💰How are the Investment Banks Doing?(Long Chapter 15s?)💰

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On Sunday, we wrote about the stellar earnings reports from Evercore Inc. ($EVR) and Houlihan Lokey ($HLI). Are they outliers?

Apparently…no.

PJT Partners Inc. ($PJT) reported earnings this week and they, too, knocked it out of the park. The firm reported a 28% increase in revenues YOY ($167mm) and a 35% increase in advisory revenue ($133mm). These guys are killing it. Regarding the restructuring team, CEO Paul Taubman said:

Revenues grew significantly in the second quarter compared to the prior year and are ahead of last year’s levels for the six-month period. Our Restructuring business maintained its leadership position, ranking Number One in US and global completed restructurings for the first half of 2019. Our outlook for the full year remains essentially unchanged, notwithstanding near record low interest rates, historically low default rates and extremely benign credit conditions, we expect restructuring revenues for the full year to be flat to only modestly down. Despite this muted macro backdrop, we are working on an increased number of Restructuring mandates, which should serve us well entering 2020.

In addition to pounding his chest, Mr. Taubman provided some market commentary as well — particularly with respect to the notion that all of the “dry powder” in the market will impact M&A and distressed situations and Europe:


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🏦How are the Investment Banks Doing? Part II.🏦

You didn’t think we’d just stop at Evercore and Greenhill, did you?

Moelis & Company ($MC) recently reported “disappointing” financial results reflecting a dramatic decline in M&A activity in Q1, which affected revenues significantly. Reported revenue was $138mm, down 37%. “This compares to the overall M&A market in which the number of global M&A completions greater than $100 million declined 18% during the same period. The decline in revenues was primarily driven by fewer transaction completions.” Restructuring activity “declined slightly.” MC guided towards softness in the first half of the year with a relatively stronger second half.

Some key takeaways:

  • Brexit and a number of shaky elections in Europe are having some effect on M&A activity in Europe.

  • Expected continued chill of cross-border M&A that involves China due to “underlying weariness” of “significant Chinese ownership of American companies.”

  • The melt down in late Q4 certainly affected M&A chatter in the C-suite as people are cautious about price volatility.

Asked what happens at MC if the M&A volume remains down, Moelis unabashedly indicated that costs would have to come out of the business, i.e., travel expense and headcount. That must’ve been a bit chilling for MC employees. Sheesh.


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🏦How are the Investment Banks Doing? Part I.🏦

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There was a barrage of earnings over the last two weeks and they can sometimes be a bellwether of things to come for the economy so we figured we’d dig in. Here’s what we learned…

Evercore Inc. ($EVR) was among the first investment banks to report Q1 ‘19 earnings back in late April (though the Q was only filed on May 2) and, man, they came out of the gate fast and furious on the earnings call with all kinds of braggadocious talk about being fourth highest in global advisory revenue in ‘18, and how they’re kicking a$$ and taking names in ‘19 already, etc. Only then, however, to say that YOY results were down. Hahaha. Totally buried the lede. Revenues were $419.8mm, down 10% YOY. Investment banking fees were down 14%. This despite 59 fees greater than $1mm, as compared to 53 in the year ago period.

Regarding, M&A volume and Europe:

…if you look at the M&A environment generally the dollar volume of announced transactions in the first quarter was down mid teens and the number of announced transactions globally was down in the high 20s. In Europe there was actually a little bit more pronounced. The interesting thing is if one looks at our backlogs they're not really consistent with the announced activities in the first quarter and to be completely blunt about is we expect this year could be a pretty good year. We certainly don't see anything in our dialogues with clients that suggests that it won't be.

Some EVR-specific highlights include (i) increased emphasis on “liability management” as a source of revenue generation and (ii) in turn, no increased emphasis on coverage of smaller cap companies (like certain competitor banks). EVR says that is not a focus: the focus is on bigger deals or deals with “high quality companies that may not be big.” In other words, they don’t want quals for quals sake. They want to get paid. And get paid well.

Specifically relating to restructuring, this is what EVR had to say:

…our advisory revenues last year were up in every category including restructuring notwithstanding the fact that default levels are at almost all time lows. So I think we've been able – we've added talent in the restructuring area. We think we are well positioned to capitalize on a pickup of activity when that inevitably happens. But other than relatively isolated sector activity like retail or like we saw in energy two or three years ago, there certainly is no broad scale pick up in distressed companies at this point in time.

No sh*t. Though it does seem like things have picked up a notch, no?

*****

Greenhill & Co. Inc. ($GHL) reported only $51.2mm of revenue, down 42% on a “dearth of large completions and generally slower deal activity,” and a “decline in EU revenue” more than offsetting increases in other regions. Noticing a Euro-centric theme here?


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⚡️Feedback re: Sycamore Partners & More⚡️

Another quarter is in the books and we here at PETITION continue to be flattered by the reception that you’ve given us. Thank you for your continued readership and support. If you’re not yet a Member, please consider joining our ever-growing community today. If you’re a student, email us for special student rates.

One thing we particularly enjoy is feedback from our readers. We endeavor to do our very best to be accurate with our coverage but sometimes we make mistakes. When we do, please don’t hesitate to call us the morons that we can sometimes be. Just email us at petition@petition11.com.

For instance:

  • One Managing Partner at a law firm wrote us that we made a mistake in “Disruption May Be About to Affect Your Wallet (Long Infrastructure Needs)️” (paywall). We incorrectly stated that Governor Mike DeWine of Ohio is a Democrat. He is actually a Republican. We have corrected the mistake on the website.

  • Another Partner at a law firm pointed out that we misstated the amount of the committed DIP credit facility in the Hexion Holdings LLC matter. We have corrected the mistake here.

Of course, not all feedback was of the “you guys are morons” ilk. Thankfully. We get some general feedback too:

When’s the podcast launching? Your following of lazy rascals will be ecstatic with a lazier way to get all the info.” — Restructuring Advisor

PETITION Response: It’s in development but there are some obvious complications. 

You should know it takes me much longer to read your weekly email newsletter than your estimated published times.” — Liquidator

PETITION Response: Maybe if we use bright yellow, red and black fonts it will speed things up for you.

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And then there is more specific feedback. In response to “Sycamore Partners is a B.E.A.S.T. Part I.,” a number of you wrote in. Some feedback included:

You are the voice of a generation. This was pure gold!” — Restructuring Advisor

This article is next level hilarious.” — Student

As someone who used to summarize lots of cases and hearings when I was more junior, I can say that your Aero summary is the single greatest thing I’ve ever read.

I think you’ve got the difficulties with equitable remedies flipped.  It’s not the prongs on prongs on prongs that are difficult, it’s the evidentiary burden.  You hit it right on the head with 14(!) witnesses (and probably hundreds of trial exhibits). Funds that are experts in these types of transactions won’t get caught dead with the smoking gun needed to prove this stuff at trial - either through careful record building early on and/or discovery practice.

But like a judge once told me, sometimes you need to shoot one of the sheep in front of the flock.  If this were to happen in a big case with lots of publicity, then behaviors might change. Too many road blocks to that like lowball UCC settlements (a la Payless) and judicial temperaments.” — Biglaw Attorney

But this one took the cake (edited to conceal the writer):

Petition, can't tell you how much I loved the Sycamore Partners article! Can't wait for Pt. 2 to drop.

Your mention of Aeropostale triggered some old thoughts... at the time Aero filed its petition, [I dug] around to see what could be learned about Aero's post-petition real estate tactics... since 2016, I can't stop surmising…

I marveled at this deal then and now. Once the $SPG/$GGP(nka $BRP)/ABG deal was approved, Buyer got to pick lease rejections and assumptions. Simon/GGP's initial proposal (Sept 12) rejected every store lease that wasn't in a GGP/Simon mall. Savage. In the weeks following, I can only imagine the back alley beatings put on $TCO $MAC Westfield $CBL and others as they begged their collective arch-rivals to keep the stores open--oh the blood(rent)letting! The assumption notices started flowing in… no way to know what concessions were in those lease amendments! Just to think of $TCO surrendering rental revenue to Aero to keep Aero in place knowing it [sic] inflicting harm to $TCO's metrics (and possibly its valuation) and was flowing back to $SPG and $BRP. Double bitter. Initially, the deal structure was hush-hush, but in the subsequent earnings transcripts over the last 2 years both $SPG and $GGP have stated plainly that they bought Aero for 1xEBITDA, so have made a killing on the investment alone, not to mention the far more juicy bits.

More importantly, $SPG and $BRP control some of their own tenancy now--all the Aero spaces are available to rent to the right new tenants without sacrificing current occupancy rates. Aero stores are inventory on-demand. Is there a dreadful zombie space of 8,000sf at the wrong end of the mall? Just slot in Areo: goose occupancy rates and ease worries of co-tenancy claims! Bring home all that international licensing revenue, and "distribute" it to the owners in the form of rents, as they may be adjusted. Probably as tax-slick as it gets. $SPG and $BRP scratch each other's backs--I can't image what the Aero Real Estate committee looks like in action! [Authentic Brands Group] presenting leases and amendments in $SPG and $BRP malls to representatives of $SPG and $BRP! Oy! The rents in those new stores could really goose their owner REITs’ reported leasing spreads, occupancy rates and NOI metrics. If the stores’ profitability is not the real objective, then the lines get even blurrier.

Since exiting, I wonder what has changed in footprint within the $BRP and $SPG portfolios, since it is a "captive" tenant? The operator is ABG, of course, but I’ll bet lunch that 100% of the growth stores are in either $SPGor $BRP centers. Or, if Aero has opened in a competitor's mall, I would have to believe it would be at nearly breakeven for the outsider-landlord. So, Aero's store would be oh-so-cash-flow-positive to continue to fund the very competitors of that hapless landlord.

That’s quite a “store growth” story. A decidedly different “where are they now” post Ch 11 success story, indeed.

Is the next chapter ABG's acquisition of Nautica, et al. vis a vis $SPG's Premium Outlets division? I don't know what the right metaphor is… from the perspective of other retailers… but maybe something like the fox setting up an omelet stand in the hen house! — Real Estate Investor

 Maybe some bank analysts should start asking some detailed questions about Aero on future earnings calls: as far as conspiracy theories go, that one is pretty damn meaty.

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