Fixed-income markets in which sovereign and semi-governments, supranational organizations like the World Bank, corporations, and financial institutions issue debt in bonds and loans are called debt capital markets. Borrowers use these products to generate funds for expansion, mergers, development, or to broaden their revenue sources.
Bonds and loans are two types of debt capital market products that differ in risk profile, maturity, and terms. Bonds are financial products sold to a wide range of investors in the secondary market. Bond markets are categorized into high-yield or junk bonds, investment-grade bonds, emerging market bonds, and securitized products.
Debt capital market divisions of investment banks collaborate with customers such as financial companies, corporations, and governments to provide fixed-income securities. They take care of the creation, structure, operation, and distribution of a wide range of debt-related products.
Bond Markets and Issuer Types
The bond market provides a diverse range of maturities, from short-term bonds to intermediate and long-term securities. Short-term bonds have a maturity of fewer than five years. Intermediate-term bonds have maturities of up to ten years, and long-term bonds have maturities ranging from ten to thirty years.
An investment bank can underwrite the bond issues, which means they buy and sell newly issued bonds from the issuer. When an issue is very big for a single bank, syndication of bonds takes and other institutions take part in the underwriting. Government bonds, such as treasury bills, municipal bonds, and sovereign bonds, are part of the bond market. The others are emerging market bonds, corporate bonds, leveraged loans, and asset-backed securities.
Governments of countries across the world sell bonds to fund their spending and budgetary deficits. They are risk-free, but the conditions and coupon rate are determined by how the market perceives the issuing country’s credibility. These bonds are fully supported by the government and carry less risk.
On the other hand, corporate bonds include investment-grade bonds, commercial paper, high-yield bonds or junk bonds, and leveraged loans. Large corporations typically issue these bonds to fund expansion, capital expenditures, or M&A activities. They may also issue new loans with better conditions to pay off previous debt.
These bonds are issued by the most creditworthy companies and receive the highest ratings.
Often known as junk bonds, they are known to have a larger default risk than investment-grade bonds and hence pay higher coupon rates. These bonds are typically issued by corporations that may struggle to meet their financial obligations in full and on schedule. Junk bonds often have shorter maturities, with durations of 10 years or shorter.
These loans are given to businesses that have a bad credit history or a lot of debt. They are often syndicated and used to finance highly leveraged or speculative businesses. Because increased leverage implies a greater chance of failure and bankruptcy, these loans have higher interest rates and more stringent covenants.
Emerging market bonds
They are issued by developing countries, typically by their governments. However, they can also be issued by companies. Because their credit ratings are lower than those of developed market bonds, their yields are greater. While there are advantages to investing in emerging market fixed income, there are also concerns such as economic disruption, political instability, inflation, less developed regulatory and legal frameworks, and the lack of capacity to repatriate returns.
They are also more susceptible to geopolitical developments and bear interest rates, liquidity, and exchange rate risk. Investors may suffer due to a lack of transparency from issuers and in financial markets, and assets may be appropriated. It is commonly known as country risk. Default risk has increased, resulting in greater interest payments on emerging market debt.
These are bonds issued by municipalities, states, and counties to fund big capital expenses such as infrastructure investments. These bonds are normally of investment-grade quality; however, they are less liquid than treasury bills.
To conclude, financial institutions like DBS provide businesses access to funds through their extensive product portfolio of Asia’s top equity capital and debt capital market houses. They can create, execute, and distribute equity and debt instruments via private and public offerings. Customers can gain from their strong capital markets presence, track record, differentiated market knowledge, and worldwide investor connectivity.