How to earn a crust in debt capital markets
As the one bright spot in dark markets, DCM is the business that everyone wants to be in this year. But a distinction is emerging between those banks that are crowding into the space and those that are able to make money from it. To be one of the latter takes more than just a strong league table showing; it takes a global franchise and a sharp eye for opportunity.
In 2007, the top-five debt capital markets houses globally netted fees of $8.1 billion from primary underwriting between them. Heady days indeed, but the DCM bandwagon was already spinning wildly out of control.
Once the wheels finally came off with Lehman Brothers’ collapse in September 2008 these revenues collapsed, with the same five banks chalking up $4.2 billion of DCM fees between them for 2008 – a 50% slump in 12 months. The climb back out of the pit has been stuttering and unpredictable. Fee revenue for 2011 for the top five was $5.1 billion – still 35% off the peak. However, in the first quarter of this year global DCM revenue accounted for 37.3% of all investment banking revenue according to Dealogic – its highest share since 1998 and well above the 10-year average of 26%. Even in the record second quarter of 2007 it still accounted for only 25%. So banks are making less money in DCM but given the dearth of M&A and equity business what they are making is far more important to them than ever before. It could also become far harder to achieve as the market adjusts painfully to the vastly changed banking landscape.