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What is a Corporate Debt Market?

Geri Terzo
Geri Terzo

A corporate debt market is where companies go to borrow money to complete large-scale transactions, such as a merger, acquisition or organic expansion. It is the opposite of the corporate equity markets, which is where companies sell equity or stocks to raise money. Companies that use the corporate debt market are taking on some risk, because if the company cannot repay investors in light of a bankruptcy or another negative event, shareholders can gain control of that entity. On the plus side, using the corporate debt market usually results in some tax benefits.

The asset class most closely associated with the corporate debt market is fixed income. A company that chooses to raise money in the debt capital markets will hire an investment banking firm to lead the deal. Bankers and product specialists often work together to design the appropriate debt product for a company to issue or sell in the financial markets. The bankers and company executive team will decide on the type of product to issue, the timing of the launch and a plan for marketing. Proceeds from the bond sale could be used to acquire another to company, pursue a clinical trial of some sort or to purchase assets in an expansion, for example.

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There are different types of financial products that are issued in the debt markets, including corporate bonds. The issuer of these bonds is the company, and the lender is the investor. An investor purchases some of the debt being offered in the transaction and, in return, receives regular cash distributions, typically on a semiannual basis at a preset interest rate. Also, the company is required to repay the principal amount of the loan or the original amount invested after the bond reaches maturity or its expiration date.

There are considerations to be made by companies before accessing the corporate debt market. Since in the case of a bond issuance the company becomes responsible for making ongoing cash distributions to investors, the management team needs to be prepared to earmark cash flow to follow through on this commitment. On the plus side, in many places, the company can write off these payments, which results in tax advantages. The potential disadvantages are similarly great because if a company defaults on its bond payments to investors, it could lose control of the company. Also, the more outstanding debt that a company has in the corporate debt market, the more expensive it becomes to issue additional bonds.

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