How investment banks operate in DCM markets?January 17, 2019
DCM or Debt Capital Markets is the link that connects the corporate issuers and bankers. DCM groups provide advisory services to corporate issuers for debt-raising required for acquisitions, restructuring of debts existing-debt refinancing, and old-debt refinancing. The investment banker is the vital link in the entire process and acts as a broker between the intermediaries. Such investment banking teams need to be agile, flexible and abreast a fluctuating market.
One will need proficiency in markets with fixed income, treasuries, bonds, instruments in the money market, and much more. The investment banker receives a fee from the contracting parties for his mediation and making of financial arrangements, advice on financial issues like mergers, acquisitions, and services in trading of bonds, shares etc.
Let us understand the Debt Capital Market operations to explore the role of the investment banker in DCM operations.
DCM Teams and ECM Teams
DCM teams focus on operating the fast-paced short-term side of financial investments. ECM-Equity Capital Markets teams focus on the long-term investments which move slower. The risk factors keep these two teams in different environs. Obviously, the ECM teams bear more risk with longer termed investments. DCM teams work with debt securities and ECM teams with equity securities. The differences between the teams are due to the risk capabilities and types of investments they focus on.
Debt Capital Markets explained.
DCM or Debt capital markets are capital markets that generate fixed-income and have low-risk. The investors receive debt securities for money lent to the company invested in. The DCM is popular with companies who look for finance through debt. Investors also prefer them as it ensures their capital remains intact while they earn profits and a fixed-income.
Investors are comfortable with low-risk income providing instruments in the DCM like bonds, debt securities, and others. This helps them preserve the capital amount while earning profits when trading in the securities. The investment bankers advice customers for a fee on the risks involved in investing in such money investments.
Companies that raise funds make debt securities to the lenders in the form of money market instruments, bonds, treasuries and such. The creditworthiness of the debtor is assessed and sets the interest rate. Higher the creditworthiness lower will be the interest rates.
Debt securities can be obtained from both the primary and secondary markets. The primary market is one where companies issue their bonds. The secondary market is one where persons holding bonds sell them at market prices which may be higher or lower.
Bonds are securities dealt in by the DCM teams. They have different values, characteristics and return profiles. The most often mentioned bonds are:
- Investment bonds
- Bonds with high-yield
- Bonds from the government
- Emerging markets based bonds
- Bonds by the municipality
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