DCM/Lev Fin - need help
Hi Monkeys,
This may seem like a stupid question, and most likely is a stupid question. Anyway, here goes.
As far as my understanding the Lev Fin product group provide HY bonds, leverage loans (for sponsors and strategic M&A), mezz etc - while the DCM group provide lower risk debt products like IG bonds.
- Does DCM also provide loans? (hence Lev Fin and DCM both provide several types of debt but the difference is lower vs higher risk)
I believe all IBs have better/worse connection with ret/inst investors in regards to bonds, but some banks simply do not have a retail/commercial bank backing them and therefore must source loans through other banks. I would assume the banks providing loan capital are in a much better position of winning these mandates and therefore outcompete the "non-balance sheet" players.
2a) How can an IB be a top tier DCM/Lev Fin player without having a "balance sheet"?
2b) Are the sourcing of the capital just a "trivial" part in grand scheme of providing leverage loans - and IBs therefore demonstrates their value add through other advice and expertise?
Let me know, also interested
bump
1) This may differ by bank but that sits more in a commercial banking function afaik. A DCM group could connect a client to their bank's CB people though. 2a) hiit's answer is better 2b) Not trivial but not the only thing as with all banking.
I'm not in DCM so if someone wants to correct anything please do but this is my understanding.
Great, thanks
2a: Having a balance sheet definitely helps. Debt issuers will often want their lead bank to hold a large position of their debt. But, you also compete on pricing, more aggressive leverage, or allowing for more aggressive/issuer-friendly credit terms. Banks will provide commitment letters (which are legally binding) so if you can provide more favorable pricing/structure/terms than other banks without getting hung on syndication, you're in a better position to win the mandate. The flip side is you better be pretty damn confident that you can execute and sell to debt investors what you agree to in your commitment letters or you'll find yourself out of a job very quickly.
2b: Not trivial because of reason I previously mentioned (you gotta pay-to-play), but not exactly as critical because levfin is typically a flow business and you can de-risk your exposure in a relatively short period of time. Yes, you need enough balance sheet to make the initial commitment, but if you can sell the paper very quickly, having a massive balance sheet isn't as important (for example, Jefferies and Nomura have relatively small balance sheets).
That makes sense, thank you
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