amount. It is issued under the guidance of the central bank of a country and is also known as a fixed deposit.

Non-convertible Debentures

These are financial instruments publicly issued by companies to raise long-term capital. They have fixed tenures, promising regular interest at a certain rate. They may be short or long term, depending on the needs of the client.

Commercial paper

It is an unsecured instrument issued in the form of a promissory note, redeemable at par to the holder during maturity. These are issued by the company and primary dealers and all financial institutions under the guidance of a country’s central bank.

Conclusion

Debt capital marketing strategies by investment banking DCM teams play a pivotal role in achieving clients’ short- to medium-term requirements in a structured manner.