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By Tom Freke and Olesya Dmitracova
LONDON Feb 25 Investment banks expanding their
restructuring teams will meet fierce competition from specialist
financial advisors in the battle over lucrative fees from
companies restructuring their business.
The smaller outfits say that only they can provide the
tailor-made solutions needed and that they are less biased
because they are not lenders to clients.
"Putting deals together is a totally different kettle of
fish to dismantling them," said Gareth Davies, managing director
in Close Brothers' restructuring group.
"Unless you have done restructuring for many years, you
cannot know how restructuring deals work," he said.
Yet investments banks have an equally strong argument,
saying their access to capital markets and financial know-how
makes them ideally suited to help ailing companies.
They are keen to win debt advisory mandates because of the
fees on offer -- often millions of dollars for each company --
and to get a foot in the door to provide other, potentially more
lucrative, services in the future, such as issuing shares and
bonds, or selling assets.
Societe Generale (SOGN.PA) said last week it had set up a
debt restructuring and advisory group. JPMorgan (JPM.N) and
Credit Suisse CSGN.VX put together London-based restructuring
teams in January, while Morgan Stanley (MS.N) created a European
restructuring group last year. Deutsche Bank (DBKGn.DE) also
plans to build its restructuring business.
"If you are close to setting up and placing the debt in the
capital structures, you are best-placed to advise the company
during the difficult times," said Marisa Drew, co-head of debt
advisory and restructuring at Credit Suisse.
The desks are all chasing business as advisory teams
elsewhere have shrunk as the flow of mergers and acquisitions
has slowed, while lucrative proprietary trading and the fixed
credit derivatives business have dried up.
The newly formed teams will compete against much smaller
firms such as Close Brothers (CBRO.L), Houlihan Lokey, Lazard
(LAZ.N) and Rothschild ROT.UL with a proven track record and
reputation in the business.
Lazard's latest results report a 47 percent rise in
restructuring revenues in the fourth quarter of 2008, to $47
million, while revenues from mergers and acquisitions advisory
slid 39 percent, to $193 million.
It reported a "dramatic" increase in demand for
restructuring advice, including the multi-billion-euro
restructurings of Spain's Metrovacesa MVC.MC and UK chemicals
firm Ineos [INEOSP.UL]. The company is advising more than 70
companies on restructuring globally, it said.
The boutiques say their independence is another advantage,
as big banks may also be lenders to the companies they advise.
"The appearance of lenders as advisers is a very confusing
message for boards, private equity backers, management teams and
other lenders to the company. Who are they trying to protect --
themselves or the company?" Davies said.
Banks' involvement in different markets complicates their
position in other ways, says Richard Stables, co-head of global
and European restructuring at Lazard.
"The role of an independent adviser cannot be performed by a
bank that is involved in the lending syndicate and is trading
the company's debt in the secondary market," Stables said.
Excessive debt and weak trading conditions have proved a
toxic combination for many European firms, bringing a big
increase in demand for restructuring advice.
Default rates amongst European companies will hit 19 percent
this year, Moody's said on Feb. 10, from just 2 percent in 2008.
Meanwhile, many investment grade firms have seen their debt
downgraded perilously close to junk level in recent weeks.
The large investments banks defend themselves by saying they
have procedures in place to guarantee their independence and
their sheer scale is now a must.
Whoever wins the battle, the rapidly growing market promises
solid business for both small and large players.
"The restructuring market has seen a number of new entrants
recently, many of whom are either new to the market or whose
focus has been resprayed in the light of the current demand for
expertise in this field," said Kevin Hewitt at FTI Corporate
Finance, a financial restructuring firm.
"We expect this demand to continue as the restructuring boom
will be more a marathon than a sprint," Hewitt said.
(Editing by Douwe Miedema and Simon Jessop)