Steadily improving cycle
“As I have articulated since our IPO, we believe it’s going to be a long and steadily improving cycle. I think this is evident based on our conversation with clients and when you look at the data.”
Global M&A up 14% this year
“The dollar volume of global announced M&A transactions over $100 million is up 14% over the first quarter of 2014.”
Volume is up for big deals though while smaller deals are flat
“But as we have discussed, we believe the number of transactions is more indicative of revenue potential and this number is up only 3% from the prior year period. But that’s not the whole picture, when you look more closely at the day the different trends emerge for large cap and mid cap activity, while the number of transactions of over $5 billion almost doubles versus the first quarter of last year, the number of deals between $100 million and $5 billion was basically flat.’
Deals are taking longer to get to the finish line
“So while the M&A market is improving, some of the headline deals are suggesting a more pronounced rebound than what we’re seeing in broader markets. And to be candid we were surprised by this trend as relative to last year does feel like deals are taking longer to get to the finish line, particularly with regards to credit sensitive M&A.”
M&A is being driven by the seller. Now we’re seeing a mismatch of what buyers are willing and able to pay
“Last earnings call I think I spoke about M&A activity being driven by the seller, stock prices increased and sellers become confident that they can receive value for their company and M&A begins to pick up.
This was the dynamic last year, which led to an acceleration of activity and high valuations achieved for sellers. Today, the seller’s expectations continue to be high, but we’re seeing a bit of mismatching terms of what buyers especially credit sensitive buyers are able and willing to pay.
Banks aren’t as willing to make leveraged loans for the purchases either
And by being able to pay one of the key ingredients is financing packages. The big banks are feeling regulatory pressure on leverage transactions, which means financing packages and buyer’s ability to pay on credit sensitive deals are being impacted.”
Many buyers are tapping the shadow banking system which are charging more money
‘by willing to pay, we mean buyers are generally being more disciplined as they face either lower levels of leverage when they evaluate opportunities or higher interest cost as many of them are now tapping the shadow of banking system in the unregulated sectors, which are charging more money.”
We are staying prepared to help restructure balance sheets when the cycle comes back
“I believe we have the leading restructuring franchise globally and it includes about 12% of our managing director population. We’re going to keep the team in place for when the cycle comes back. I’m pretty convinced that it isn’t a question of if, but when, given the tremendous amount of debt issued in recent years.
And if you look back on the last cycle, I don’t think in 2006 or early 2007, it was apparent how hard the cycle would hit in 2008 and 2009. So I don’t think they will give you a lot of warning, but we want to be ready for it.”
We’re seeing companies created by PE and credit hedge funds step into provide credit on leveraged transactions where regulated banks pulled back
“I mean a lot of these companies that are being created by the private equity firms and the credit hedge funds are stepping into provide it. The interesting point is, it’s more expensive. Those prices are different on interest rates and terms and that ultimately does affect a buyer’s willingness to step up to the level of price that was expecting us.”
PE firms are putting together credit vehicles because there is a real need for it right now
“that is why one of the reasons you’re seeing some of the big private equity firms put together credit, shadow banking credit opportunities and the opportunities have such growth orientation because there is a real need it for right now.”
It’s much harder to start a boutique firm than to just be a great banker
“the number of people who had said they are going to go out and create new investment banks or boutiques and I do think there is a lot of great bankers but I think the ability to create a long-term cohesive culture around a system that can create clients, new clients around the globe like we talked about earlier in the presentation is a very different thing than having a great banker, can’t be a great banker.”
Some foreign issuers have US debt that hasn’t been hedged properly which is all of a sudden a much larger obligation over night
“it is interesting there are places around the world that are have debt in U.S. dollar denomination, you talked about rate and currency and that might be that where that has happened remember that sort of results in a 30%, 40%, 50% increase in obligation just on currency and if you haven’t hedged it correctly, there could be some restructuring around that.”
The oil restructuring cycle hasn’t even started yet
“I think it haven’t even began. I don’t think it has even began. Look it happened rapidly, the decline was rapid, there are many, many firms who hedge at least six months to a year out, not unusual at all to not even the feeling yet, the cash flow, the real cash flow decline of the oil price.
And the first thing people do is you do anything to avoid default, you will sell your quality assets, you will sell your – first you sell your non-essential, then you will try to sell some assets even if it’s quality to keep current on your interest rates.
So look I don’t think it’s even really gotten started, I mean it started I know there are a few firms out there, but if oil would have settle in and call it $50 a barrel for long period of time, I think you see substantially more restructuring than we have seen.”