ECM and DCM: understanding capital markets

Financial markets offer companies various financing solutions to support their growth, optimize their capital structure, or refinance their debt. Among these solutions, two major segments stand out: Equity Capital Markets (ECM) and Debt Capital Markets (DCM). These two segments play a key role in financing companies and financial institutions.

DCM: Debt Capital Markets

Debt Capital Markets (DCM) focus on financing through debt issuance, mainly via bonds. This market is used by companies, governments, and financial institutions looking to raise funds without diluting their capital.

• Traditional bond issuance: A company borrows money by issuing debt securities to investors.
• Convertible bonds: Debt securities that can be converted into shares under specific conditions.
• High-Yield bonds: Bonds issued by companies with a higher risk profile, offering higher returns in exchange.
• Green bonds: Securities dedicated to financing environmental projects.
• Securitization: Pooling of receivables into tradable securities on the market.

DCM transactions allow companies to access flexible financing with maturities tailored to their strategic needs.

Why choose debt financing over equity issuance?

Raising debt allows companies to secure funds without diluting ownership. Additionally, debt interest payments are tax-deductible, unlike dividends. However, debt must be repaid on fixed schedules, increasing the risk of default in case of financial difficulties.

Structure of a DCM department

A DCM department is typically divided into three branches:

• Origination: Analyzes financing needs, existing debt, and credit ratings to propose tailored solutions.
• Structuring: Designs complex instruments like hybrid debt, which combines debt and equity characteristics.
• Syndication: Coordinates banks to structure and place bond issuances with investors.

Why work in DCM?

DCM provides early exposure to clients and opportunities to work on a high number of deals. It is closely tied to macroeconomics and interest rate movements. Additionally, DCM working hours are more predictable and often less demanding than in other investment banking divisions. Lastly, DCM can serve as a gateway to other finance roles such as M&A or private equity (PE).

ECM: Equity Capital Markets

Equity Capital Markets (ECM) cover all transactions related to equity financing. This market allows companies to raise funds by issuing new shares, either through initial public offerings (IPOs) or capital increases.

Key ECM Transactions:

• Initial Public Offering (IPO): A company goes public by selling a portion of its capital to investors.
• Capital increase: A publicly traded company issues new shares to raise additional funds.
• Private placement: Sale of shares to institutional investors without a public offering.
• Preferred stock issuance: Securities offering specific advantages to investors (priority dividends, reduced voting rights, etc.).
• Secondary offerings: Sale of shares by existing shareholders on the public market.

ECM is a key solution for financing a company’s expansion, reducing its debt, or facilitating the partial exit of historical shareholders.

Structure of an ECM department

Like DCM, the ECM department is structured into multiple divisions:

• Origination: Identifies potential clients and proposes equity issuance strategies.
• Structuring: Determines the share pricing and selects the appropriate issuance mechanism.
• Syndication: Places shares with institutional investors.

Why work in ECM?

ECM provides strong exposure to company executives and institutional investors. It also allows professionals to participate in major strategic transactions. Working in ECM means having a direct impact on financial markets and company valuations. Additionally, like DCM, ECM can serve as a stepping stone to other finance careers, such as M&A or PE.

ECM and DCM are two fundamental pillars of corporate finance. While ECM provides access to capital without repayment constraints, DCM offers a more predictable solution in terms of cost and maturity. The choice between these two options depends on strategic objectives, financial profile, and market conditions.