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- The investment bankers advising struggling companies have been slammed with business, and some execs expect restructuring revenues will easily double this year.
- Many of the boutique banks that specialize in restructuring also rely heavily on M&A revenues, meaning it’s essential to capture their share of the growing restructuring fee pool.
- But adding staff now, given the heightened demand and the social-distancing restrictions in place, is a challenge.
- Top restructuring firms like Evercore, Lazard, and Moelis have been shaking up their operations to capitalize on the opportunity.
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While much of the global economy is in a tailspin from the coronavirus pandemic, the investment bankers advising struggling companies have been slammed with business.
Executives expect restructuring revenues to soar this year, and given the abundance of work — and a hiring market complicated by social distancing and stay-at-home orders — firms are shaking up their operations to capitalize on the opportunity.
Oil and gas companies that binged on cheap debt from private-equity firms have especially struggled as oil prices crater. Whiting Petroleum and Diamond Offshore Drilling filed for bankruptcy in April, and Reuters reported that Chesapeake Energy is preparing to potentially follow suit.
Ailing brick-and-mortar retailers like JCPenney, Macy’s, and Nieman Marcus — whose stores have been sitting empty— have also tapped bankers to help restructure their debt and potentially stave off bankruptcy.
But even comparatively healthy companies have been seeking help managing liquidity amid the unprecedented business shutdowns across the world.
“We’ve got 11 partners globally who do restructuring and debt and equity capital markets advisory work. They’re all going flat out,” Ralph Schlosstein, the CEO of Evercore, recently told Business Insider. “And in the restructuring business of course, if we had twice as many people we could utilize them all.”
Ken Moelis, CEO of boutique investment bank Moelis & Co, said on the firm’s first-quarter earnings call that doubling restructuring revenues seemed like an easy benchmark to surpass.
“I do think if we stayed in this type of environment for a while, I think doubling would be the baseline for most — for the total amount of restructuring,” Moelis said, according to a transcript from financial-data platform Sentieo.
To be sure, boutiques have also grown more nimble in recent years, as they built up practices that straddle the line between restructuring and M&A.
The glut of restructuring opportunities won’t hit corporate income statements right away. Banks typically earn a six-figure retainer, but the real bounty — typically two-thirds of the total fee — arrives when transactions are finalized, which often takes six to 18 months.
And it’s not simply a gold rush. Even firms with top-tier restructuring practices rely heavily on fees from mergers-and-acquisitions — which have screeched to a standstill during the pandemic — meaning the influx in debt advisory mandates provides a crucial bulwark against profit losses.
Restructuring “never really substitutes M&A for dollar for dollar,” Lazard CEO Ken Jacobs said Thursday on an earnings call. “But at the same time, it does provide a very important buffer.”
Not enough bodies
However, staffing up substantially at this time is a challenge. While some investment-banking hiring is getting done at junior levels, remote working has made experienced hires harder to push through, according to Kevin Mahoney, a partner at executive search firm Bay Street Advisors who heads up its investment-banking practice.
“Junior hires are getting done virtually at some firms. Senior hires, however, are for the most part taken to the goal line through virtual meetings and calls with the objective of officially going to offer and completing the hire once everyone can meet in person … whenever that might be,” Mahoney said in an email. “We have several MD-level candidates in this ‘holding pattern’ now with clients.”
And for bankers with restructuring experience, the challenge is compounded. It’s a smaller niche in the dealmaking community, so right now the demand far outstrips the supply.
Even the firms that have hired in recent years in preparation for the end of the record bull market, like Evercore, need more bodies. As a result, swarms of junior and mid-level bankers are being siphoned away from strategic advisory teams and deployed to restructuring teams, a trend Mahoney expects to “continue well into next year.”
“We’ve taken a bunch of our younger bankers — and this is a double digit number, not a single digit number — and added them to the restructuring group, just to have extra analytical capabilities and arms and legs to do all the work that we’re being asked to do at this point,” Schlosstein said.
Lazard, which said in its first-quarter earnings release on Thursday it has more than 75 mandates in the works, has taken similar steps. Jacobs said the firm is “pivoting additional bankers on to restructuring teams as we have done in previous cycles.”
Trial by fire
Another way boutique advisory firms are coping with the deluge of work is leaning on senior coverage bankers with experience navigating turmoil by dint of their industry specialty, like energy or shipping.
“Those people, while they don’t necessarily have experience with Chapter 11 bankruptcy restructurings, they have lots of experience with debt restructurings and amend-and-extend agreements and things like that,” Schlosstein said.
Moelis said one of his most experienced restructuring experts today is actually an energy banker they hired a few years back, who upon joining the firm had to Google what a restructuring group does.
With economic pain cutting across all sectors, more senior bankers will be getting a crash course in restructuring, and trial-by-fire is part of Moelis’ strategy for building capacity.
“The workforce will expand very rapidly. We have sort of 50 or 60 dedicated restructuring people. We will pair them up with our leadership,” Moelis said. “They will do one or two deals in their space, and then the leadership will be pretty expert in how to do it.”
Long-time restructuring veterans blanche at the notion that a strategic-advisory banker could replicate their years of experience overhauling unwieldy capital structures and building relationships with the lawyers, creditors, and other experts who regularly traffic in this world.
“When someone needs a restructuring done in a company or a bankruptcy, they don’t go and seek out to hire a consumer industry banker that does exclusively strategic advisory work. They go to the guys that do restructuring work,” Michael Kramer, the CEO and cofounder of Ducera Partners, a boutique focused primarily on restructuring, told Business Insider.
“Tom Brady is a great quarterback, but you’re not going to have him go pitch for the New York Yankees,” he added.
Kramer said when stay-at-home orders first went out in March, the amount of activity “was on the verge of unmanageable.”
Ducera has gotten reinforcements in recent weeks. The firm, which ramped up hiring last fall to get ahead of a potential downturn, continues to onboard employees, Kramer said, and their staff is up 20% since the fourth quarter, with upwards of 50 restructuring professionals.
Kramer and other execs said they expect the restructuring work will come in waves, as supply chain disruptions and a reduction in consumer spending filter through the economy.
“It’s not going to be a quick blip. The challenges that companies are going to feel — it’s going to be years before we’re totally clean,” Kramer said. “It means a whole lot of work for us. It means a whole lot of challenges for the country.”
‘Engaging with clients without any wasted time’
In some ways, the bright line separating restructuring and strategic advisory has dimmed since the last downturn as advisory shops have expanded.
Restructuring groups aren’t synonymous with bankruptcy. Firms have built out liability management and capital markets advisory operations that straddle divisions and offer services regardless of the economic climate.
Acknowledging how much the lines have blurred, Lazard stopped separately breaking out restructuring revenues in public filings starting in 2018.
“The reason we eliminated the disclosure, it became too hard to distinguish between a pure restructuring assignment, a capital advisory assignment, a distressed M&A assignment,” Jacobs said on the earnings call.
Paul Taubman, the founder and CEO of PJT Partners, said in an earnings call that his strategic advisory bankers have gained experience with debt advisory issues because many assignments are cross-staffed.
Previously, nearly 50% of restructuring assignments were cross-staffed, he said, but today “it’s far more than half, and it’s heading towards nearly 100%.”
But even in the absence of additional staff, firms are finding, perhaps unexpectedly, the remote-work environment is making their work more efficient. With the absence distractions like traveling and coordinating meetings, the average banker can handle more than they could previously, Taubman said.
“We’re just getting on phone calls, video conferences, exchanging messages with clients,” Taubman said. “And I think we’re able to spend a lot more time for every minute of every hour, and every hour of every day, engaging with clients without any wasted time.”