DCM - On The Job Insights

Hi,

I am hoping some experienced folk on this forum could provide me with some deep insights into the DCM world.

I have recently just read the Pearl & Rosenbaum book on valuation, it's very insightful but I feel it is heavily geared towards the Equity related business of banks (IPO's, M&A ect..), I'm looking to develop a deeper understanding of the DCM side. Firstly, I was wondering, do DCM groups build/use the same models used in ECM/IB groups ? I have compared a few equity research reports to credit reports & I can see the ratios looked at are slightly different – and obviously emphasis is placed on the price of their bonds/CDs as opposed to price of their stocks.

The main thing I am trying to understand is what exactly does a DCM banker do- and what goes into their pitchbooks ? There's not nearly as much info on the day-to-day role as you might find in IB/ECM groups, for one – I'd like to understand exactly, how would you determine what type of debt / structure would be suitable for a given client ? Do you run different debt scenarios on the company and work out which would be the most suitable (or least expensive) ? Do you look at the impact debt has on their valuations ? Do you try and figure out the likely ratings of a bond issuance ? How comparable company bonds are performing in the secondary markets ect… Any high level insights / reading would be much appreciated.

Thanks
JTHUN

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Comments (7)

Best Response
Aug 2, 2017 - 2:39pm

Ok let's share some insights. Just to clarify, your questions mix up a LOT of stuff which is typically done by several different teams, almost none of these is DCM. I will try to keep my answer DCM-related as much as possible with a focus on Investment Grade Corporate DCM (High Yield has slightly different features) which is the most common.
DAY TO DAY
DCM starts the day much earlier than M&A, typically around 7.30/8 am. If there are no deals on which the bank is involved, the day is spent talking to clients/sending emails to clients regarding the credit markets with indicative pricing and recommendations for a potential bond issuance. Most of the client calls/updates are focused on new issue recommendations, investors behaviour, macro trends, direction of interest rates, central bank policies. If you have deals in the market you follow the orders coming in from investors and then the updates are focused on the deals on which your bank is involved. Alongside the regular interaction with clients, which is generally done by seniors, there is the pitchbooks preparation on which juniors take the lead. Again, the pitchbook is focused on issuer's bond pricing, macro trends and credit markets. If the pitch involves other contents such as acquisition financing or rating advisory, these are not typically done by DCM. The quantity of pitches and the pitching style of your MDs will determine the length of your working day. If phone intensive, you can expect to leave early (around 6-7pm), if pitch intensive 8-9 pm can be the norm with some (not many) weekends required to close the pitchbooks
SKILLS AND MODELLING
The understanding of interest rates, monetary policies and the broad macro environment is key and much more relevant than pure corporate finance skills which however help to have good discussions with clients. Beyond that, being good at developing relationships and interacting with people will make the difference.
Regarding modelling, modelling in DCM (corporate investment grade) is basically non existent. DCM guys look at the models developed by coverage/M&A and than they decide which pricing the bond portion of the M&A package would have. DCM itself can be the one who develop these models in smaller banks. Otherwise, the only models developed by DCM are triggered by DCM banker's curiosity and eagerness to learn. You can develop models for your use to see if a client has enough money to service its debt/meet redemptions or if an acquisition will trigger a downgrade or how much they need to borrow if the buy something. In any case, the ratios/metrics which matter in credit are different from the equity world - this should be well clear if going to an interview.
EXITS
There are plenty of posts on exit opps thus I wont spend too much time on ot. Many say that is the worst job ever and you get stuck there forever and cry everyday and want to kill yourself. It is not.
Clearly is less usual to see DCM bankers going to PE or HF given the lack of modelling skills. DCM is more a banking career. All in all, work-life balance is sweet (and gets even better when you grow) and the career is much more stable than IBD, with a very similar pay,
Typical exists are into debt advisory shops, corporates (financing teams) or credit funds...when you are very senior, the relationships you have developed matter the most and you can go anywhere.
Hope it helps

Aug 15, 2017 - 5:09am

Hi,

Sorry for the late reponse, but thank you very much for this highly detailed overview, it's extremely helpful. I just have 1 question though, if DCM folks rarely model and spend most of their (non-deal) time managing relationships and discussing the current credit climate, what exactly goes into their pitch books ?

Aug 16, 2017 - 3:22pm

Pitchbooks are generally much shorter than M&A ones, they tend to be 20-30 slides. Generic pitchbooks tend to be focused on macro overviews, rates, credit markets, some analysis on recent deals/supply, and some slides issuer' specific (new issue pricing and recommendations), plus creds obviously. Then you can have larger books if you include other stuff such rating analysis or M&A-related content (typically its not DCM doing these though). Also, being a product group, in some instances you are simply required to provide colleagues in coverage groups with a couple of slides at most.

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Aug 15, 2017 - 9:29am

Wow, amazing write up. I've always been hesitant about Capital Markets with the fear of pigeon holing my self. But the lifestyle does seem to make sense if your plan is to be a career banker. Are there really DCM guys pulling 7-7/9pm ? That sounds amazing.

Aug 16, 2017 - 3:35pm

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