Investment Banking Aspirant’s Guide to Debt Financing

Debt financing presents a good opportunity for investment banking aspirants.

In general, jobs in debt financing are similar more or less with those in the equity capital markets. But, there are subtle differences that aspirants must take note of.

This guide would introduce debt financing to upcoming investment banking professionals.

Debt financing, as the name suggests, is raising capital through the issuance of debt securities in exchange for cash. Unlike equity securities, debt securities have a written promise to pay a specific rate of interest to its security holders.

Perhaps one of the best ways for you to better understand debt capital markets is to contrast it with its sibling, the equity capital markets.

Debt Capital Markets vs. Equity Capital Markets

Generally, issuance of new capital through debt capital markets is easier than equity capital markets. Debt markets are more stable than equity markets because the payments involve fixed income sets of payments. But, because of lesser risk, lesser income is also expected from debt markets.

Debt markets, as a result, produce lower fees for investment banks. Banks or bank division that deals with debt markets rely on volume in order to increase their revenues.

Debt financing markets are divided into two: primary markets which involve IPOs and secondary markets which involve selling and buying between holders of debt securities.

There are much more fees earned from IPOs. You can earn in the secondary markets via trading, via monitoring of fast-moving markets. Just like equity trading, you buy low and sell high.

According to Wharton, debt financing covers a big part of the capital raising market:

Debt Financing markets

This makes the debt capital market a lucrative source of stable careers for investment banking aspirants.

Public vs. Private Debt Financing

Usually, when debt financing is mentioned, the first thing in the mind of a newcomer is public financing. But, actually, aside from public financing, there’s also one kind we call private debt financing.

Public financing is the more popular one, and if you get hired as an investment banker, most likely, you will be working with public financing.

Public financing is the issuance of debt securities to the public. Public financing is done usually (1) because huge financial requirements cannot be met by banks and (2) because public debt financing is cheaper. One of the reasons that public debt financing is cheaper is because the securities are liquid, that is, the securities holder can sell it whenever they need the money.

Private debt financing is done through over-the-counter, that is, the securities are not listed on an exchange. Some companies prefer private financing because there are less regulatory requirements. However, these financings come with higher interest rates.

As an investment banking aspirant, you must focus on public financing. Most likely you will be asked about the IPO process in debt financing; which is actually similar to that of an equity offering.

Debt IPO Timeline

Securities involved in the debt financing market

There are different types of bonds, but the most common ones are government bonds, investment grade bonds and junk bonds.

Government bonds are debt securities that are issued by national governments and its subsidiaries, including government-controlled companies. These securities are backed-up by a national government, in which case, upon default, the government guarantees payment through an increase of taxes or government cuts on other projects.

Because of this guarantee, government bonds are considered the safest among classes of debt securities. The rates on government bonds are usually made use as the basis for rates on other securities, wherein a risk premium is added to the rate of the government security.

Investment grade bonds are bonds that are issued by financially healthy companies. These bonds have higher rates than government bonds, but lower than junk bonds.

Junk bonds, on the other hand, are securities that are issued by companies that are failing. Because of the high risk of default, investors would logically require high rates of interests.

A good financial analyst would be able to prepare a good mix of the different debt securities that will be suitable for his investor or client.

Suggested: Read more about investment banking careers

What kind of work should you expect in Debt Financing?

Tasks in Debt Capital Markets

There are different kinds of debt securities you may be working on depending on the level of risk.There are securities called investment grades or even junk bonds.

As there are different classes or kinds of debt securities, part of your job being an analyst is to advise them what kind of debt security would be appropriate for them.

For example, if the company is doing a leveraged buy-out, generally, you will be recommending higher yield types of debt securities.The tenor would depend on the capacity of your client, but most likely, it will be a long-term one.

On the side of the lender, you will have to give details about the credit standing of the borrower company. Your task is to give an objective data so that the lender can act on the best possible option. You will have to act on their requests for special financial information.

Expect also some jobs on working with securities that are not really debt securities but has debt-like features. Examples of these are equity stocks that have embedded features which allow it to be converted to debt securities.

You will learn to manage credit spreads. You will have to find a crossroad between your own company’s targets, the expectations of the lender and the capacity of the borrower.

You might also meet the Leveraged Finance sector wherein which it relates to below investment grade debt securities. This service is catered to companies with a financial status that is not that healthy.

Skills needed from bankers for debt financing jobs

1. First of all, you must have the ability to multi-task. There are a lot of things to work and lots of markets to cover. At one time, you might be working on a tough deadline, then somebody, a client or a boss, will call. You have no choice, you have to cover both.

2. You also must be able to work at a fast pace. In debt financing, you would most likely monitor live feeds or live movements of interest rates and securities prices. Being able to act fast and think fast would give you the ability to get the deals or trades at the best possible rates.

3. Analysts also are expected to have the ability to develop long-term relationships with clients. Debt financing, especially the big ones, take a long time. Thus, during that period, the analyst must be able to build and continue a long-lasting and beneficial relationship.

4. And lastly, analysts in debt financing are expected to be highly knowledgeable about the technical aspects of debt financings. This includes the ability to learn new concepts at a reasonable time, which most often, means quickly. At least, a junior analyst must have a strong foundation about interest rates and debt security prices.

How to get a job in debt financing?

Getting a job as an analyst in debt capital markets is pretty much similar process to getting one in equity capital markets. The only main difference is in the questions in job interviews and questions in the tests.

The processes are similar in terms of prospecting, application, and the overall process.

In the interview, you could be asked about discounted cash flows or some in-depth analysis of the effect of Brexit in the debt capital markets. Topics could include questions on interest rates and its relationship with debt security prices.

You could be asked with a lot of different questions, that’s why you’ll need a guide to banking interview and questions.

Here are some mock questions in DCM to get you going.

How much are they paid in Debt Financing?

In general, analysts in DCM earn less than their counterparts in ECM. In the junior level, they earn about 10-20% less. The gap widens as you go up the corporate ladder.

In big markets like London and New York, junior analysts earn about $60,000 a year. That goes up to $100,000 - $125,000 dollars in the 2-4 years. Directors earn about $600,000 to more than a million dollars per year.

The same logic goes for the bonuses. DCM analysts will receive lower fees than those in ECM. However, since DCM is a more stable market, a number of bonuses every year tends to be more stable as well. You could expect almost the same level of bonuses every year.

The bonus is around 30-50% of yearly salaries. Though, of course, this varies depending on the bank and the country you are working on.

Do you want to start a career in Debt Financing?

So, after reading this article, do you think debt financing is for you?

If yes, then, there’s a lot of jobs waiting for you. Banks, private equity firms and hedge funds would provide you good careers in debt financing.

To help you find the best employer, I put up my top 30 investment banking employers for you in my previous article.

Do you think you need something else so that you can better prepare yourself for a career in debt financing? Let me know by leaving your comments below!

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