Most people are familiar with equity markets, or the stock market, as it’s commonly called. Lesser known is its peer, the debt capital market.

Like equity markets, debt capital markets play a critical role in global finance. Companies and governments use debt capital markets to raise funds from lenders (investors) in return for consistent, recurring income.

These funds help companies invest in growth and allow governments to fund new projects. Instead of shares, investors obtain bonds.

Debt vs. equity

Businesses can raise funds through two primary sources: debt and equity.

With equity, the investor is allotted a share of ownership in the company but no promise of a return. With debt, no ownership is provided, but the investor is promised a fixed interest payment.

While equity has the potential to appreciate, there’s no guarantee. As a result, stocks are typically considered risker than bonds.

In the event of a company’s bankruptcy, equity holders are paid after debt holders. Also, any income earned on equity (dividends) is generally less stable than income earned on debt.

With equity, there is greater reliance on the success of the company. That is, the investors rely on the business's success to help deliver a return on their investment.

Primary vs. secondary markets

Two main types of debt capital markets exist: primary and secondary.

The primary debt capital market is where new debt securities are issued and sold to investors for the first time. It’s where debt offerings occur—just like an initial public offering (IPO) with equity—and where businesses and governments go to raise money by issuing bonds.

These bonds help finance infrastructure projects, business expansion, or debt refinancing.

Typically, investment banks underwrite the bond issuance.

The secondary debt capital market is where the previously issued bonds are bought and sold. It’s where investors trade bonds as they do shares of a company in the stock market.

The secondary debt capital market permits the original bond purchaser to sell the debt obligation to other investors. This means the bond can be converted to a cash value before maturity.

Trading in the secondary market has no bearing on the capital the issuing company initially raised. It’s simply an exchange that permits investors to trade these fixed-income securities amongst themselves.

The secondary debt capital market helps generate liquidity in the fixed-income market and allows for price discovery. Even with open trading, however, debt capital markets are generally considered far less transparent than equity markets.

What is a debt capital markets banker?

A debt capital markets banker is typically found working on the sell-side of an investment bank. They are generally considered experts in fixed-income products and advise borrowers (i.e., companies) looking to raise and manage debt.

Debt capital market teams within investment banks will usually be responsible for the following:

  • Origination: This is the initial stage where a company, for example, expresses a desire to raise capital via debt issuance. The investment bank or other financial institution will work with the issuer to produce a debt security, like a bond. At this stage, critical items like the size of the issue, maturity date, and interest rate or coupon rate are determined.
  • Structuring: This stage entails designing a detailed outline of the debt product, including its features, like whether the debt will be secured or unsecured, the repayment structure, and covenants (conditions the issuer must adhere to during the life of the debt).
  • Execution: Execution is the issuance or sale of the newly created bond to investors. At this phase, offering documents are prepared, often including details about the issuer and the debt product. Marketing initiatives will also begin during the execution stage. Once marketing is complete, orders are obtained, and the bonds are allocated to investors.
  • Syndication: This step is typically reserved for larger debt issuances. A group of investment banks (a syndicate) partner to underwrite the debt issue. Underwriting is when the syndicate agrees to purchase any unsold portion of the issued debt. By combining forces, the investment banks spread out the risk of the large issuance. Partnering also provides the added benefit of widening the pool of potential investors.

What are debt capital markets products?

As the debt capital market has evolved, so has the breadth and complexity of available products. You can now find a range of investible options within debt capital markets.

Here are some of the most common types you can find:

  • Government Bonds: Debt products issued by a national government, denominated in the domestic currency. Government bonds are often considered the safest form of debt. In fact, government-issued Treasury Bonds (“Treasuries”) are sometimes referred to as “risk-free” assets, with their yield called the “risk-free rate.”
  • Municipal Bonds: These bonds are issued by state, county, or city governments. Municipal bonds often focus on financing a singular project, like a new hospital.
  • Corporate Bonds: Corporate bonds are issued by businesses to raise capital for various reasons, like research and development, acquisitions, or expansion.
  • Convertible Bonds: This type of fixed-income product has a feature allowing it to be converted into a predetermined amount of the issuing company’s equity.
  • Collateralized Debt Obligations (CDOs): These products pool multiple cash-flow-generating assets and redistribute the proceeds to investors.
  • Asset-Backed Securities (ABS): These debt products are backed by a pool of assets, like auto loans or mortgages.
  • Credit Default Swaps (CDS): CDSs’ are a type of complex derivative that provides insurance against the risk of borrower default.

Without debt capital markets, companies and governments would have fewer opportunities to fund projects. And investors would have fewer investment opportunities that generate consistent interest payments.

While less popular than equity markets, debt capital markets undoubtedly play a vital role in a functioning global financial system.