DCM - An overview

Debt capital markets (DCM) is the team within the investment bank that helps clients raise funds via the issuance of bonds. DCM teams assist and advise these issuers in structuring, pricing and executing bond offerings. In their day-to-day, DCM bankers engage with clients (issuers) to understand their needs to better advise them on their capital structure and strategies. 

To supplement their engagement with issuers, DCM bankers also need to understand the other side of the coin: investor appetite - i.e. who are the ones that will provide capital in exchange for these newly issued debt?

Key aspects of the role:

• Facilitate primary issuance on both the investor and issuer side. 
• Conduct soft sounding in the market to understand demand and pricing expectations.
• Conduct/attend roadshows and other events to present the investment opportunity directly to institutional investors. Platform for Q&A.

DCM makes money in two main ways: 

1. Underwriting fees is the primary revenue stream, typically a percentage of the total amount of debt issued. Fees also depend on the complexity of the deal and the issuer's creditworthiness.
2. Advisory fees relate to advisory services on capital structure, debt management and optimising capital structure.

In a large bond issuance, a group of banks collaborate to underwrite the entire amount. This allows them to pool resources and share the risk. Key roles of the banks in these groups are:

1. Lead Bookrunner / Global Coordinator: Most important bank(s) - the primary advisors to the issuer and takes the lead in all aspects of the transaction. These banks "run" the book, collecting and managing investor orders. They lead the pricing decisions, manage the syndicate and take the largest share of underwriting. Naturally, fees are the highest.
2. Joint Bookrunner / Coordinator: Actively participate in all aspects of the deal alongside other joint bookrunners, including marketing, structuring, book-building and pricing.
3. Passive Bookrunner: Does not issue the bond or have access to the investor order book.

Additionally, bond issuances are supported by credit rating agencies like S&P and Fitch to provide public ratings for the bond.

Project bond is a type of bond issued to finance a specific project, just like a project finance loan used to finance a project. Characteristics are similar (e.g. non-recourse and payment relies on cash flows from the project). The key advantage for banks to help issue project bonds is to refinance existing bank loans with stable cash flows, freeing up capital for other uses. The advantage for the borrower/issuer is that project bonds allow for longer tenors, fixed pricing and lighter covenants, among other benefits.

LBO - An overview

Leveraged buyout (LBO) is the acquisition of a company (buyout) by a fund (the sponsor), in which a significant portion is financed through borrowing (leverage). In most banks (the lenders), this refers to the leverage finance or LevFin team. The key distinction in using more debt to buyout a significant portion of the company is that it allows for (1) lower upfront capital and (2) amplification of returns on equity. Other benefits include tax shield from debt. 

In summary, sponsors use significant debt to maximise equity and amplify returns to acquire companies which they think have the potential to grow and generate value for stakeholders. The success of an LBO depends on:

1. Target management's ability to implement a sound and long-term strategy
2. Evolution of the industry
3. The target's intrinsic value - qualities, products, services, brand etc.
4. Value creation especially with the sponsors' expertise and ability to support the target management team. E.g. providing access to its network, sharing best practices and expertise.

LBO is a 3-step process: acquire, monitor and exit. The monitoring phase typically lasts 4-5 years and is key as it is where value is created via:

1. EBITDA growth: increasing organic sales and margin improvement
2. Cash generation / deleveraging: reduces cost of capital, optimise capex
3. Strategic value / valuation multiple: growth profile, financial markets conditions at exit

There are several ways a fund can exit its LBO investments:

1. Trade sale: full disposal at price premium
2. IPO
3. New LBO (secondary, tertiary): for newcomer to join as minority or non-controlling shareholder
4. Continuation fund: another fund set-up by the sponsor to continue supporting the investment over the long-term

How banks come in: Levfin teams in banks support the sponsor via the provision of debt at the holdco level. The debt is then repaid via cashflows from the target company (opco). Banks could also provide advisory services for sponsors and target companies on the LBO transaction, including valuation, deal structuring, negotiation and syndication.

M&A - An overview

Mergers & acquisitions is the act of merging or acquiring a company by another company. Before diving in, let us consider what sell side is vs buy side, which is an important jargon to know. 

Buy side are firms that buy and manage securities to generate returns for their clients (investors). These include asset management firms, sovereign wealth funds and pension funds. Their goal is to provide risk-adjusted returns to their clients and generate management and/or performance fees. The role of the buy side in M&A is to:

• As money managers, buy side oversees the clients' money
• Determine whether to buy, sell or hold various investments to earn the returns for their clients
• They do this by conducting due diligence, e.g. internal research on opportunities, financial modeling and valuation
• Ultimately to increase wealth (assets under management)

Sell side are firms that sell or facilitate the sale to the buy side, a.k.a. the dealmakers. These include investment banks, brokerages and research houses. Their goal is to generate revenue through commissions/fees and spreads. The role of the sell side is to:

• Facilitate the increase of debt and equity (capital raising), and generate liquidity for securities
• Advise clients on major transactions and M&A
• Provide equity research analysis, perform financial modeling and valuation

Generic and brief M&A process:

1. Strategic planning of the business
2. Research on the target to be acquired
3. Due diligence based on available information (financial, tax, commercial, tech, legal etc.)
4. Contact the target and establish NDA
5. Generate internal business valuation
6. If keen, submit a letter of intent and conduct more in-depth due diligence before arriving at final valuation of the target
7. Negotiations begin and to consider sources of financing the transaction
8. Legal docs must be ironed out
9. Establish purchase price
10. Acquire and integrate

How banks make money from M&A

1. Advisory - banks can come in as an advisor to both the buy and sell side. Key aspects include in-depth understanding of the market and the target, to understand how the acquisition can generate value for the company. Banks earn retainer (fixed and recurring) + success (largest component, paid only upon successful closing of the transaction) fees from the transaction.
2. Financing - typically called leveraged finance in investment banks, the M&A financing team provides loans to the buyer. 

Trade Finance - An overview

The essence of trade finance lies in facilitating trade between counterparties (importers and exporters) while mitigating its risks, including non-payments (defaults), non-deliveries, etc. To put it simply, exporters (sellers) want to sell goods to importers (buyers) who can pay. Importers, on the other hand, want to purchase goods from sellers that can produce the goods to the specifications as listed in the contract. These needs are resolved through various trade finance products: 

1) Letters of credit ("LCs") - among the most common and standardised forms of trade finance. A bank guarantees payment to the exporter on behalf of the importer if the exporter meets the contractual terms and presents the required shipping documents (e.g. bill of lading). This reduces payment risk to the exporter. 

• Commercial LC (documentary credit) is the most common type, used for direct payment against shipment of goods.
• Standby LC (SBLC) acts as a guarantee and drawn only if the applicant (importer) defaults on their contractual obligations.
• Confirmation LC is when an additional bank (confirming bank) adds its own guarantee to the issuing bank's undertaking as another layer of security.
• Transferable LC is one that allows the beneficiary to transfer all or part of the LC to another one/multiple beneficiaries (e.g. middleman to end suppliers). 
• Back-to-back LC involves 2 LCs where a master LC acts as security for the issuance of a second LC
• Red clause LC allows the exporter to receive advanee payment from the advising bank before shipment of goods.
• Sight LC is where payment is made upon presentation of compliant documents.
• Usance LC is where payment is made at a specified future date after presenting the documents.

2) Documentary collection - also a common form of trade finance. Banks act as intermediaries to facilitate the exchange of documents. 

• Documents against payment is where the importer receives the shipping documents only upon making payment to the exporter's bank.
• Documents against acceptance is where the importer receives the shipping documents upon accepting a bill of exchange and will pay at a future specified date.

3) Factoring - simply put, it is the sale of a company's receivables in exchange for cash on a discounted basis.

4) Bank guarantee is where a bank promises to pay a beneficiary a specified sum in the event of non-fulfillment of contractual obligations. 

• Performance guarantee is where the bank guarantees a counterparty will fulfil their contractual obligations.
• Advance payment guarantee is where if an advance payment is not utilised as per the contract, the advance will be returned.
• Bid bond guarantee ensures a bidder will sign the contract if their bid is accepted.
• Payment guarantee is for payment for goods and services.

Funded trade finance: Involving direct cash advance or loan to a counterparty in the transaction, e.g. in receivables financing (factoring) and red clause LC.

Unfunded trade finance: Do not involve immediate cash outlay, but provides a commitment / guarantee against risks to facilitate the trade.

Key considerations in pricing a trade finance product:

1) Applicant's credit worthiness and country risk

2) Type of instrument

3) Notional value

4) Tenor

5) Relationship with the client

6) Complexity

How banks make money from trade finance:

1) Fees from BGs and LCs

2) Interest income from loans, e.g. import/export loans to purchase or produce goods

Cash Management - An overview

Cash management is a corporate banking product that revolves around the business of cash. Cash management teams provide solutions to corporates to help otimise their cash flow and liquidity. They do this via different ways:

1) Account management

2) Payments and collections

3) Liquidity management for excess cash, e.g. investment of surplus funds

4) Cash flow forecasting and optimisation

Benefits for corporates: 

1) Proactive decision-making supported by having a real-time, consolidated view of the company/group's cash across all their accounts.

2) Reduced borrowing costs by understanding their cash cycle and when cash is required to bridge any working capital gaps.

3) Additional revenue via interest income for surplus cash.

How banks make money through cash management:

1) Service fees - includes account maintenance fees and transaction fees.

2) Cash deposits from these companies are used to fund the bank's lending activities which generate income, greater than the interest it pays on these deposits. 

3) Some other ways include interbank lending (e.g. overnight loans) which generate interest. Such overnight rates are typically higher than the interest it pays on these deposits due to the difference in risk levels. The difference is what the bank profits on these transactions.

Investing in S-REITs - An overview

REITs are an extremely popular investment choice in Singapore, with the country being the largest REIT market in Asia (ex-Japan). As of February 2025, the 39 Singapore REITs (S-REITs) and property trusts have a total market cap of S$82bn, making up 10% of the Singapore Exchange's market cap. In a small country like Singapore, it is no surprise that more than 90% of S-REITs own properties outside Singapore. S-REITs are well-diversified across various sub-sectors, including industrial, retail, office, hospitality, data center and healthcare.

Fun fact: S-REITs that own Singapore real estate properties must distribute at least 90% of their specified taxable income to unitholders to qualify for tax transparency treatment. With quarterly/semi-annual dividends and no dividend tax in Singapore, S-REITs are thus a great sector in which to invest.

Structural overview of REITs: REITs pool funds from investors through an IPO, whose units are then offered to the public. The pooled funds are used to acquire and manage a portfolio of income-generating properties and leased out to tenants. The rental income is distributed back to investors via dividends. REITs are managed by the REIT manager which sets and executes the strategic direction of the REIT, charging a management fee (base + performance).

Steps to analysing REITs:

1) Understanding the REIT's business and portfolio - REIT type, sector focus, property portfolio quality and diversification

- sector risks and opportunities

- alignment with investment goals and risk tolerance

- quality of assets (e.g. prime location), geographic diversification, tenant mix, occupancy rate, weighted average lease expiry, rental reversion

2) Financial health and performance - key financial metrics, dividend analysis, and debt/leverage

- funds from operations, net asset value, net property income, property yield

- dividend per unit, dividend yield, payout ratio, dividend growth track record

- gearing (S-REITs have leverage limit of 50%)

- interest coverage ratio, credit rating, debt expiry profile

3) Management team

- track record, sponsor and fee structure

4) Macroeconomic and market factors

- interest rate (borrowing cost)

- economic conditions, regulatory environment, trends

5) Risk

- taxes, refinancing risk, leverage risk, concentration risk etc.

Asset Financing - An overview

Asset financing in a nutshell.

Summary: Asset financing is simply raising capital (equity and debt) by an organisation to acquire an asset, leveraging it and reducing the need for full upfront cash outlay or impacting other credit lines. In the case of corporate banking, this typically involves debt arranged by lenders. Such assets include ships, data centers, real estate, and machinery.

Financing the purchase of assets can come in various ways:

1) Full cash outlay:

a) Company uses existing cash or equity to buy the asset and gains full ownership of the asset.

b) No debt incurred, hence no implication on gearing (debt-to-equity). 

c) Ties up liquidity which could be used for other purposes (opportunity cost).

2) Debt financing: 

a) Company borrows money from banks to finance the purchase of the asset. 

The asset serves as the collateral of the loan. However, due to loan limits (i.e. LTV), they will still need to inject cash/equity to finance a portion of it (e.g. 20% of the asset price). The company gains full ownership of the asset from the start.

b) The company makes regular payments (P+I) to the lenders.

c) Preserves cash but adds debt to the balance sheet.

3) Leasing:

a) In the case of corporate banking, the bank could purchase the asset and lease it to the company with regular payments for the right to use the asset over a period of time. The ownership thus sits with the bank.

b) At the end of the period, (1) the lease could be extended; (2) the company may choose to end the lease, and the bank will then dispose the asset; (3) the company may purchase the asset from the bank entirely.

c) Preserves cash and gives the company flexibility.

Which method of financing is right for the company? This depends on the company's financial health, cash flow / balance, business opportunities / needs for cash etc.

Our friends in Global Markets

To provide a more comprehensive suite of solutions for our clients in corporate banking, we also work with business lines within Global Markets. These include corporate sales (FX and rates), cross-asset sales and prime services and clearing. This post will be an overview of the three main business lines we work with:

1) Corporate sales: This team sells FX and rates solutions to corporate clients as suggested by its name.  The purpose of these solutions is to help corporates hedge currency and interest rate risks via key products, namely FX forwards and swaps, as well as interest rate swaps. These solutions are especially crucial for large companies with cross-border transactions (FX risk) or significant debt on their balance sheet (interest rate risk). 

2) Cross-asset sales: There may be different cross-asset sales teams in a particular bank. A key product that corporate clients may look at is secured hedging products like interest rate swaps. However unlike in (1) which is done on a corporate level, this swap is typically tailored for a specific project or asset financing transaction and hence aligned with the financing structure.

3) Prime services and clearing: The prime desks in an investment bank are the ones that can handle the trading of a wide range of products, including complexed ones, hence they typically cater to hedge funds. Clearing, on the other hand, refers to the execution of a transaction or trade on an exchange, ensuring the smooth and secure settlement of agreements.

(1) and (3) are typically flow-based businesses, with fluctuations in revenue dependent on client needs and market changes. On the other hand, (2) is contingent on the financing of an asset and hence revenue is tied to new deals in the pipeline.

Public vs Private Markets - An overview

An overview of the public and private markets for beginners.

Summary: Public and private markets are two sides of the same coin. They are both marketplaces that facilitate transactions between willing buyers and sellers. The key difference lies in the participants - public markets are open to the public, including individuals and corporations. In contrast, private markets are private and traditionally only open to selected entities. The roles of buyers and sellers differ between situations, but in general, one party looks to raise capital while the other looks to generate income from its capital.

Public Markets: Financial markets where securities like stocks and bonds are traded publicly on exchanges. This marketplace is accessible and open to the general public and institutional investors. Companies that look to raise capital from issuing shares and bonds can list them on exchanges, while investors invest their capital in these securities on the exchange to generate income. As this marketplace allows "public" access to individuals and corporations, securities are highly liquid, as any entity can buy or sell a security relatively quickly during market hours. 

Characteristics include: 

• High transparency due to listing regulations and continuous disclosure requirements
• Valuation driven by demand and supply in the market
• Moderate returns
• Diversification benefits from various public securities

Private Markets: Similar to the public markets, except this marketplace is traditionally open only to larger, institutional and professional investors like hedge funds, sovereign wealth funds, and family offices. The reason is that investments in the private markets typically command a larger minimum ticket size, hence being out of reach for regular individuals. The private market (private equity and private credit) has been growing rapidly in the past few years, and with greater access for individuals through new fund structures and platforms, this will be an increasingly important topic.

Characteristics include: 

• Not as transparent as there are fewer disclosure requirements and information is typically shared directly with investors
• Valuation estimated using models
• Higher returns due to liquidity premium and higher risk
• Some diversification benefits
• Long investment horizon as these investments are typically locked for long periods
• Presence of active management investors

Equity Capital - An overview

Equity capital represents the ownership in a company and its residual claim to the company's assets and earnings.

Summary: Equity capital is money that investors pour into the company. It could also be the retained earnings from a company's net profits. This capital is used to fund the company's activities, including investments and operations. It can be categorised in various ways, including regulatory (Tier 1 and Tier 2 per the previous post), internal vs external (retained earnings vs injections), and form (ordinary vs preferred).

Continuing from the earlier post on Tier 1 and Tier 2 capital, I will explain more about this classification of capital below. 

The tiering of this capital is dependent on its quality and ability to absorb losses.

Tier 1: Core Capital

1) Common Equity Tier 1 ("CET1"): Highest quality and best able to absorb losses.  It is considered "going concern" capital, which means it absorbs losses while the bank continues its operations. Examples of such capital include ordinary shares, retained earnings and accumulated other comprehensive income.

2) Additional Tier 1 ("AT1"): Next highest quality and able to provide significant loss-absorbing capacity. This type of capital is typically perpetual, have discretionary and non-cumulative dividend payments, and have loss absorption triggers.

Tier 2: Supplementary Capital

1) Considered to be supplementary capital, lower quality than Tier 1 because it is not as permanent and has lower capacity for absorbing losses. Designed to absorb such losses after Tier 1 capital has been depleted. Examples of such capital include subordinated term loans, hybrid capital instruments (quasi-equity), and loss provisions.

To note, these types of capital are not reported as such on the balance sheet. While the balance sheet shows individual line items, CET1, AT1 and Tier 2 capital represent various line items adjusted for rules according to regulatory requirements.

Risk Weighted Assets - An overview

Risk-weighted assets ("RWA") is one of the most important concepts to learn in finance.

Overview:

The general idea is that when banks lend money to borrowers, there is a risk of default by the borrowers. These loans are labelled as an asset because when banks lend to borrowers, these appear on the bank's balance sheet as an asset (think receivables). RWA is thus basically the bank's asset whose nominal value is adjusted for its riskiness, converting it into a standardised measure of risk exposure. The higher the risk, the higher the potential loss and hence the higher its RWA. Itself, RWA is a function of exposure at default (EAD), probability of default (PD), and loss given default (LDG).

The reason RWA is crucial is that banks must hold a certain amount of capital against their RWAs to be able to absorb potential losses in the event of default and protect depositors and the financial system in general. This amount is dictated by the Capital Adequacy Ratio ("CAR") requirements.

CAR:

There are 3 key components to the CAR formula: 

1) CAR - the minimum ratio is regulated by the government / central bank.

2) RWA - calculated risk exposure by the bank in accordance with guidelines by the regulators.

3) Capital - the minimum capital that a bank must hold for its total RWA to meet regulatory requirements. This capital primarily comprises tier 1 (Common Equity Tier 1 (CET1) capital and Additional Tier 1 (AT1) capital) and Tier 2 capital.

*I will go into the different forms of capital in a separate post. 

Putting these together, with higher RWA and a fixed CAR, the amount of capital a bank must have is higher. This presents several challenges for the bank, including:

1) Opportunity Cost - minimum capital that must be held by the bank, thus unable to be deployed for other income-generating purposes.

2) Profitability / Growth - lower Return on Equity (ROE) assuming profits stay the same, given the higher equity base. The bank would then be less attractive to investors and potentially impede overall balance sheet growth (e.g. through higher cost of equity, difficulty raising more capital etc.).

Three scenarios to note:

1) RWA for hedging: While derivatives like FX swaps, interest rate swaps (IRS), and secured swaps are used to hedge risk, they still generate RWA. This is because the RWA generated is from the counterparty's credit risk when the hedge is executed, not the risk of the underlying itself. However, this is typically very low, especially if the counterparty is investment grade.

2) Increasing RWA: In theory, RWA should decrease over time for a given amortising loan as the principal owed to the bank and correspondingly the risk reduces. However, there are instances when RWA increases over time (not exhaustive):

a) Decrease in credit quality of the borrower, e.g. during periods of financial distress, hence increasing their probability of default and RWA.

b)  Changes in regulations, such as increasing the risk weights of certain types of loans by the regulators, may also result in a higher RWA.

3) RWA higher than principal: This is possible when the risk weighting assigned to a particular asset/loan is >100% of the principal amount. Such high-risk assets include those with high volatility, speculative exposures, subordinated debt, and low credit standing. 

Quick check: why is it possible for RWA to be greater than the principal if the principal is the max exposure / possible loss of the bank? The reason goes back to the notion of RWA - it is not the maximum amount of loss, but rather the amount of capital a bank must hold to buffer against potential losses. In the case of risky assets, this buffer must be higher. This not only provides a greater safety margin for such unexpected losses, but also denotes a disincentive for banks to take excessive risk.

Diving further, let's break down RWA. Total RWA comprises RWA from credit risk, market risk and operational risk.

1) Credit risk: the risk that a borrower will not repay the loan. Certain banks use the internal risk-based approach ("IRB"), where instead of using fixed risk weights, it uses its own models to determine the riskiness based on probability of default (PD), loss given default (LGD), exposure at default (EAD) and maturity. 

2) Market risk: risk of losses from changes in market prices (interest rate, exchange rate, stock prices) for a bank's trading book.

3) Operational risk: risk of losses from internal errors or external events (e.g. fraud).

From the bank's perspective, we focus on credit risk RWA which is given by the formulas:

• RWACredit Risk (IRB)​=EAD×RWcalculated from PD, LGD, M​
• RW ≈(Unexpected Loss Probability×LGD)×Scaling Factor
• Where Scaling Factor = ~9.5 based on the 10.5% minimum capital adequacy ratio under Basel III.

In the event of high EAD, PD, and LGD, in conjunction with the scaling factor, RW may increase > 100% and hence if EAD = 1, RWA will be greater than the total loan amount.