The changing of the (debt capital markets) guard

Debt Capital Markets (DCM) has seen better years.

Although 2023 was a slightly better year than 2022 per Dealogic, it still was a far cry from the glory days of… Erm, 2021.

On the GlobalCapital podcast, hosted by John Hay and Michael Turner, the two noted that the expansive job cuts across the financial services industry had had a significant impact on not just the operating costs of individual banks, but also their wisdom.

“There's an awful lot of very senior bankers who've left syndicate desks,” the two noted. “These are people who've been in the market 20 or 30 years… There's been a sort of generational shift with a lot of these people leaving the market, essentially, in many cases being let go by their banks to save money.” 

The impacts of these senior people departing are relatively clear. “It's not about technology, it’s about knowledge, experience, and judgment,” they said. “Issuers really value the experience of certain individuals that they trust. And they certainly feel that these individuals still give them a competitive advantage in the market.”

And those individuals cannot be easily replaced, even by people that served directly under them (or are serving directly under them). “It's not as easy as just following the rest of the crowd and doing what others are doing,” they said, “which is what a more junior person would do. You need a more senior person to know when you can be more aggressive and make the difference to the issuer – and get them a better deal as a result.”

That experience comes not just with time, but also through directly witnessing market turbulence, and being able to make comparisons to the present day. “As one very senior banker put it, your experience is not equally shared across the age range, because difficult markets don't happen all the time. You have to have been around for 10-15 years to have seen a bad market before.”

The cause of this is, at least to an extent, short-term thinking. Banks “have been thinking, well, you know, if revenues are poor, we've got high fixed costs from these high fixed pay contracts. Let's get rid of some of them.” The impact of that thinking is potentially dangerous, the two said, although banks seem aware and comfortable with the situation – until revenues improve, at least. One argument is that “banks are now sort of accepting getting used to the new normal of revenues coming down in debt capital markets.”

Another argument is that the old guard of DCM top brass is at least a little bit outdated. Banks aren’t just under financial pressures, but are also “reassessing what the role of a syndicate bank actually is, and what the what the syndicate desk job really consists of.” A DCM banker’s role has changed substantially over the years, mostly gradually, although often sharply.

One instance is the debut, around 20 years ago, of the pot system, which was introduced from the US market. It “meant that the syndicate banks were no longer each taking a chunk of the deal themselves in selling it privately to their own clients, but were all putting orders into one book. That really led to a big shift in the market.”

It also lowered barriers to entry in the market, making them more competitive – and bringing in a substantial number of commercial banks, who leveraged the strong corporate relationships they had with clients.

“There is a sense in which that has made the work easier, and sort of, or at least made bank management's think it can be done more easily,” Turner and Hay said. That means that juniorization might not just be an opportunity to get rid of high earners, but also to change the face of the industry – or at least a bank’s footprint in the industry.

But losing decades of experience is hardly, if ever, a good thing, both for the industry and for individual banks. “There does have to be generational change inevitably, and often that is uncomfortable for the ones at the top that have to leave.”

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