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Revenues at boutique banks are surging as high interest rates force more companies to seek advice on how to restructure debt and tap fresh liquidity.
Advisory fees at five of the six major listed independent investment banks — Evercore, Lazard, Moelis, Perella Weinberg and PJT Partners — together jumped 21 per cent in the first quarter of 2024, relative to a year ago.
The smaller, so-called independent firms tend to dominate in restructuring advice because they are not subject to the same conflicts of interest as the big banks, which also buy and sell corporate debt instruments.
“It’s a clubby type of business. When activity picks up, those are the firms that are getting the calls,” said Devin Ryan, an equity analyst at Citizens JMP Securities.
At the three largest “bulge-bracket” banks — Goldman Sachs, JPMorgan and Morgan Stanley — advisory revenues collectively fell 6 per cent in the first three months of the year.
The traditional mergers and acquisitions market remains muted as companies are unwilling to pull the trigger on blockbuster transactions because of economic, regulatory and geopolitical uncertainty.
Boutique banks typically do not break out restructuring revenues in their financial disclosures but their executives have recently cited increased activity in these operations.
“The revenue increase is primarily attributable to growth in restructuring,” said Ken Moelis, the founder and chief executive of Moelis & Company whose overall advisory revenues jumped 17 per cent in the first quarter.
“The M&A pipeline continues to build, but conversion to revenue remains challenging.”
Restructuring specialists have historically made the bulk of their fees helping companies or hedge fund creditor groups through the Chapter 11 bankruptcy process.
But in recent years the practice has come to be dominated by helping borrowers raise new capital to refinance existing debt in the hopes of avoiding in-court restructurings, a product now broadly known as “liability management”.
Bankers can earn fees for giving advice and leading negotiations with counterparties as well as a separate percentage owed for the amount of new debt or equity raised.
Liability management work in the first quarter was more than twice what it was in the first quarter of last year, said Peter Orszag, the Lazard chief executive who has hired several new restructuring dealmakers in recent months.
“We do expect an elevated level of activity will continue as the debt maturities that are approaching interact with the higher for longer [interest rate] environment,” he recently told analysts.
Ken Moelis said the explosion of the trillion-dollar private capital marketplace was increasingly keeping strapped companies out of formal bankruptcies.
He said: “And believe me, every single person, every single owner of a company would rather finance than go bankrupt. No matter what the rate, they will try to extend the runway to that . . . Of course, there will continue to be some Chapter 11s, but it’s not as big a Chapter 11 market as it was in the last downturn by a long way.”
The share prices of the groups with the highest proportion of restructuring bankers — Houlihan Lokey, the sixth listed independent, which reports earnings next week, and PJT Partners — have risen about 50 per cent in the past 12 months.
Even without a bankruptcy filing, liability management transactions have proved increasingly complex, contentious and expensive. Lumen Technologies, a listed telecoms company, recently restructured a $20bn debt stack and paid nearly $400mn in combined “lender fees” and “third-party costs”, according to its securities filings. One person involved in the situation said the company covered the costs for the roughly 10 different law firms and banks advising the company as well as various creditors.
One hedge fund manager told the Financial Times that companies and investment firms had little choice but to grit their teeth and pay the fees. “There have been two winners in the distressed debt boom: law firms and investment banks and they have every incentive to keep that party going.”
A top restructuring lawyer conceded that banker fees were high, but insisted that expert financial acumen was necessary. “The financial advisers add a ton of value in these complex liability management situations. They understand the [debt] structures and know the players and the right math for the situation.”
Bankers remain bullish about the need for their repair services.
Paul Taubman, founder of PJT Partners, said on a Thursday earnings call: “I think we’re going to enjoy elevated levels of liability management . . . Some is simply that rates are not coming down nearly as quickly as people had hoped or expected.
“And that way, there is real disruption and lots of winners and . . . there’s all of these incredible success stories, but there’s creative destruction, and you can’t just have a world where there are winners and there are no losers.”
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