Debt Capital Markets Process Explanation

Hello,


This is kind of dumb and I could totally look it up to try and understand, but, I thought I would also ask.

I am looking to understand the role that DCM places in finance and how Credit Investments on the buy side relates?

I just want an understanding of the over-arching process of issuing large amounts of bonds and investing, and how both desks on both sides of finance operate respectively.


Thanks!

 
Most Helpful

I'll use plain language to explain.

First, assume a company is fit for a corporate bond offering (e.g. large enough, in the right industry that bond investors are OK/willing to take exposure on, etc.), and is a first time/inaugural issuer.

The CFO calls your bank (most likely your industry coverage banker), tells you they are interested in a bond offering, and asks for a pitch.

You and your buddies huddle over a weekend, and basically try to address the following:

- Credit profile and positioning - how does this company compare vis-a-vis the comps with public bonds outstanding. The word done here will also lay the groundwork for credit ratings, the offering memo/roadshow memo and the bank's internal credit process

- term sheet, incl. format, structure, size, potential credit rating, tenor, spread/yield, and possible covenant package (depending on whether the issue is an investment grade or high yield, but let's simplify things and not differentiate the two for the purpose of this post). You from DCM would work closely with debt syndicate the formulate the right pricing and terms

- appropriate market updates, comps that would support your proposed terms

After the pitch, assume your bank gets the mandate, you immediately form a deal team to start the actual "execution" of the process - crediting ratings, legal documentation (OC/prospectus, debenture, subscription docs, etc), bank's internal credit process, sales package and roadshow, book-building, pricing and closing. Typically the whole process would take 8-10 weeks from start to finish, subject to market conditions.

During the sales/roadshow stage, the banks syndicate and fixed income sales teams will be mobilized to talk to the fixed income investors (e.g. the likes of BlackRock, Fidelity, insurances co, pensions, other banks, private banks, etc.) on the deal, to generate interest and potential soft order for the later on book-building, once the deal is "launched". This is not too dissimilar to how an IPO is marketed. After a dozen fancy luncheons at Four Seasons and 1-o-1 meetings, subject to market feedback, your syndicate would go launch the deal and start building the book (the sales would simultaneously talk to/chase investors for feedback/actual order). If there's strong demand, the book would be oversubscribed (e.g. $5bn order wanting to buy into a $1bn deal). This could lead to revision of pricing and/or increase in offering size. Syndicate's job in terms of book-building is twofold - 1) ensure best pricing/terms, and 2) ensure the best quality book (e.g. long-term take and hold type of investors on the book). Then you officially price the bond, with closing/settlement 3 or 5 days later. Lastly, the lead u/w bank is usually involved in post-offering stabilization to ensure smooth secondary trading of the bond.

The deal then crystalizes into a tiny tombstone (with nice logos) + case study that you'd need to make and updated in your credentials page for future pitches.

DCM's work with respect to this bond isn't over. Later on, the company may need to refinance or event go into distress. You'd then pitch again for another bond or liability management. 

Hope above helps. Shoot me with any questions.

 

Life Cycle of a Deal - Leveraged Finance / Loan Capital Markets

consisting of say a Revolver, 1st Lien Term Loan B, 2nd Lien Term Loan

1) Request for Proposal (RFP) / Pitch [Term Sheet w/ structure, pricing, fees, etc.]

-perform due diligence (sell-side CIM/LP, Investor Presentation, deal site materials) 

https://s23.q4cdn.com/717214394/files/doc_presentations/Investor-Supple…

-submit term sheet

2) Internal Approvals (Credit Risk Approval Memo / Underwriting Approval Memo)

-comps

-risks & mitigants

-fees & flex, breakeven analysis

-syndication strategy

3) Officially Mandated (Commitment Letter, Fee Letter aka "Commitment Papers")

T-Mobile (Sprint) - 2nd A&R Commitment Letter (9.6.2019) https://www.sec.gov/Archives/edgar/data/1283699/000119312519240407/d799…

-draft CIM/LP

-set up Deal site (www.debtdomain.com / www.intralinks.com / www.syndtrak.com)

-set up bank meeting

-dry run - w/ company prior to bank meeting

-loan sales - reach out to potential investors on a "no names basis" to gauge interest, invite to bank meeting. Possibly send investors a "Teaser" - short form of LP

4) Launch Bank Meeting - NYC (Lender Presentation LP, Confidential Info Memorandum Cim

Rackspace - LP: https://www.sec.gov/Archives/edgar/data/0001107694/000110465916149867/a…

Shutterfly - LP: https://www.sec.gov/Archives/edgar/data/1125920/000119312518041585/d373…

-typically at hotels such as Four Seasons, Parker Meridian, St. Regis, etc

-launch to 100+ investors (many dial in)

-fill out Syndication Tracker - organize investor feedback w/ columns such as comments, bite size, if they attended bank meeting, if they asked Q&A, etc.

-Q&A - answer from investors - typically 15-20 Q's each

5) Closing (Credit Agreement)

https://www.sec.gov/Archives/edgar/data/1305014/000119312516645569/d225…

-Post docs to Deal site:  Allocation Memo, Credit Agreement, Flow of Funds Memo (routing numbers to send $$)

 

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