Debt Capital Markets (DCM) teams advise companies looking to raise debt in a variety of forms in the debt capital markets. Sometimes debt advisory teams may also advise on raising bank debt. Recently, the US market (and increasingly the European market) has moved away from bank debt finance to public debt finance, in the form of bonds. This is primarily a result of lenders becoming subject to more onerous capital requirements (imposed through reforms implemented in the wake of the financial crisis, notably Basel III), which can make it more difficult to profitably lend large amounts of capital to companies.
- Capital Requirements: regulation requires banks to retain a certain amount of high-quality liquid assets on their Balance Sheets (such as cash and highly-rated government bonds). Research into the Basel III regulations to see examples of the types of capital requirements imposed upon banks.
DCM teams help companies to: market themselves (through helping to produce a prospectus with other financial and legal advisers); acquire a credit rating (or multiple ratings) from the main credit rating agencies; and then price their debt at an optimal level for both the companies and prospective investors.
Debt advisory teams tend to specialise in different levels of debt risk, from companies rated as ‘investment grade’ (companies with a high credit rating that are issuing debt perceived as low risk, implying that the likelihood of repayment for investors is very high) to ‘junk’ or ‘high yield’ debt (debt from companies with a lower credit rating, implying that there is a higher risk of them defaulting on debt repayments).
Restructuring teams are generally concerned with debt that has become so risky that there is little chance of the creditors being repaid in full. Their role is to help the lenders and the borrowers to reach an agreement (compromise) whereby the borrower has a chance of avoiding insolvency and the lenders have a chance of retrieving at least some of their capital.
- Insolvency: a company is insolvent when it cannot pay its debts in time, or when the total of its liabilities exceeds its assets. If a company becomes insolvent, it must cease trading.
By Jake Schogger - City Career Series