Why will Elite Boutique banks thrive in 2020? Read Rory Conway’s article on the impact of Covid-19 on the restructuring industry.
$86 Billion. That’s Boeing’s current market valuation, $104 billion lower than the $190 billion valuation it entered the year with. The root cause of this is a deep, Covid-19 induced demand shock, estimated to be 6 times greater than 9/11, caused by international travel bans and quarantines in over 150 nations. This is just the tip of the iceberg, the Dow Jones is down 24.1% and its predicted that there is going to be in excess of 800,000 corona related insolvencies in the UK, 7 times higher than there were in 2008. This large increase in corporate insolvencies will result in companies seeking out the advice of banks on how to modify their capital structure so that they can survive. Here, restructuring groups within investment banks will help those companies in financial distress find a solution to their financial difficulties, typically through right-sizing their balance sheet. Bulge brackets don’t tend to work on restructuring deals, as it usually conflicts with their lending practice. Therefore, the biggest players in the Restructuring landscape are Independent Financial Advisory firms, more commonly known as “Elite Boutiques.” In simple terms, there has never been a better opportunity for Elite Boutiques to succeed.
Who’s Working on this deal?
In order to ease the adverse economic effects from the pandemic, The US Treasury have launched a $2 trillion stimulus bill, with $78 billions of it focused on airline restructuring. PJT Partners Inc., Moelis & Co and Perella Weinberg Partners will be the banks on the creditor mandate, advising the Treasury on how to give out the aid to the airlines, aerospace provides and other industry players. Interestingly, each banks has been given a subsector focus to reflect their relative industry strengths: PJT Partners Inc. will be advising on the $50 billion available for commercial airlines, Moelis & Co. is working on the $8 billion in aid for cargo airlines and contractors and Perella Weinberg Partners will be advising on firms critical to national security, which would include Boeing. On the debtor mandate, Lazard and Evercore are advising Boeing on how best to analyse government aid and potential funding from the private market. Advising the Treasury will certainly be less lucrative, with Steve Mnuchin, the Secretary of the Treasury, saying there would be “No big fees to bankers” and like all government projects will come with a heightened level of public scrutiny. Yet despite this the creditor mandate would’ve most definitely been more attractive to all banks involved on either side of the deal. The importance of the assignments to the health of the national economy would have enhanced the public reputation of all three of the firms involved and cemented future business on the fact that they’ve handled this calibre of work.
Like many deals, the mandate decision ultimately came down to relationships.
Perella Weinberg Partners have strong links to the US treasury, as current CEO Robert Steel worked there as a principal adviser between 2006 and 2008. Equally Moelis & Co’s pitch would’ve been aided by the fact that Eric Cantor, a current Managing Director at Moelis & Co, was formerly a Republican United States Representative for Virginia. Meanwhile, Evercore and Lazard both have very democratic histories, as Evercore founder Roger Altman was a former deputy Treasury secretary under President Bill Clinton and Former Lazard Partner Steven Rattner was a lead adviser to the Obama administration, hence it was unlikely that they would play a major role in a stimulus package, which is so vital to Donald Trump’s 2020 Presidential campaign. 
The most contentious issue in any deal between The Treasury Department and Boeing is the idea of an equity stake. One proposal is a debt for equity swap, a refinancing deal in which the debt holder gets an equity position in exchange for cancellation of the debt. In this situation, analysts at Boeings advisors Lazard and Evercore would be looking to use “due diligence”, a presentation of a company’s key financial metrics, to maximise the company’s value and highlight how the company will eventually be able to repay its debt.
In Restructuring, bankers are often looking to minimize losses, instead of maximising value and in this case that will done by giving up a lower equity stake However, Boeing Chief Executive David Calhoun has disregarded the possibility of an equity stake, stating he doesn’t have a “need for an equity stake,” and would instead prefer to seek funding, through public and private loans to reach the $60 Billion they need to ease their cash crash.
Elite Boutiques V Bulge Brackets
Despite Bulge Brackets having larger balance sheets and being significantly more diversified in terms of revenue streams, Elite boutiques are in a better position to navigate the post Covid-19 environment. Firstly, all the EB’s have large restructuring practices, which will help offset the lack of M&A deal flow. Also, Bulge Brackets banks have a large amount of support positions for their revenue generating areas, in which their base component makes up most of their salary. In periods, where deal flow is low, these support positions will make up a fixed cost that is not present at boutique banks. Furthermore, EBs tend to have much leaner deal teams, where the analysts have a generalist skillset, allowing them to effortlessly deal with the increase in restructuring activity. Now only time will tell, but Elite boutiques are certainly on their way to a successful 2020.