In the same way that individuals often borrow money – large companies and governments also borrow money. The place large companies and governments borrow money is called the Debt Capital Markets.

The same as personal borrowing

For an individual – we go to a bank to borrow our money. This might be a mortgage to buy a house or a loan to buy a car. But because the amounts of money that large companies need to borrow are usually too big for individual banks to lend to them – instead a group of investors get together to lend them the money. For example, if a company needs to borrow $500m, this might be lent to them by a group of 10 investors – each putting up on average $50m. These investors can be large institutions like pension funds and insurance companies, but can also be individuals who, for example, effectively lend to the government by buying bonds issued by the government.

The debt capital markets is a broad term for everyone and everything involved in these markets for borrowing (debt) by large companies and governments.

Who is involved in the debt capital markets

For the “everyone” part of this – it includes:

• the organizations borrowing the money (referred to as the borrower or issuer),
• the investors (pension funds, mutual funds, insurance companies, wholesale banks, hedge funds, etc.),
• and all the other organisations involved like the investment banking teams who arrange the financing deals for the issuers, the trading teams who allow investors to buy and sell the debt they hold, the rating agencies and research teams who help investors understand the riskiness of the debt, and the law firms who help prepare all the documents that confirm all the terms of the debt (when it has to be repaid, what happens if it is not repaid on time, etc.).

What type of financial instrument exist in the debt capital markets

Issuers borrow in the debt capital markets through a few main types of instrument. These can be classed as bonds and loans. Bonds and loans are then split into sub classifications.

For bonds, you have the main categories of:

• government bonds – which are issued by governments.
• investment grade bonds – which issued by low risk companies (with a rating of BBB- or higher).
• high yield bonds – which are issued by higher risk companies (with a rating of BB+ or lower). These used to be called junk bonds.

Then you have more complex types of bonds like:

• securitized bonds – these are a type of bond where the debt is secured by a group of assets (like properties or aircraft) rather than by a company. These are also called asset backed securities (ABS).
• covered bonds – these are secured by both the issuing company and a set of assets.

In terms of loans, there are:

• syndicated loans – which are large loans which are jointly lent to a borrower by a group (“a syndicate”) of lenders. These lenders are usually banks – who want to issue the loan, but it is too big for any bank to issue alone.
• direct loans – these are large loans issued by private credit funds and other lenders.

The primary and secondary debt capital markets

The primary debt capital markets are where companies and governments first issue their debt and get money from investors. This is similar to an IPO in the equity markets.

The secondary debt capital markets are where the investors who bought the instrument through which the issuer borrowed the money, can sell their instrument, and other investors can buy these instruments. This is similar to buying shares in a listed company through your broker.

Who are the largest players in the debt capital markets

Some of the largest players in the debt capital markets are:

Issuers:

• Governments like the US (with over $31tn of debt outstanding), Japan (with over $10tn), China and EU countries.
• Companies including Toyota, AT&T, Volkswagen, Deutsche Telekom, Korea Electric Power and Petrobras.

Investors:

• Fund Managers like PIMCO, Vanguard, Blackrock and Fidelity.
• Pension Funds like the California Public Employees’ Retirement System (CalPERS), the Dutch Pension Funds (ABP), and the Ontario Teachers’ Pension Plan (OTPP).
• Insurance Companies like Prudential, AIG, Allianz, MetLife and AXA.
• Sovereign Wealth Funds like the Norwegian Government Pension Fund, the Abu Dhabi Investment Authority (ADIA), the China Investment Corporation (CIC) and Singapore’s GIC.
• Central Banks like the US Federal Reserve, the Bank of Japan, the People’s Bank of China and the European Central Bank.
• Hedge Funds like Bridgewater Associates, Elliott Management, Citadel, Millennium and Paulson.
• Family Offices like Soros Fund Management, the Rothschild Family Office, Rockefeller Capital Management and Bill Gates’ Cascade Investment.
• Private Banks like UBS Wealth Management, JPMorgan Private Bank, Morgan Stanley Private Wealth and Goldman Sachs Private Wealth Management.
• Commercial Banks like Wells Fargo, Citigroup, JPMorgan Chase, HSBC and Bank of America.
• Endowments and Foundations like the Harvard University Endowment and the Bill and Melinda Gates Foundation.
• Companies like Microsoft, Berkshire Hathaway, Apple, Johnson & Johnson and Pfizer.

Investment Banks:

• Large global investment banks including JPMorgan, Citi, Goldman Sachs, UBS, Deutsche Bank, Barclays, Morgan Stanley, HSBC, BNP Paribas, Societe Generale, Mizuho, Bank of America and Nomura.
• Boutique investment banks including Lazard, Moelis & Company, Evercore, Rothschild & Co, Houlihan Lokey, Jefferies, Greenhill & Co, Perella Weinberg Partners and Guggenheim Partners.

Rating Agencies:

• The three largest agencies are Standard & Poor’s (S&P), Moody’s Investors Service, and Fitch Ratings.
• Newer entrants include DBRS Morningstar and Kroll Bond Rating Agency (KBRA).
• Some rating agencies are country or region focused including Japan Credit Rating Agency (JCR) and China Chengxin International (CCXI).

Law firms:

• Include Linklaters, Clifford Chance, Sidley Austin, Skadden, Arps, Slate, Meagher & Flom, David Polk & Wardwell, White & Case, King & Spalding, Millbank and Baker McKenzie.

How big are the debt capital markets

The global bond market was estimated to be $128 trillion in 2020 by industry body ICMA.

What does the future look like for the debt capital markets

The debt capital markets are expected to continue to grow and innovate. Some of the key dynamics that will shape the debt capital markets over the coming years are:

• a higher interest rate environment will reduce supply as issuers need to pay more for their debt.
• greater innovation as markets readjust and regulators loosen requirements imposed after the financial crisis.
• greater digitisation – for primary and secondary markets.
• sustainable finance is expected to grow as global governments implement climate change reduction efforts.