The ongoing pandemic has had a widespread impact on both individuals and business enterprises across the world. While specific sectors could spring back quickly, others struggle and may take a long time before reverting to pre-pandemic levels. Examples include tourism, events, hospitality, etc. These sectors are also facing significant cash flow related problems. To make things worse, they would have incurred tremendous fixed costs. Hence, there isn’t an option for these firms but to raise more capital. Investors might not consider investing due to these sectors’ inherent risks. Financial institutions might avoid these areas altogether due to deteriorating financial projections.
The importance of debt
The usage of leverage and debt in the business world has seen an increase in the 21st century. With large scale acquisitions becoming the new normal, leverage is often used to expand the businesses and scale up operations. The Debt Capital Market has usually been deemed necessary for a business to grow beyond a point. The usage of DCM Investment banking is also widespread through Leveraged buyouts. Thus, it can be concluded that debt has formed formidable importance in the business world. Many financial institutions around the world indulge in debt capital markets. Apart from financial institutions, various consultants exist that allow various companies to approach the debt capital market. However, due to the increased risk, deteriorating financials, and an uncertain cash flow impact, the debt capital market has been hit hard despite the financial world seeing low-interest rates.
How has DCM been affected?
DCM Investment banking involves using different means of finance to support the expansion and growth of the business. The availability of larger markets and international finance at a cheaper rate had made DCM a preferred mode of raising finance. However, many companies entered COVID-19 with large debts on their books. As per reports, non-government debt was around USD 75 trillion in September 2019, limiting the firms’ capacity to raise further debt. With little prospective business, uncertain cash flows, and high debt levels would restrict the companies from accessing the debt markets or indulging in expansion or acquisition unlike they usually would.
Besides the rising debt many companies face, the banks and financial institutions are also reluctant to boost the economy further. The large overhang of debt on many companies has increased the credit risks for banks and financial institutions. Apart from worsening credit situations, many banks might be reluctant to provide loans due to tightening covenants. Such an increase in credit and reluctance of financial institutions has also led to the declining usage of DCM Investment banking in the post COVID era.
What are companies doing?
Rather than indulging in raising new capital, most companies are more focused on restructuring their existing debt. While many countries worldwide and financial institutions have not treated such restructuring and defaults, the reluctance to issue new debt to such companies is an understandable issue.
The companies are also facing issues with providing appropriate security to banks or financial institutions to raise finance. Fixed assets are a hard sell for many financial institutions at the present moment due to the ability to sell such assets amidst a global pandemic. In contrast, the cash flows or inventory might be insufficient at the moment. It has forced the companies to look at alternate solutions or raise equity finance at a much higher cost than procure debt financing at an affordable rate.
Due to the uncertainty of cash flow and the re-opening procedures, many businesses have put on a halt any expansion plan that they might be undergoing. It has massively impacted the DCM market. However, this scenario should change once the cases reduce across the world — something happening already. Pent-up demand should also act as a driver. Thus, DCM Investment banking should see a comeback shortly.
Firms such as Acuity Knowledge Partners can assist companies and banks in meeting their financing requirements through DCM.
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