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Al Abraj Street, Business Bay

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Debt Capital Markets – The Preferred Source of Corporate Funding

June/27/2019

Debt Capital Market

What is the Debt Capital Market?

It is a market where funds are raised for companies and governments through debt security trading. This also includes the trade of corporate bonds, government bonds, certificates of deposit, preferred stock, credit default swap, etc.

The working capital finance of a company largely depends on capital markets. The two main forms of debt financing include selling of bonds or obtaining long-term loans from individuals, banks, and other financial institutions.

To raise equity capital, a firm sells a percentage of ownership and does not pay any interest. But to raise debt capital the firm would borrow funds and then will pay the interest on those funds. Though it is similar to a loan or mortgage, when it comes to organizations, they are done at a much larger scale. This is how Debt Capital differs from Equity Capital.

Any company, agency, sovereigns or even a supranational approach the debt capital market team, or the DCM Team for advice pertaining to debt capital raising.

Typically, the role of a junior-level banker of a DCM Team will be to

  • Pitch in clients and potential clients and answer their queries
  • Execute debt issuances for them
  • Provide information to other groups on request
  • Update market trend slides and
  • Document recent deals made.

In Debt capital market the volume is higher and the margin in lower when compared with the equity capital market. This is also because the global credit markets are larger than the global equity markets as the deals happen within a few days compared to the equity market deals which take weeks or even months. This also facilitates a number of deals to happen, making the market very large.

So, investment banks here charge very less compared to other services like IPO, etc. This is compensated with a higher number of deals.

The debt capital market is preferred because debt cost usually is between 4% to 8% compared to the equity cost being 25% or more. Debt is also a safer option as there are other alternatives to rely upon when the company does not perform well.

The structure of Debt capital markets Team depends on the banks along with the nature of services they provide.

Some banks combine Debt capital market with Leveraged Finance.

Some banks divide their team as corporate issuers and government issuers. They may be again divided based on industry verticals.

There will also be a syndicate team, as in equity capital market, that is responsible for order allocation among investors and builds bond offering books.

Thus, while considering the various options available for corporate financing, the debt capital market stands out to be the best in terms of process time and also with its less risk nature.

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