Funding is essential for the success of any business. Initial Public Offerings (IPOs), venture capital, private equity, and other sources of equity funding are available for businesses, including startups. However, equity financing is not the only hope for businesses. Many companies issue debt or fixed-income securities to raise capital from investors. Most businesses might be familiar with straight or plain vanilla bonds to raise capital. However, many other options are available in Debt Capital Markets (DCMs).
They can explore different debt securities and raise capital from interested investors in DCMs. Continue reading to understand the diverse DCM Solutions available for businesses.
Demystifying Debt Capital Markets
It is essential to understand the concept of a debt capital market before delving deeper. It is a place where entities issue debt securities. These entities could be corporate or government organizations. Investors keep a tab on DCMs, as they can provide them with fixed-income securities.
A DCM offers access to a range of debt securities, from plain vanilla bonds to commercial papers. These debt securities represent a promise of repayment of the principal amount, along with the interest. Besides receiving the principal amount, investors get periodic interest payments from debtors. However, investors must hold these debt securities to receive periodic interest.
Besides issuers and investors, investment banks are also involved in DCMs. These banks help issuers with underwriting, the process of determining the worth of securities and bringing them to the market. Investment banks can also help investors get their hands on debt securities.
Diverse DCM Solutions Available for Businesses
Most organizations start by issuing straight or plain vanilla bonds in DCMs. These are straightforward bonds with simple terms and conditions. A straight bond comes with a fixed coupon rate i.e. the interest rate. Investors receive the interest payment at regular intervals until bond maturity. Besides straight bonds, a range of DCM solutions are available. Investors are not actively looking for diverse debt securities to diversify their portfolios. Besides raising capital, organizations can attract more investors with diverse debt securities.
Must Read: What Is ECM Investment Banking?
Here are some alternative debt or fixed-income securities you can issue in DCMs:
- Convertible Bonds: These bonds can be converted into a fixed number of issuer’s shares. The investor must pay a predetermined conversion price to convert the bond into a common stock. Convertible bonds offer upside potential to investors through equity conversion. On the other hand, they prevent downsides through fixed-income features.
- Zero-Coupon Bonds: Some might not prefer financial obligations through debt securities. Such organizations can issue zero-coupon bonds in debt capital markets. The issuer need not pay regular interest to investors with zero-coupon bonds. These bonds are offered at a discount on the face value to investors. Investors usually earn through appreciation of the bond when it is redeemed on maturity.
- Floating Rate Notes (FRNs): These debt securities offer period interest payments that fluctuate based on a benchmark. The interest rates fluctuate based on a government bond or a benchmark interest rate like LIBOR. FRNs are preferred by investors who want to protect themselves from interest rate changes in the market.
- Green Bonds: You can probably notice how the demand for Environmental, Social, and Governance (ESG) practices has risen. Investors now prefer sustainable companies taking care of their surroundings and employees. The terms of green bonds are linked with the sustainability achievements of the issuer. For instance, the issuer might be asked to pay a lesser interest upon accomplishing predetermined sustainability goals.
- Asset-Backed Securities (ABS): These instruments are backed by a pool of assets. The pool could contain mortgages, auto loans, and other instruments. An organization can reduce its credit risk by transferring ABS to investors.
Besides these fixed-income securities, organizations can also try Certificates of Deposits (CDs), Treasury Bills (T-Bills), Collateralized Debt Obligations (CDOs), Commercial Papers, Municipal Bonds, Hybrid Securities, and structured notes in DCMs.
Conclusion
A range of DCM solutions is available for businesses searching for capital. Besides straight or plain vanilla bonds, diverse fixed-income securities are available in debt capital markets. Organizations can partner with investment banks to explore diverse DCM solutions. You can attract more investors by issuing unconventional debt securities.
