This is the latest in my series of posts guiding you through the world of debt capital markets. I hope the series is proving useful to you.
If you hadn’t realised that this post was part of a series, then perhaps I can interest you in this page, which contains links to all the articles so far.
In today’s post, we’ll be looking at the specialist structuring teams within debt capital markets, as well as considering the work done by department legal teams.
What do the structuring or specialist teams do?
Within any bank with a reasonably large debt capital markets department, there will be teams that are responsible for structuring more complicated capital markets products.
The two most popular product specialisms are hybrid capital and liability management. other potential specialisms include insurance products structuring or cross-asset (or new product) structurers.
The hybrid capital team is responsible for designing (and then selling) hybrid capital instruments, primarily for bank and insurance clients but also for some corporate clients.
A hybrid security is a financial instrument that is fundamentally a bond issue, but has certain characteristics which are more commonly associated with equities. They are more risky for investors than straightforward senior corporate debt but, in return, will pay a higher yield.
Issuers launch hybrid capital transactions for a variety of purposes.
In the banks sector (i.e. banks as issuers), hybrid issuance can serve to provide a buffer of capital that sits between the banks shareholders and its senior creditors, in order to provide an additional layer of protection to those senior creditors should the bank find itself in difficulties.
A corporate issuer may launch a hybrid capital deal in order to bolster the metrics (interest cover, leverage/gearing) that are used to determine its credit rating, or to raise equity-like capital that is tax deductible and, if prevailing underlying interest rates are low, cheap.
We’ll look at some of these concepts (credit ratings, leverage, what ‘cheap’ means in a debt context, etc) in a future post.
Liability management is the specialism responsible for originating, structuring and executing transactions that involve a bond issue (or multiple issues) that already trades in the market.
Common types of liability management transaction include Exchange Offers (where an issuer offers to exchange existing holders out of an old bond issue and into a new one) and Tender Offers (where an issuer offers to buy back its existing bonds for cash).
My specialism during the second part of my DCM career was liability management, so we will certainly return to this topic in more detail in the future.
What does the legal team do?
Generally within a debt capital markets department, there will be a team responsible for the legal aspects of debt issuance.
In order to launch a new bond transaction, the issuer will need to produce various legal documents, including the terms and conditions of the bonds themselves.
In most cases the issuer will appoint a law firm to act as issuer’s counsel and the arranging banks will appoint another law firm to act as lead managers’ counsel.
The legal team within each bank (which will often go by the name of Transaction Management or Transaction Development) will be responsible for managing the various legal participants in the transaction, ensuring that the law firms produce the required documentation in the desired time frame and that the settlement process occurs successfully once the deal is launched.
It is increasingly common for members of a transaction management team to have a legal background, for instance as a capital markets lawyer at an external law firm.
In some smaller debt capital markets departments (and in one or two larger ones), the transaction management role may be performed by someone that is appointed from a central legal team within the bank, rather than being within the department itself.
That concludes this post. If you have any questions on what I have written in this or any other post, please do leave a comment in the box below.
All the best,