Corporate and investment banking focus its activity on financing the development of enterprises and corporations and catering to their investment needs. Wholesale clients – which can be anywhere from different-sized companies to financial institutions or institutional investors - require more sophisticated financial products, either because of their size or the nature of their activity. In this guide we take a look at eight basic concepts that will help you understand the fundamentals of this business.
A bond is a debt security issued by a company or public administration that is sold to investors in financial markets with to raise funds to finance their activities. The issuer of the bond promises to repay the borrowed money, plus a fixed amount of interest (the so-called coupon), to the bondholder. When issuing a bond, issuers usually resort to banking institutions for assistance, who act as placement agents.
Shares are equal parts into which the capital of a company is divided. Shares are traded in stock markets. Stock markets are the places where buyers willing to pay money for shares – i.e. the demand for shares - and companies looking to raise money by selling the shares they own – i.e. the supply - converge. Thus, when demand and supply coincide, the transaction is carried out.
Corporate loans are financial transactions whereby a bank (lender) lends, pursuant to a contract or agreement between the parties, a specific amount of money to a third party (borrower), in this case a company, in exchange for an interest, called the cost of money. We can differentiate between bilateral or syndicated loans depending on whether the loan is arranged with a single lender or a group of lenders.
The term project finance refers to the financing of large infrastructure or energy projects that require particularly large investments subject to extended payback periods. They are arranged based on the long-term predictability of their cash flows and structured by means of fixed contracts with customers, suppliers, market regulators, etc. This financing activity is closely linked to the development of a country's basic infrastructures and, therefore, also contributes to its economic development.
The term trade finance refers to the portfolio of products required to facilitate international trade, and enable importers, exporters, banks, insurers, and export credit agencies (ECAs) to arrange transactions. This portfolio of products includes buyer’s credit, the issuance of letters of guarantee, the discount of invoices and insurance. This activity enables businesses and people to import and export of goods and services, mitigating the risks existing in international trade relations and simplifying transaction settlement processes.
Initial Public Offering
The term Initial Public Offering makes reference to a growth strategy whereby a company offers its shares in a regulated public market. This transaction allows companies to expedite growth by raising the funds they need to materialize their business plan, and its private shareholders to raise liquidity and materialize the value of their shares and diversify their assets.
A capital increase is a process whereby a company increases its share capital. In other words, it entails providing the company with more value and more goods. To increase its capital, a company normally issues new shares or directly increases the share value of the company without requiring shareholders to make any additional disbursements.
The M&A activity (M&A stands for Mergers & Acquisitions) is a term coined to refer to a business growth strategy whereby a company acquires, buys a stake, partners or takes control over the business or assets of another company to expand its current business or venture into new ones. Banks act as financial advisors, focus on solving the corporate problems of the companies and provide ideas aimed at generating value for shareholders.