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.