The debt capital markets (DCM) are a sector of the capital markets specifically for buying and selling debt securities. If you are not already familiar with this term, debt securities are financial instruments that are issued by governments, corporations, and other entities to raise capital for a variety of projects and purposes. Investors essentially lend money to the issuer in exchange for regular interest payments and the potential return of the principal amount at maturity. Common types of debt securities include corporate bonds and loans, certificates of deposit (CDs), and collateralized securities, as we’ll explore in more detail.
If you’re considering investing in the debt capital markets, but aren’t sure where to start, this blog post is for you. We’ll walk you through the growth of DCM in recent years—as well as the different types of debt securities, and the features and benefits of each type—to help you make more informed investment decisions.
About the debt capital markets (DCM)
Debt has always been an essential component of the capital stack; however, the private debt space has expanded in recent years as the sustained low interest rate environment sent both institutional and retail investors on a search for higher yields through less-liquid investments. In fact, according to PitchBook, total assets under management (AUM) in private debt was just shy of $1.9 trillion as of June 2023. Additionally, in March 2024, our analysts reported that fundraising was down in H2, but would likely still exceed $200 billion for the fourth consecutive year as interest in private debt remains strong.
2023 Annual Global Private Debt Report
Private debt has overtaken venture capital among the top private markets fundraising strategies of the year, second only to private equity—learn more in our recent report.
Common types of debt securities
What are corporate bonds?
Corporate bonds are a type of bond, in which investors loan money to a company. The company issuing the bond typically agrees to pay a certain amount of interest—and then return the principal when the bond matures.
Note that if you are looking to learn more about corporate bonds, you can filter by this deal type in the Credit News section of the PitchBook Platform. You can also find recent trends under Credit Research—gaining quick insight into the performance of investment-grade bonds versus high-yield bonds.
The definitive guide to the high-yield bond market
A high-yield bond is a type of corporate bond—a debt security issued by a corporation with a lower-than-investment grade rating. Get answers to questions about high-yield bonds from our primer.
What are corporate loans?
Corporate loans are similar to bonds in that investors loan money to a company. Historically loans were typically made by banks to companies. Therefore, these instruments had amortizing deal structures and lenders had more protection than bond investors to keep closer tabs on a company when facing difficulty repaying its debt. Some of these protections have been eroded in recent years as the two markets have converged, with the investor base for loans broadening out beyond banks to institutional and retail investors (in the US; Retail investors in Europe can still not invest in corporate loans).
What are certificates of deposit?
A certificate of deposit (CD) is a type of account offered by financial institutions, which comes with fixed terms. Investors deposit their money for a set time—anywhere from three months to five years—in exchange for a set interest rate. In some cases, there may be a penalty for early withdrawal.
Note that if you are a PitchBook client, you can use our Excel Plugin to find information on certificates of deposit.
What are collateralized securities?
Collateralized debt obligations (CDOs) are a type of asset-backed security, in which a bank or an asset manager bundles groups of debt obligations together into different tranches based on the level of associated risk and repayment seniority. These repackaged assets are then sold to specialized investors through a special purpose entity (SPE).
Collateralized loan obligations (CLOs) also fall under this category. Collateralized Loan Obligations (CLOs) are structured financial products that pool together a diverse portfolio of loans—typically leveraged loans or corporate loans—and transform them into tradable securities.
Note that if you are a PitchBook client, LCD provides comprehensive coverage of the global CLO market.
What are leveraged loans?
Leveraged loans are a type of debt instrument that companies with below-investment grade credit ratings use to finance their operations and acquisitions. These loans are typically provided by banks or institutional investors.
Leveraged loans are attractive to borrowers because they allow them to access large liquid amounts of capital and typically can be prepaid when interest rates fall–or even repriced. And in recent years these loans have been structured without financial covenants, meaning borrowers have similar financial flexibility as when issuing corporate bonds. And they are attractive to investors because they pay higher rates of interest than investment-grade securities. However, they also carry a higher risk of credit default.
Leveraged loan primer
The LCD Leveraged Loan Primer is the definitive guide to the asset class for leveraged finance newcomers and professionals alike.
What is private credit?
Private credit refers to direct lending—a form of corporate debt financing often provided by non-traditional lenders, such as private equity firms, hedge funds, and specialized credit funds.
Unlike traditional bank loans, private credit offers more flexibility in terms of structure and collateral requirements. It allows borrowers to access capital quickly and efficiently, often with less stringent underwriting criteria, however, borrowers typically pay higher rates of interest and often have more financial covenants to adhere to, although these covenants have been eroded as more investors have piled into the asset class, increasing competition for this debt. Private credit can be used for various purposes, including leveraged buyouts, recapitalizations, refinancing, and growth capital.
What is distressed bankruptcy?
Distressed bankruptcy (or in Europe referred to as distressed debt) refers to a situation where a company is unable to meet its financial obligations and is on the brink of insolvency. It is often characterized by the company’s inability to service its debt, declining revenues, and negative cash flow.
In distressed bankruptcy, the company may choose to file for Chapter 11 bankruptcy, which allows it to reorganize its operations and negotiate debt restructuring with its creditors. This process aims to provide the company with a chance to recover and continue its operations while addressing its financial challenges.
Investors in this type of security typically purchase debt from companies that are in distress at a steep discount.
Features and benefits of different types of debt security for investors
Of course, as with all types of investments, there are risks to investing in public and private debt. If economic conditions worsen, for instance, some borrowers may be unable to pay back their outstanding debt—leaving investors at risk of suffering significant financial loss. And even within the debt capital markets, there are different levels of risk and return associated with each type of investment.
Prior to committing any capital, it’s important to do your due diligence. Consider how much risk you are willing to take on—and which assets might then be the best fit for your current portfolio.
For reference, here are some of the potential benefits of each type of debt security, in ascending order of relative risk and return:
| Type of debt security | Benefits for investors |
|---|---|
| Certificates of deposit | CDs tend to offer higher interest rates than a typical savings account. They are also federally insured up to at least $250,000, making them a relatively safe options for investors that do not need immediate access to capital. |
| Corporate bonds and loans | Potential benefits of investing in corporate bonds include portfolio diversification and income generation. Typically returns on debt securities are lower than equity investments, but they are generally considered less risky. Investors can also choose their level of risk using internal credit analysis and external credit analysis via rating agencies. Leveraged loans and high-yield bonds offer the highest returns, albeit the highest risk of loss if a company defaults. |
| Collateralized loan obligations (CLOs) | CLOs are designed to provide investors with exposure to a diversified pool of loans, while offering potentially attractive risk-adjusted returns. Backed by the cash flows generated from the underlying loans, CLOs have gained popularity due to their potential for higher yields and the ability to tailor risk profiles to suit different investment strategies. |
| Collateralized debt obligations (CDOs) | If a CDO contains just mortgages, then you might see it referred to as a collateralized mortgage obligation (CMO). Other types of debt that could be included in a CDO include corporate loans, auto loans, credit card debt, and bonds. As a potential investor, it’s important to consider a CDO’s rating. Typically, the higher the rating, the safer the investment will be—and the lower the rating, the more likely it is that the assets within that tranche will default. Lower-rated CDOs also come with higher potential returns, however, which can be a compelling option if you are not too risk-averse. |
| Private credit | Direct lending provides investors with higher returns and more credit protection than more liquid debt securities. It also offers compelling diversification benefits. |
| Distressed bankruptcy | Investors can acquire distressed debt at discounted prices, potentially leading to substantial returns if the borrower successfully emerges from bankruptcy. Additionally, investors may have the chance to influence the restructuring process and gain a stake in the reorganized company. |
Conclusion
We hope this blog post has served as a helpful introduction to the debt capital markets. If you are considering investing in DCM, remember that there are pros and cons to different types of debt securities. As market conditions change, you may need to reevaluate the level of risk within your portfolio and adjust your allocations. If you do not have in-depth and accurate information, however, this can be a tall order.
PitchBook provides comprehensive insights into the debt capital markets, with access to the Morningstar Leveraged Loans Index, as well as our trusted data, news, and research across the full credit lifecycle.
More on the debt capital markets (DCM)
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Private debt fundraising has moved up the ranks—read up on the latest trends in our 2023 Annual Global Private Debt Report
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