Moelis & Co 2Q17 Earnings Call Notes

Kenneth Moelis – Chairman and CEO

Companies waiting to see what happens with tax before inverting

“there’s a hold waiting to see what happens with tax. I think there were some industries that felt like the U.S. tax rate was not competitive and they were looking to do inversions for a few years. I think there’s a feeling now and a hope that’s worth waiting for. It’s sizable enough that we may solve our own tax problem. So not to do an unnatural act here while waiting to see what happens. Look, if that goes on another year, maybe they will run out of patience. But I think, for the time being, there is a feeling that, that particular problem might get solved.”

Outlook for retail and restructuring

“I think there’s a fundamental need to rationalize. People want to get larger to fight online and to fight Amazon and retail specifically. And there’ll be restructurings as well. Now the last time I was asked this, this would retail step in for energy? And the answer is I don’t believe it’s going to be as big an opportunity as energy. Energy was a very, very large user of capital in the leverage world. So I think retail will undergo both, but I don’t think it’s worth — I don’t think it’ll be so large that it’ll step in and replace things like energy in the restructuring world. But it will be — yes, there’s a lot of restructuring going on in the retail business, but a lot of those are smaller companies who are just kind of closing stores and shutting down, in some cases. So yes, I do think you’ll see some of both.”

I’m sensing an upturn in the European business

“Yes, I’m sensing a bit of an upturn in European business. I think some of it’s, us, doing better as a group. So I always like when you guys ask us these questions, we only have — we have a small portal into it. But we do — we feel like the general market is getting more upbeat on doing things and we feel like we’re having a better year and have organized Europe and feel much better about our activity there. So yes, I think it’s steady — I wouldn’t expect a spike, but I think — I feel like there’ll be a steady improvement in European corporate activity”

Moelis & Company 1Q17 Earnings Call Notes

Ken Moelis – Chairman & CEO

Activity up in middle markets

“Last year, I said we might experience an increase in middle market activity particularly with the sale of private businesses. In fact the number of global market completions was up 13% year-over-year for transactions size between $500 million and $2 billion and the number of announcements was up 25%. And we are benefiting from this activity.”

I feel optimistic about Europe

“Europe, I feel pretty optimistic about Europe. I think it’s coming back and I do think that that election was a bigger a bigger problem in a lot of people’s mind than they were talking about.”

Sellers are finding excellent prices

‘So there’s capital going in prices are excellent prices create sellers. People can sell their assets. Private owners are finding this to be a wonderful time to capitalize on an asset they have gone for a long period of time. And the buyers are still finding low interest rates, very low volatility. And they are really buying cash flow in a world where it’s hard to find yield, what used to be considered high multiples are really not that high considering your alternative investment.”

Moelis and Co 4Q16 Earnings Call Notes

Ken Moelis

M&A dialogue continues to be extremely active

“Our M&A dialogue continues to be extremely active and certainly in the U.S. CEOs are looking to transact. And there could be further tailwinds if the new administration implements regulatory and tax reform as has been suggested. A recapitalization and restructuring dialogue remains healthy and we continue to advise clients on how to navigate a slower growth and rising interest rate environment.”

Look there is a business cycle but not a lot of growth in restructuring

“I call it out – if it’s growing it’s slight – it is not fiercely growing, let’s put it that way. For right now you have a lot of optimism in markets, there is a lot of refinancing capability, the markets are open. But it’s fine, it’s healthy and it’s spreading. There is a lot, look the locus of restructuring is around energy and commodities, but there is a lot of leverage companies out there in retail, media, TMT and there will be specific one-off occurrences based on the overleveraged et cetera, where you have to do restructuring and we’re seeing it start to evolve in that. There is a tremendous amount of leverage paper in the world. There is a business cycle and we feel very good about the restructuring group and what the next three years look like. But that’s not to say that I characterize it as growth in the very short-term.”

Deregulated environment going to drive M&A

“by the way rates are not moving as fast as people thought; I have not changed my view on where the economy is right now on growth. Now there’s an expectation I think of a deregulated environment that is making people very excited about what they might be able to implement and I actually think that’s what’s going to drive M&A. There’s a feeling that you can achieve the goals you set out that the government will not get in your way if you have a strategy to implement something and I think that’s rifling through all industries, people call it animal spirits but I think it’s the optimism that they can envision a creative way to create value and that the government might not get in their way and that’s going to motivate people to attempt and try things that will be exciting for everyone. That’s what I think is going to drive the M&A market.”

I think everyone is excited about lower taxes

“I think everybody is very excited about lower taxes and most executives have in the back of their mind exactly how much their earnings go up and lower tax rate but I’m not heard one person say we do that deal in a lower tax environment. I think the transactions are strategic and they are not based solely on the financials around lower tax. Lower tax would affect everybody across the board. So I think there’s a feeling it might affect your cost of capital, raise your equity stock price, lower your cost of equity but I haven’t heard it become a precursor to a deal.”

Moelis & Co 3Q16 Earnings Call Notes

Moelis & Company’s (MC) CEO Ken Moelis on Q3 2016 Results

M&A dialogue remains healthy

“My commentary on the market is similar to what we discussed last quarter. While there have been declines in M&A volumes across the board, our M&A dialogue remains healthy. Fundamentals remain in place for continued activity and the current study low growth environment is actually very conducive to M&A.”

restructuring business picking up nicely

“Our restructuring business is picking up nicely with continued momentum in new mandates leading to higher ongoing retainers. We expect the trends that we are seeing in U.S. M&A and restructuring in the third quarter to continue through the end of the year and we will continue to emphasize strict financial discipline.”

Restructuring has longer lead time but M&A harder to tell for 2017

“I’d say sitting here in a static environment, because we know what we have and restructuring is long lead times with lots of retainer, you know they have a lengthy time. So I’d have to say right now it would be in the restructuring market but I have to tell you that our relationships and our connectivity at the Board room is pretty good. So M&A just less predictable and less able for me to know what 2017 is going to look where restructuring – we have a serious of things that we know should conclude in 2017.”

Can’t say that Brexit changed much, but it was already slow before the vote

“I think Europe and the UK were slow going into the vote and they’re slow coming out of the vote. So I don’t know if there were slow going into the vote because of the vote. But it’s been a slow year. I don’t know how it will all play out. I actually think – there are people who think when they actually start to have negotiations that it will have more of an effect. But it’s not dominating any conversations. I don’t believe it’s – there’s nothing I can point to, to say that Brexit is keeping anything that would have happened. Let’s put it this way. I cannot discern that Brexit has changed the direction but it was slow before Brexit and it has continued.”

There’s plenty of dialogue everywhere else, just not in Europe

“I think the animal spirits of Europe trying to do what the United States – look, the United States is having a tremendous amount of conversation and dialogue and we had a tremendous amount of activity in India and in China, and yet there’s something in Europe, UK, Eurozone that just seems to be not exciting about M&A. And it could be Brexit related but it started a year ago, if it started.”

The slow growth is helping the M&A environment

” I believe the M&A dialogue and the desire to take action to that against what is a low growth economy, threating your top line, you cannot get the growth organically. And then secondly, there’s a big thing going on. I believe the change, the technology that each industry is facing and trying to figure out where their business is going to be three, five years from now and setting themselves up in a technology format to compete is really adding a tremendous amount to the dialogue”

Moelis and Company 2Q16 Earnings Call Notes

Moelis & Company’s (MC) CEO Ken Moelis on Q2 2016 Results

M&A driven by low growth

“In US, M&A activity should continue to be driven a consistent and predictable low growth environment which CEOs are able to plan for. Interest rates remain low, capital markets were open and companies are planning accordingly. Our outlook remains positive, our M&A dialog remains healthy, our restructuring activity is growing and our internal talent has developed to serve a growing client base.”

Restructuring activity is episodic

“I would call it at this point episodic. I think some of it is little retail oriented. I think the consumer and some part of that sector you’re seeing more than episodic, but I can’t discern a trend across the economy in some ways that’s the good news I don’t think it’s yet hit across the high yield spectrum all industries. I think that’s still to come.”

UK is responding quickly to Brexit

“We were, I think we were slow in Europe and I can’t attribute that to BREXIT, I’m not sure it was, I’m not sure it wasn’t. I think people have attributed a lot to BREXIT, but I’m not sure how you know exactly what BREXIT did or did not do during that timeframe. I actually I’m very bullish. I think the UK is responding quickly.”

I think the market is prepared for either outcome in the election

“I don’t expect the elections to have much input. I said there’s a plenty bumper sticker I saw which said, the good news is we can only elect one of them. So I think all the possibilities are out there and so there’s only two outcomes and I think the market is kind of ready for either one.”

I’m bullish on the UK

“I think I’m bullish over Europe and the UK over the future. I actually I’ve been, I wasn’t surprised but I think the UK has moved to solve a lot of problems pretty quickly but politically, they are solving some of the issues that were deemed to be unsolvable prior to the vote. I think that we’ll see a lot of activity there, but in the short-term there’s a hangover I think from the vote.”

Companies are pretty confident that the economy is going to be lousy

” I feel no diminution in level of activity from sort of fee standpoint. We haven’t really incurred it, I know there is volume changes and the restructuring revenues are ramping up and it’s all because of a very poor economic environment as somebody said, how confident are CEO’s, I said yes they’re confident that the economy will be lousy and they may need to do things about it, but that they’re confident, that they understand that there will be a no growth economy that’s not good for leverage companies, but it does allow corporations to plan around a very predictable and unchanging low growth economy”

Moelis and Company 1Q16 Earnings Call Notes

Kenneth Moelis

M&A dialogue remains healthy

“Our M&A dialog remains healthy and the desire for interesting ideas and creative solutions for companies is the highest I have witnessed in a while”

We did witness an air pocket in Q1

“However, it’s important to note that during the first quarter we really did witness what amounted to an air pocket in M&A across Wall Street. M&A announcements were down significantly given market volatility and the sharp widening of credit spreads in January and February, as well as the increased level of government and political risk to transactions as both antitrust and tax authorities become more aggressive in their stands on deals. Since the first quarter, the market has recovered and credit markets are probably passed half way back to their mid-2015 levels, but the political and regulatory overhang has really not dissipated.”

If oil prices didn’t get down into the 30s you wouldn’t be so happy about 45

“Remember the levels at which you’re talking about materials, prices or energy prices, if we didn’t take a short trip down into low 30s you would think this was a very distress level of oil, let’s say oil price relative to the debt levels in the companies are out there. So yes there has been a recovery, but it’s still at a price that’s going to cause many companies to have to focus on restructuring their balance sheet and the same in the commodities part of the cycle, and we’re starting to see it in other parts of the consumer areas like retail. So I believe that we’ll continue to accelerate.”

Credit markets have been a little bit slower to come back than the stock market

“Yeah the financing market is a part I think the stock market has rebounded 95%, 99% of the way back to where it was. And the credit markets are a little slower the spreads are still wide, there is still caution in the market, deals are still being more diligent on covenants and structure. So it’s a little different in the middle market, it’s a little slower on the comeback.”

It’s a low growth environment and companies are looking to M&A as a way to increase growth

“Look as you remember my call on the fourth quarter I was pretty — I try to give a warning that if that volatility stayed where it was we’d have a problem. It was short, it was sharp and outside of credit spreads still by the way the credit spreads are still different than they were. So that’s having an impact. But I think corporates are back and looking and how they can improve their business. It’s a very low growth environment out there, they still have to look at M&A as a way to either take out cost or increase growth.”

Let me remind you that we still only see a few percent of the deal market

“Let me say this, one of the things is I think I would say I see about 2%, 3%, 4% of the deal environment. So when I say I’m optimistic I’m very optimistic about where Moelis & Company is positioned. It’s really actually hard we all pretend to speak for the other 96% of the market that we don’t see or whatever given our market share. But and I’m very bullish about where we’re positioned on this. If I had to say on revenue growth, I would pick restructuring because where you came off a low base. If you were to ask me where the absolute dollars of growth would come from I think I’d say M&A.”

Moelis and Company 4Q15 Earnings Call Notes

Ken Moelis

Markets are catching on to what management teams already knew-that this is a slow growth deflationary environment

“I have been saying for a while that I think we are in a slow growth deflationary environment and I believe corporate management teams have had a sense of this for some time and have been adjusting for it. And that has served pretty much as the catalyst for much of the M&A activity in the past year as companies sought growth or cost savings through mergers. And while this is not a new phenomenon to boardrooms and managements, I do believe that the capital markets are now catching on to that level of slow growth and low interest rates and possibly deflation and readjusting to this environment. And this is undoubtedly causing volatility in the markets and re-pricing of assets.”

We feel good about our business, but volatility is a concern

“we feel good about our business. Our teams remain very busy. We are in active dialogue with our clients. At the same time I want to acknowledge that the long-term volatility that we are seeing and the slowing of world economies are of a concern and we remain vigilant in ensuring that our company is well positioned in any environment.”

The financing market is almost completely shut down

“Look, the financing market is very difficult. I think in certain industries it is almost completely shut down in the non-investment grade market and I think the lower end, triple C lower single B rating market is very difficult to access than the public markets. Or let’s put it this way, it is also getting much more expensive. And we do see that, look it is creating problems in financing and it is also creating the opportunities in the restructuring market. But we are seeing it, it is starting to go, for a while there it felt like it was only going to be in the commodity based sectors but it has leaked across the board and financing is tougher in almost all transactions that are less than investment grade right now.”

We still see a lot of interest in M&A but I worry that the volatility could affect M&A

“Our conversation levels continue to be very high. We are still seeing a lot of interest in M&A. I just worry that at some point volatility does become a problem in the market. I wanted to say that because I think there is extreme volatility right now and depending on how it shakes out it could get, you know, if it got a lot worse I think it would affect M&A.”

Financial sponsors have been sidelined but have buying power

“But the other think to think about is I know everybody is trying to figure out if the financial sponsor is out, I don’t think they are. I think they’ve actually been further sidelined then people think the last two years because strategics were out bidding them. It was very hard for them in the market we were in 12 months ago to actually win an asset. The strategics just had stock values and had access to investment grade public debt that made it very difficult for them to compete. ”

Restructuring activity will probably spread to retailing and restaurants

“And when the availability of capital goes down and a slight decrease in revenues, because of the economy, I do think you are seeing some of that in retailing, and restaurants are slowing down. You are starting to see some of that. The people with too much leverage in that end of the economy are going to have to do something as well. And it hasn’t spread as wide as it did in 2008 but I think it will continue to spread.’

I think you’re going to see financial sponsors become very active

” when assets are trading at values that they just can’t see a way to make money on, that’s been the problem for them for the last two or three years. And so I think you are going to see them become very active. They may not be able to get seven times leverage but if an asset is trading at 50% discount to where it used to, I don’t think they are going to care.”

Joseph Simon

The volatility is stirring up as many conversations as it is hurting

“I did specifically point out that these markets — this last two months of markets have the opportunity to change rather quickly and we’re keeping our eye on that as well. But for now I actually think the volatility in the market is stirring up as many conversations as is it is hurting and/or maybe more. I think some parts of the market I think, the volatility has started to stir up even more conversations around restructuring and things like that.”

Moelis and Company FY 2Q15 Earnings Call Notes

Moelis & Company’s (MC) CEO Ken Moelis on Q2 2015 Results

Mega deals were up but general activity was actually down

“We continue to see strong completion activity for deals greater than 10 billion. Mega deals were four times greater in number of transactions for both the quarter and the year-to-date 2015 periods. However the number of global M&A completions greater than 100 million in value which is how we look at sort of general market activity was actually down 20% for the third quarter and 6% for the year-to-date.”

October has felt more stable

“While September’s volatility in the equity markets was not conducive to deal activity our momentum hasn’t been disrupted and October has felt more stable. However I do want to prolong volatility of that nature could make the deal environment more challenging and is probably the number one risk for deal making activity.”

We look to hire people who want to be part of a team and aren’t looking for immediacy

“in the hiring process Ashley is we look to people who are looking to be part of the team and operate as a team. And it comes out pretty directly when you’re talking about message of compensation et cetera. People elect to either be part of a team or they want to operate individually and we can tell that pretty quickly. So I think what we avoid I’ll tell you two things we avoid. We avoid that and we also avoid people who are looking for immediacy. I have a big believe that the value in hiring people is the duration of which you keep those people. There is very I would say it’s a I would say there is very little value and short-term employee no matter how productive they are”

Restructuring is tough in Brazil

“restructuring mechanisms in Brazil are difficult. They don’t have a very clean chapter 11 procedure”

You could get more going private deals in small companies as valuations haven’t risen as much as large companies

“I think as you get down to small caps you’re not seeing quite the same recovery in valuations and so in mid the rest of the 2000, rest of 5000 index I don’t think it’s recovered quite as much and you could start to see a little more the going private-private equity deals that we saw prior the crisis really.”

September did not feel great but it’s gotten back to stable in October

“I think it got back to pretty stable in October. It was – if it gone on for a longer time it didn’t feel really great like on September I don’t know if it was second or third week. It did not feel great”

Moelis and Company 2Q15 Earnings Call Notes

Paying dividends

“we looked at our cash flows and we’re very comfortable with this dividend. We think there’s substantial excess capital. We had no debt on our balance sheet, and we’re very comfortable. I think as we’ve experienced being a public company for a year and a quarter, we’ve gotten more and more comfortable and feel like we want to have a stronger dividend. Look, we do hope to grow the dividend. I think we’ve come to the conclusion that we did a $1 special dividend last year. We think it’d be better to continue to put those into regular dividends, return them — showing the strength of the franchise. ”

Are bulge brackets increasing share?

“I do think in some of the big cap transactions there is a need for large amounts of cash, credit, maybe some more capital markets in those types of transaction and maybe that’s the reason, but look I still feel like the trend toward independent advisors and the trend toward talent wanting to go to those independent advisors is in place ”

Strategic buyers have better options this cycle than financial buyers

“strategies have better currency in this cycle right now that outbids, so if you have an asset and it’s moving in a strategic, has an interest, they often have a better currency to use. ”

I don’t know why the restructuring market will pick up, but I know it will

“I would look at the default rate, that’s a general reason why they’re slowing down and there’s certain sectors where you’re starting to see some volatility and that could help, but in general, very low interest rates, kind of a decent economy, I think is — I don’t see a short term reason why that market would pick up, but I know from being alive in Wall Street for 35 years, it will. I just don’t know when.”

Strategics can pay a higher price than financial sponsors

“I still think that, there’s a price at which the finance sponsors kind of don’t go. They don’t want to pay and the strategics can, so there’s still going to be — it’s a good strategic market.”

Regulators stepped put a clamp on the market for financial transactions, but people are learning how to deal with that now

“What happened in the first quarter and earlier this year was processes and transactions in development were stopped or changed by regulatory changes in the way they were going to access financing…Now, what I sense is happening now and we see it in our processes, people learn. They are now planning. They understand the regulatory environment. Banks are forewarning them when they might have an issue. People know the leverage limits and they are structuring — we’re structuring the process”

We were surprised at how much capital went into energy in the first quarter

“we were I think surprised as — probably shouldn’t have been but the world was how much capital in the first quarter marshalled itself to go into energy and so really, stayed off default.”

You had a combination of capital and hedges protecting oil companies from taking pain

“you have two things, an enormous amount of capital was just marshalled to put it in, and secondly there were a lot of hedges that extend for at least, till June 30th natural operating hedges that people didn’t have to take the pain yet of the downturn, the full downturn in oil prices. So, I think that will over time, start to creep up on people.”

Moelis and Company 1Q15 Earnings Call Notes

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.”