Individuals and institutions trade financial securities on the capital markets, which are divided into equity and debt capital markets. In the equity capital markets, shares are issued and traded. In the debt capital markets, bonds are issued for investors to purchase, providing the issuer with finance, and can subsequently be traded between investors on what's known as the secondary market. These investors might include pension funds, insurance companies, and banks.
The Financial Institutions Group within the debt capital markets department at BNP Paribas advises on and facilitates bond issues by European banks and insurance companies. By doing so, we're ensuring these banks have the cash to lend to retail consumers on the high street. So if you have a student account, we help ensure your bank has money to pass on to you when you wish to make a withdrawal.
Debt capital markets works closely with a number of other departments within the bank. Because every bond issue requires a prospectus (a legal document with all the details of a security), we work very closely with our legal team. We'll also work alongside our research department who provide us with valuable information, our sales department who sell the bonds to investors on the secondary market, and also some of the structuring desks who help ensure the bonds are structured appropriately to meet investor appetite. Finally, our corporate finance team ensures we have good access to the issuing clients.
What is a bond?
A bond is a glorified "IOU", issued by a company or a government which needs to raise a large amount of capital. Investors who buy the bonds effectively lend the issuer the amount they pay to purchase the bonds. The maturity of the bond - the length of time before it expires and the issuer must repay the investors - can be anything from 90 days to 30 years. Interest is usually paid on the bond every six months, with the rate based on the credit rating of the issuer and the maturity. Bonds can be issued in almost any currency, and bond issues normally have a minimum size of £250 million, but can be worth up to several billion.
Why issue a bond?
Issuing a bond can often be a better way for an entity to raise capital than a bank loan or an issue of shares. The bond market is deep, which means there are many potential investors, and liquid, which means bonds are easily tradable. Investors are therefore usually confident in investing in bonds because they know they can sell them easily at a later date on the secondary market, which makes it easier for the entity to raise money through bonds rather than, say, a syndicated loan.
By issuing bonds rather than shares, an entity will not dilute existing ownership interests because bondholders do not take a stake in the company when they invest, as shareholders do.
How does the bond issue process work?
An issue of bonds means the point at which they are sold to investors. The bank who facilitates the sale is known as its underwriter, and is responsible for ensuring the sale of the bond to investors. If investors wish to sell the bonds at any point, the underwriter can usually take them back and sell them on to other investors. Typically, these bonds will trade for their entire lifetime, so if it's a five-year bond, it will continue to trade on the bond market for five years. At the end of the five years, the bond will sometimes be redeemed, that is, the issuer who issued the bond will pay the money back to investors. But often the issuer will refinance itself at this stage with another bond issue.
What problems can arise during the bond issue process?
Occasionally, there can be difficulties in issuing a bond. For instance, if the pricing of the bond is wrong, that is, the return investors will receive is not attractive enough, then investors may not be interested. The bonds can then fail to sell, and the issuer isn't able to raise the finance it had hoped for.
Every bond is given a credit rating by the rating agencies (Moody's, Standard & Poor's and Fitch) as part of the bond issue process. If, for any reason, one of these decides to downgrade the bond, it will make investors nervous and could deter them from buying the bond.
How does your work generate revenue for the bank?
We charge a fee for the advice we give issuers on their financing strategy - for example, we may tell them that the euro is looking strong and that they should consider issuing a bond in this currency. In addition, when we then sell the bonds on their behalf to investors around the world, we charge a fee relating to the amount raised by the bond issue.
How did you join debt capital markets and how has your role and the business changed in this time?
I joined the Financial Institutions Group in debt capital markets as a geography graduate in 2000. When I started, I was primarily conducting research into clients; looking at what their requirements were, what the maturities on their existing bonds were, and what our advice should be. I was focused on the UK market and dealt with some of our smaller clients, like building societies and some of the insurance companies.
Now I've got a broader European role. My job involves trying to work out where the markets are going, what the trends are, and trying to ensure the bank's strategy in my area will ensure the best service possible for our clients. I started at the bottom of the ladder and while I would never say I was doing grunt work, I certainly got my hands dirty! Eleven years later, I'm leading the team. The opportunities for progression are there to be taken.
Since I joined, we have taken the business from being euro-focused onto a broader, global platform. We're far more heavily involved in the dollar, the pound and the Asian currency markets now. We've also broadened our portfolio of products from traditional senior debt (the debt that must be repaid first if a debtor becomes bankrupt) into a variety of more sophisticated products, across subordinated debt, covered bonds (securities created from bundles of public sector loans or mortgage loans) and insurance products. We're now also number one in the league table for the financial institutions market, which is something banks always get very excited about!
Can you tell us about a recent project you worked on?
We recently advised and executed a large capital markets transaction for a big European bank who were hoping to restructure their capital base. The work involved buying back old bonds which weren't providing the right regulatory credit for the institution and exchanging them for new bonds, with longer durations. The aim of this process was to ensure the bank not only had full regulatory credit from the authorities, but also that it was well funded for the next five to ten years. It also made sure that the bank avoided having to take any more capital from its government, and gave it a strong base for lending to retail consumers for years to come. The transaction involved billions of pounds' worth of securities and coordinating investors in Europe, Asia and the US.
What do you enjoy about debt capital markets?
Because we work with the biggest banks in Europe, we get to meet some very senior, and interesting people. Often I'm required to make presentations to these banks to ensure they can sell the bond issue to investors in Asia, Europe, the US or Latin America. As such, there's a lot of travel involved. We often go on roadshows with these banks, meeting the investors in exotic locations.
Next week, we're off to Asia, to do an investor seminar for European banks in Hong Kong and Singapore. After that, we're going to the US to do another investor forum in New York and Boston. Even when you first join as a graduate, the opportunity to travel is there. Someone always needs to escort the clients on these roadshows and ensure everything runs smoothly, while the rest of us are in the office trying to win new business. It's certainly a perk of the job!
What kind of work does a graduate role involve?
Banks make money by lending money, so they always need financing. Therefore, there's always a need for people like us assisting other banks, so debt capital markets work for financial institution clients is one of the most secure areas of employment in the finance sector. By and large, positions in all areas of debt capital markets are open to new graduates.
A typical day for a graduate might start at around 8am, when we have a meeting with traders and research people to hear about the latest trends in the market and relevant news stories. Phone calls and meetings with clients is a huge part of the job, or they might get involved in putting together presentations and documents based on these client conversations. These documents will advise clients on how we can best help them achieve their financial objectives. It's important that we're always relaying the best, most up-to-date advice possible. Typically, the day finishes between 6pm and 7pm, so the hours aren't as long as they can be other areas of banking.