are debt deals "easier" than M&A?
It seems like everything i read about Ibanking from spreading comps to get ratios and valuation methods/pro forma modeling apply to M&A deals.
Debt deals make up a huge % of the revenues for a lot of these banks. my question is are these deals typically much more standard and easier after pitching? What are the major forms of modeling/DD done for a debt deal?
Finally are coverage groups mainly spending their time on M&A?
Any info is appreciated. Thanks.
What are you talking about?
Industry groups do M&A, just not the modeling typically. Debt deals are extremely easy and repetitive. You do one, you have done them all but that is just my two cents.
Guess you haven't tried to sell any HY lately.
there is nearly zero modelling done for debt deals typically. companies come to the debt banker with an idea of how much they need they need to raise and the debt banker tells them at what spread to treasury (the risk premium) they think they can raise it at. the pricing of debt depends on credit ratings obviously, but it is also partly arbitrary/qualitative (read: dependent on the banker's read of the market + how savvy his bank's loan syndication group is) as opposed to requiring spreadsheet work.
that said, i don't think you can compare debt deals to M&A straight up.
it's true that alot more goes into your typical M&A, but for each M&A you might see x number of times more debt deals - much more of a flow business. bankers that enjoy working DCM cite 'instant gratification' - if you did a good job reading the market you look like a genius the very next day.. or an absolute loser otherwise. these bankers also enjoy variety - debt deals come in many different flavors - hybrids, step-ups etc. etc. you spend a lot of time trying to help your client get the best deal for his needs. in tough markets, being able to find creative debt solutions becomes important.
i cannot speak to the learning curve vs. m&a except to say that while the basic idea isn't complicated, the devil is in the details.
hope this helps.
I work in M&A and I completely disagree. Your debt example is like me saying "Well we can get the takeover premium by looking at the average premium in the industry for the last 3 months" or by simply applying a multiple to the valuation.
Do you know how many times we get asked to 'model' synergies and accr/dilu, and dcf and spreading comps, all to come up with the same valuation as a back of the envelope method.
"Debt deals" can get pretty involved. For a firm wishing to issue more debt you can get into DCF modeling with a new forecasted WACC and additional Tax-shields, etc. Once you start looking at capital structure and modeling FCF it can get tricky.
The devil is in the details is correct. M&A does require more modeling because typically it involves a merger of two firms (duh) and a change of control. However, I have seen some of the DCM group models and they are pretty intensive.
so are you saying coverage groups in IBD may be pitching a lot of debt deals, but most of their technical work will be in M&A / and the DCM and syndicate handle most of the work for debt?
Coverage groups don't pitch debt deals that often, at least where I worked. Usually clients come to the bank for help with an issue. Debt deals are of two types; investment grade and high yield. For investment grade, the DCM team does no modeling. They just get some preliminary ratios and numbers and hand it over to the ratings team within DCM to get an estimate of the spread. High yield requires more work and some modeling is done by the bankers again depending on the situation. High yield also brings a lot more revenue than investment grade and can take a while to actually get on the road. The work in DCM is not complicated at all. It's a lot of power-point work and talking on the phone (at senior levels). You also write weekly market updates for prospective issuers talking about pipeline issues or timing issues etc (analyst level). The associates usually go through the updates, look at the prospectus and make sure everything is alright. The only time it might get interesting is when you use some options in your issue. Even then, the modeling experience is very limited.
What are considered the exit opportunities for working on the DCM side?
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