by Jacques Els

So, you have a degree or two behind your name and even a few years’ banking experience and you have heard about the concept of debt origination, which truly is one of the most fascinating professions in the South African financial sector. And you ask yourself, what on earth does a debt originator do? In order to answer this question, I am going to create two real life scenarios, you should then decide which of the 2 two days in your view belongs in the world of a debt originator…

Scenario one:

• 6:30am – rushing through breakfast at the Hotel in Frankfurt (Germany), preparing to meet the client for a briefing before the start of day.
• 7:30am – leave the Hotel for a breakfast presentation with investors at another venue downtown in Frankfurt.
• 8:30am – investor breakfast commences.
• 10:00am – investor breakfast concludes, followed by a conference call.
• 10:30am – leave the venue for Frankfurt airport.
• 11:15am – flight from Frankfurt to Munich, arrive in Munich at 12:10. No time for lunch, had a quick bite on the plane.
• 13:00pm – second investor presentation for the day commences.
• 14:30pm – third investor presentation for the day commences.
• 15:45pm – fourth investor presentation for the day commences.
• 17:30pm – fifth investor presentation for the day commences.
• 18:30pm – last presentation for the day concludes and the roadshow party rushes through Munich city to get to the Munich airport.
• 20:30pm – flight from Munich to Amsterdam.
• 22:00pm – arrived in Amsterdam, waited 45 minutes for luggage and still haven’t had a proper meal since breakfast.
• 23:00 – check into a Hotel only to find that the kitchen had closed, beg the staff to throw together a hamburger and chips – comfort food for a very tired brain and body.
• 24:00 – time to go to bed after a long day, tomorrow is another early morning – have to get up at 6:00am for investor presentations and onward flight to Paris.

Scenario 2:

• 7:30am – arrive at the office, grab a quick cup of coffee and read through about 35 emails.
• 8:00am – receive a legal documentation pack of more than 300 pages of legal agreements in respect of a transaction which is being implemented on behalf of a large JSE listed corporate.
• 8:15am – commence working through the legal documentation in order to provide feedback to our internal counsel and the client’s external legal counsel before tomorrow morning.
• 11:00am – still reading through the stack of legal documentation.
• 14:00pm – first break from the legal documents. Join in on a conference call with my investment banking counterparts re a possible transaction.
• 14:30pm – back to the stack of legal documents – reading, reading and reading. The documents appear to be broadly in line with the transaction specs, but still require a few small amendments to provide the client with greater flexibility. I drafted a few new provisions for inclusion, then continued reading the remainder of the documents.
• 16:30pm – time for a quick 15 minute coffee break.
• 18:30pm – finally done with the legal documents. Marked up all my comments and changes and drafted an email which I will distribute tomorrow morning.

Now for the million dollar question: which of these two days do you think belong in the life of a debt originator? If you had said the first, you are half right. If you had said the second, you are also half right. If you had said both, you are spot on! Debt origination is not all about glamour and air miles… but it’s also not nearly as monotonous as the title may suggest…

Just as a background, the 2 different scenarios I provided above were in fact real life examples of two recent days in my career as a debt originator. The first scenario relates to the itinerary of the 3rd day of a week-long pan-European roadshow for the recent launch of a Euro Bond arranged on behalf of one of the Top JSE listed corporates. The second scenario relates to the finalisation of the legal documentation in terms of a privately placed Structured Covered Bond which was implemented on behalf of JSE listed Commercial Property Loan Stock Company.

Debt origination as a concept is still relatively new in the South African market – first emerging in the year 2000 and only really taking root from 2002 onwards. This article will explore the concept debt origination, thereafter dissect exactly what debt origination as career entails, and lastly attempt to highlight some of the qualities and attributes that sculpts one into a good debt originator.

In general, a company can fund its operations in the following three different ways, (each with its own unique set of benefits and drawbacks):

• Through the proceeds of the issuance of equity in the form of ordinary shares or preference shares (dilution remains a risk),
• Through cash which it generates internally on a day-to-day basis (cash flows might be subject to unpredictable volatility),
• Through incurring interest-bearing or non-interest bearing debt (debt can be expensive and has to be repaid, which again requires cash or re-financing).

Debt origination relates to the funding of companies via the issuance of debt, primarily interest bearing in nature. Debt in itself can take many forms, ranging from overnight bank funding, long term bank funding to funding via the debt capital markets (generally known as the fixed income or bond markets). It is in the latter arena where the term debt origination found a home.

Debt origination entails acting as an intermediary between a company that requires funding in the form of debt and institutional investors that might be willing to advance such funding to the relevant corporate – at a price naturally. Debt is structured along the lines of corporate bonds, commercial paper, securitisation issues or even hybrid capital structures which include some characteristics of debt and some of equity instruments.

Debt origination is closely aligned to the investment banking discipline and is now well established in the South African market. In fusing the funding requirements of your client with the investment needs of the fixed income investor community, the job of a debt originator is truly a multi-faceted one, requiring a wide variety of skills, technical knowledge and personal attributes. One walks the tight rope on a daily basis to ensure that you structure the most efficient total funding solution for a client, but simultaneously you need be acutely sensitive to structure the deal in such a way as to ensure that it can be sold to investors – at the correct price. In order to remain in business and to build a sound and credible reputation for your employer and yourself, a win-win scenario must be the outcome on every single transaction. Win-loose or loose-loose deals are simply not an option!

Debt origination products constitute only a few of a multitude of funding alternatives available to corporates and the first step in the debt origination process is to sell a specific product at a specific price to a specific company as the most suitable alternative to its specific funding needs. Yes, you did note a lot of “specifics”…. That is exactly what debt origination entails – selling a very specific set of products to a very specific audience.

The debt origination process requires project management skills as well as the ability to mobilise internal and external resources. The 2 pillars on which most debt capital market transactions rest are the underlying legal structure and the credit rating of the borrower or of the debt instrument itself (dependent on whether debt ranks senior vs subordinated or secured vs unsecured in status). As such, a close working relationship with the relevant legal firm and credit rating agency is of paramount importance – a background in law or credit ratings therefore won’t hurt…

The selling process starts long before one even contemplates the legal structure – it starts at the moment when you market a suitable debt product to the CEO, MD, FD or Treasurer of a company. Communicating at this level, the very highest level in the corporate jungle, poses an interesting, but very fulfilling challenge! Only with a sound foundation and understanding of the relevant corporate’s financial and business profiles accompanied by a through analysis of its funding strategy do you dare take on an FD to propose a new funding solution. Attention to detail is not a myth, it is an absolute non-negotiable. The selling process ends with the marketing of a transaction to a defined set of investors and agreeing a suitable price. Continuous relationship building and networking with your investor base is required to ensure that you remain updated with their unique requirements.

Briefly, there is a set of characteristics which is necessary to be a successful debt originator:

• Qualifications, financial or legal would assist greatly in quickly grasping concepts and identifying possible solutions.
• Patience – it can take a short as 4 weeks or as long as 6 months to implement a deal.
• Project management skills – you need to mobilise resources internally and externally.
• Relationship building and networking.
• A passion for financial markets and the economic landscape in general.
• Good understanding of corporates’ financial statements, ability to analyse corporate profiles and business strategies and propose changes.

Ability to think “out of the box”- innovation is vital. With increased competition, clients see more and more proposals and you need to distinguish your product offering form the next. Everyone can propose a “vanilla” run-of-the-mill solution, but not everyone can structure something that has never been done before! PS, many clients like the idea of innovation and to be seen doing something unique…

A career in debt origination can take many forms, from structuring the legal side of a deal to doing the financial modelling to selling the deal to investors and pricing it – it truly takes a team effort to succeed. So as much as one may have all the qualifications or attributes, teamwork and the ability to function within a team remains the final link in the chain of success. As much as one swallow doesn’t make a summer, one debt originator doesn’t make a deal.

As the fixed income market expands and corporates in general benefit from debt capital market products as funding tools, the market for debt originators also grows steadily. Given the very high degree of specialisation however, entry remains difficult and given the job satisfaction that it brings, many debt originators truly make a career out of it. Vacancies are thus not at the order of the day. How do you get in? Again patience may be the best attribute to have, seeking an opportunity in one of the following areas:

• Fixed income analyst,
• Junior debt arranger,
• Corporate/investment banking background,
• Credit ratings background

A career in debt origination can take the form of operating at the very highest level within the corporate and legal landscape in the country and it remains exceptionally satisfying when you implement a solution knowing that it is something unique. It is also gratifying to know that since the debt origination field is so very specialised and technical, you are one of only a few transactors in the market that are playing in this market and at the highest level. But don’t get me wrong, this level of satisfaction does not come without a commensurate level of stress, but as the age old saying goes:” no pain, no gain”!