Debt Capital Markets (DCM)
A lower risk investment market
A lower risk investment market
Debt Capital Markets (DCM) groups are responsible for providing advice on the raising of debt for acquisitions, refinancing of existing debt, or restructuring of existing debt. These teams operate in a rapidly moving environment, which is unusual for an advisory role and work closely with the IBD (Investment Banking Division). Being a part of such team means dealing with saleable units of debt such as bonds, treasuries, money market instruments, and more.
As stated earlier, DCM teams operate in a fast-paced environment, focusing on the short-term side of investments. On the other hand, ECM teams operate within a slower-moving environment and deal with longer investment horizons. The difference in environments leads to different levels of risks involved for the two teams. With DCM teams, because they are focusing on the short-term side, they do not carry as much risk as the ECM teams who lock into long-term deals.
The level of risk that each team is exposed to is also directly related to the types of securities they deal with. DCM teams deal with debt securities, while ECM teams deal with equity securities. Note that the type of investing activity that each team takes part in does not differ greatly from the other. That means, the way the two teams trade are not that much different. It is only the type of security they trade that makes them different from one another. If you’re interested in DCM teams, make sure to check out our free DCM course to learn more about what it is like to invest in the debt capital markets.
Debt capital markets (DCM), also known as fixed-income markets, are a low risk, capital market where investors are lenders to a company in exchange for debt securities. These markets are also used by companies to finance themselves through debt which helps diversify their funding.
The level of risks measured against the level of rewards are something that all investors take into account when making investing decisions and different investors have different tastes. Some investors like the concept of high risk, high reward and seek out opportunities in the equity capital markets. However, for those looking for a lower risk, fixed-income investment, they might want to turn their attention towards debt securities in the debt capital markets.
Debt securities are promises that a company makes to lenders in exchange for funding such as: bonds, treasuries, money market instruments, and more. They are generally offered with the addition of interest rates, which do not change, and is dependent on the perceived ability of the borrower to repay their debt. For example, if the borrower does not seem to have an ability to repay, then the interest rate on a debt security will be high; the opposite occurs if the borrower possesses such ability.
But how does one go about acquiring debt securities? The two major ways of obtaining debt securities is either through the primary market or the secondary market. The primary market is where governments and companies directly issue their bonds. The secondary market is where individuals who have already received their bond certificates, go to resell the bond for either a higher or lower price depending on supply and demand.
Remember that bonds are a type of debt security traded by DCM teams in the debt capital market. However, there is not just one type of bond. In fact, there are many different types out there. Here is a list of the more common ones with a general explanation of their characteristics:
The major difference between DCM and ECM is the type of investing activity that occurs. In DCM, investors are lending money to companies whereas in an ECM, investors are purchasing a portion of ownership in a company. These two different investing activities yield two very different levels of risks and rewards. With DCM, debt securities are offered at a fixed interest rate, which is why the market is sometimes referred to as the fixed-income market and because of this, it has a lower return on investment when compared to ECM.
However, this does not make ECM a better market because a potential for higher return on investment is commonly associated with higher risks. Moreover, ECM do not always have consistent payments in the form of dividends and the amount of the dividend always varies depending on how well the company is doing. Contrastingly, in DCM, because the debt securities are promises to pay with interest attached, investors can expect their payment when it is due and in full. This makes DCM less riskier than ECM and the choice to invest in either one depends on the individual. If you are interested in DCM, check out our free DCM course.
Note that you can buy and sell debt securities just like how you can buy and sell company shares. Also, it is important to keep in mind that debt securities are not as volatile as company stocks. This can be very attractive for those looking for career opportunities in either the buy side or the sell side in the debt capital markets.
Do you think you’re ready to take on debt capital markets? Enhance and round out your corporate finance background even further by checking out these related articles: