Capital markets are the financial marketplaces that enable governments to fund infrastructure projects, businesses to expand and individuals to purchase homes. These markets include both equities and debt securities.
Debt is a type of investment where an investor loans money to a company that will then pay them back with interest in the future. Bonds are a popular type of debt securities that are often issued by governments and companies.
A debt issue is a financial obligation where the borrower (issuer) promises to repay a sum of money to investors at a certain point in the future. These obligations are issued in the form of government or corporate bonds, debentures, notes, certificates, mortgages and leases.
Debt issues are a key source of capital for companies that need to raise funds. They are typically cheaper than equity capital and often offer tax advantages.
Origination is the process of generating leads and managing relationships with intermediaries, including investment banks, law firms, and vendors. It is a key part of a successful deal-making process.
A debt issue involves the sale of securities, like bonds, to investors and is a common way for governments and public companies to raise funds. It is a complex transaction and requires expert legal advice and a large team to execute it successfully.
When companies want to raise money to expand their operations or fund new business ventures, they often turn to the corporate bond market to borrow. They issue bonds to investors and, in exchange, they receive a fixed rate of interest and repay the principal at the maturity date established when the bond was issued.
Pricing is a critical element of debt capital markets and debt issuance, as it determines the price at which a company’s bonds will sell. This price is based on a number of factors, including timing and prevailing market sentiment.
Pricing is also impacted by covenants, which limit the company’s ability to operate in certain ways. For example, a bond may include maintenance covenants that require the company to maintain specific credit metrics or ratios at all times. It may also have incurrence covenants that prohibit the company from taking certain actions such as divesting a division or raising dividends above a certain level.
Syndication is the process of bringing a new security to market by forming a group of investment banking companies and broker-dealers to underwrite and distribute it. There are two types of syndicate offerings: closed-end funds and preferred securities.
Corporate instruments are typically issued by large, creditworthy corporations for financing expansion or capital expenditures or to retire existing debt. They include commercial paper, investment-grade bonds (rated A- or BBB), high yield bonds (rated BB+ or Ba1), and leveraged loans.
In syndicated bond transactions, a government debt office appoints a panel of underwriters, usually banks, who manage the debt offering. These debt offerings are called “syndicated.”
Syndicate members fix the price they think will enable the bonds to trade well in the secondary market. They do this by pricing the yield through a credit spread to a reference government benchmark, whether an actual Government of Canada bond or an interpolated curve.
Underwriting is the process of evaluating risk in a financial arrangement, and it’s used by many businesses. Insurance companies, mortgage lenders and investment banks all use underwriting to evaluate applications and determine whether to approve or deny them.
In debt capital markets, underwriters sell bonds to investors. They are a type of security that can be issued directly by governments and companies or resold in the secondary market for a higher or lower price, depending on supply and demand.
Among the primary goals of underwriting firms is to smooth out informational frictions between issuers and investors that can prevent them from coming to mutually acceptable prices for new issues. They do this by striking implicit contracts that obligate both sides to meet their goals.