Top Restructuring Banker: "We're All Feeling Like Where We Were Back In 2007"

There is a group of bankers for whom "better" means "worse" for everyone else: we are talking, of course, about restructuring bankers who advising companies with massive debt veering toward bankruptcy, or once in it, how to exit from the clutches of Chapter 11, and who - like the IMF, whose chief Christine Lagarde recently said "When The World Goes Downhill, We Thrive" - flourish during financial chaos and mass defaults.

Which is to say that the past decade has not been exactly friendly to the world's restructuring bankers, who with the exception of two bursts of activity, the oil collapse-driven E&P bust in 2015 and the bursting of the retail "bricks and mortar" bubble in 2017, have been generally far less busy than usual, largely as a result of abnormally low rates which have allowed most companies to survive as "zombies", thriving on the ultra low interest expense.

However, as Moody's warned yesterday, and as the IMF cautioned a year ago, this period of artificial peace and stability is ending, as rates rise and as a avalanche of junk bond debt defaults. And judging by their recent public comments, restructuring bankers have rarely been more exited about the future.

Take Ken Moelis, who last month was pressed about his rosy outlook for his firm's restructuring business, describing "meaningful activity" for the bank's restructuring group.

"Your comments were surprisingly positive," said JPMorgan's Ken Worthington, quoted by Business Insider. "Is this sort of steady state for you in a lousy environment? Can things only get better from here?"

Moelis' response: "Look, it could get worse. I guess nobody could default. But I think between 1% and 0% defaults and 1% and 5% defaults, I would bet we hit 5% before we hit 0%."

He is right, because as we showed yesterday in this chart from Credit Suisse, after languishing around 1%-2% for years, default rates have jumped the most in 5 years, and are now "ticking higher"

Moelis wasn't alone in his pessimism: in March, JPMorgan investment-banking head Daniel Pinto said that a 40% correction, triggered by inflation and rising interest rates, could be looming on the horizon.

These are not isolated cases where a gloomy Cassandra has escaped from the asylum: already the biggest money managers are positioning for a major economic downturn according to recent research from Bank of America. And while nobody can predict the timing of the next collapse, Wall Street's top restructuring bankers have one message: it's coming, and it's not too far off.

However, the most dire warning to date came from Bill Derrough, the former head of restructuring at Jefferies and the current co-head of recap and restructuring at Moelis: "I do think we're all feeling like where we were back in 2007," he told Business Insider: "There was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time."

What he is referring to is not just the overall level of exuberance, but the lunacy taking place in the bond market, where CLOs are being created at a record pace, where CCC-rated junk bonds can't be sold fast enough, and where the a yield-starved generation of investors who have never seen a fair and efficient market without Fed backstops, means that the coming bond-driven crash wil be spectacular.

"Even if there is not a recession or credit correction, with the sheer volume of issuance there are going to be defaults that take place," said Neil Augustine, cohead of the restructuring practice at Greenhill & Co.

The dynamic is familiar: since 2009, the level of global nonfinancial junk-rated companies has soared by 58% representing $3.7 trillion in outstanding debt, the highest ever, with 40%, or $2 trillion, rated B1 or lower. Putting this in contest, since 2009, US corporate debt has increased by 49%, hitting a record total of $8.8 trillion, much of that debt used to fund stock repurchases.  As a percentage of GDP, corporate debt is at a level which on ever prior occasion, a financial crisis has followed.

The recent glut of debt is almost entirely attributable to the artificially low interest-rate environment imposed by the Federal Reserve and its central bank peers following the crisis. Many companies took advantage and refinanced their debt before 2015 when a large swath was set to mature, kicking the can several years down the road. 

But going forward "there's going to be refinancing at significantly higher rates," said Steve Zelin, head of the restructuring in the Americas at PJT Partners.

And as the IMF first warned last April, refinancing at higher rates will further shrink the margin of error for troubled companies, as they'll have to dedicate additional cash flow to cover more expensive interest payments.

"When you have highly leveraged companies and even a modest rise in interest rates, that can result in an increase in restructuring activity," said Irwin Gold, executive chairman at Houlihan Lokey and cofounder of the firm's restructuring group.

So with a perfect debt storm coming our way, many restructuring firms have been quietly hiring new employees to be ready when, not if, the economy takes a turn for the worse.

"The restructuring business is a good business during normal times and an excellent business during a recessionary environment," Augustine said. "Ultimately, when a recession or credit correction does happen, there will be a massive amount of work to do on the restructuring side." Here are some additional details on recent banker moves from Business Insider:

Greenhill hired Augustine from Rothschild in March to cohead its restructuring practice. The firm also hired George Mack from Barclays last summer to cohead restructuring. The duo, along with Greenhill vet and fellow cohead Eric Mendelsohn, are building out the firm's team from a six-person operation to 25 bankers.

Evercore Partners in May hired Gregory Berube, formerly the head of Americas restructuring at Goldman Sachs, as a senior managing director. The firm also poached Roopesh Shah, formerly the chief of Goldman Sachs' restructuring business, to join its restructuring business in early 2017.

"It feels awfully toppy, so people are looking around and saying, 'If I need to build a business, we need to go out and hire some talent,'" one headhunter with restructuring expertise told Business Insider.

"In our world, people are just anticipating that it's coming. People are trying to position their teams to be ready for it," Derrough said. "That was the lesson from last cycle: Better to invest early and have a cohesive team that can do the work right away and maybe be a little bit overstaffed early, so that you can execute for your clients when the music ultimately stops."

Of course, if the IMF is right (for once), Derrough and his peers will soon see a windfall unlike anything before: last April, the International Monetary Fund predicted that some 20%, or $3.9 trillion, of the total global corporate debt is in danger of defaulting once rates rise.

Although if and when that day comes, perhaps a better question is whether companies will be doing debt-for-equity swaps, or fast forward straight to debt-for-lead-gold-and canned food...


JRobby wwwww Sat, 05/26/2018 - 11:09 Permalink

LaGarde: "when the world goes downhill, We thrive"

Yes, that demonic puss of hers that can literally stop time (by why would they? Interest would stop accruing) shows how much thriving these Satan Bankers have been doing.

Time to start in with stakes, hammers and axes on these demons.


In reply to by wwwww

rrrr house biscuit Sun, 05/27/2018 - 10:17 Permalink

Guache is a water based medium that is manufactured for the purpose of painting pictures.…

To make GoFugYourself into guache you would have to grind him up into a fine powder and put him into a tube, from which an artist would then be able to squeeze him out and mix him with water and apply him to a sheet of watercolor paper with a camelhair brush:


In reply to by house biscuit

Ecclesia Militans wwwww Sat, 05/26/2018 - 11:10 Permalink

I cannot count the number of PE types I know who are asking me to form a turnaround management team for companies who are not yet insolvent and are residing in their respective portfolios.  Of course I have been hearing this refrain for almost three years now, but if anything the chorus is growing louder.

In reply to by wwwww

Expat MusicIsYou Sat, 05/26/2018 - 11:05 Permalink

Why should they?  The old tricks worked fine, they all made lots of money, and no one went to jail.  Good thing Donald is in the White House, though.  No more fun and games on Wall Street.  Stricter controls!  No bailouts!  Dodd-Franks will be re-inforced!

LOL.  Suckers.  Donald is a billionaire piece of shit who relies entirely on borrowing from Wall Street.  As does his piece of shit son and excremental son-in-law.  Wall Street will be protected under the Orange One.

In reply to by MusicIsYou

valerie24 Expat Sat, 05/26/2018 - 11:43 Permalink

Unfortunately, the alternative was Hitlery. At least with Trump we get a good look at the corruption of the DOJ, FBI, NSA and other alphabet agencies. We get confirmation of what we already knew that there is no rule of law for those in government.

Republicrats of the establishment - especially the RINO's have been exposed and are leaving congress in record numbers.

Do I wish the "Orange One" would cut his ties to Wall Street and warmongering Israel and had a cabinet free of Neocons? Hell yes.

Unfortunately the swamp is so deep this is the best we could do.

In reply to by Expat

Eagle40 NidStyles Sun, 05/27/2018 - 10:09 Permalink

You need to brush up on your history....NAZI meant National Zionist Socialist. Actually Hitler implemented many of Marx's theories such as labor and worker theories.

I do not support Marxism and believe in free market systems as Adam Smith theorized but during the times of Hitler his economic and nationalist ideas did work. 

Germany has always been an intelligent well educated society that thrived on engineering and technology. They would have won the War if Hitler was not crazy and to top it off going into Russia during the winter. That was Napolians down fall. 


Germany built jet planes, rockets, and was on the verge of a nuclear bomb towards the end of the war. They had the best tanks and guns. Hilter' s greed and crazy ideas destroyed Germany. 


All he would have had to do is stand his ground while developing weapons and technology that no other country could match. 

Trump is not Hitler and to have Nationalism is a good thing. For the past 8 years we had to deal with Obama the Obozo who was a real Marxist socialist. The progressive left has done an excellent job in destroying the foundation of this country. Sanctuary cities, open borders, higher crime, dumbed down education system, crippled criminal justice system, welfare cities, more welfare & food stamp recipients, failed global economy, and our domestic economy going to shit.

Let us not forget Obozo Care which has destroyed the health care system. This was planned. All progressive left wing policies to bring down America. 


Trump is not perfect but he is trying to do a lot of the right things which will take decades if ever to fix. This country is in trouble thanks to left wing progressive politics. 

In reply to by NidStyles

Expat Sat, 05/26/2018 - 11:00 Permalink

Maybe we should bail them out now instead of waiting until the crash?  Just give ten million to each Goldman employee and $25 billion to each "bank" on Wall Street.  Think of all the anguish and hassle we will save.  It's not as it if won't happen anyway.

veritas semper… Expat Sat, 05/26/2018 - 12:06 Permalink

No need to give them anything: the thieves took ALL ,already. And now, with the Donald ,they are well represented in the government-see all the Goldman Sachs golden boys. They do not need to lobby , they directly make the laws ( to favor them) .

(They) evolved ; like a successful parasite does: it evolves to the point that is nudging the host to do its bidding,and the host doesn't even notice it.

But I think that this time is going to be different for two reasons:

-the host is too emaciated to survive and because of this it might take the banking cabal down

-there are other international players , less infested , or not at all , or in the process of disinfecting themselves and during this international operation our parasites will succumb; interesting to see if the use of Zyklon B used for disinfection will trigger painful antisemitic memories

PS: for anybody interested , I have two new sites ,one where I post comments(last about the aftermath of Jerusalem move) and one where I post portraits made by me of personalities; I made the portraits of : Lavrov,Putin,Assad,gen . Suheil al Hassan ,gen. Soleimani and Hassan Nasrallah. Plan for more ,like Ahed Tamimi, gen. Zahreddine ,etc


In reply to by Expat

Arnold Sat, 05/26/2018 - 11:08 Permalink

Large bond issues go no bid.
Bank reserves low.
Silver monkey hammered.
Expensive physical disasters.
Trade deficit.

Strikes, wage cuts, poor working conditions, less hours, and discrimination plagued the few in the working force. Panic had set in. Men were no longer able to provide for their families as they once did because of the decrease in pay and hours.7…

jpot34 Sat, 05/26/2018 - 11:18 Permalink

Yep, huge rally starting Tuesday! Nothing makes sense in these markets anymore. Just do the opposite of common sense, or better yet, get the fook out of equities/bonds! Gold, silver, commodities, and cryptos for me.

CoCosAB Sun, 05/27/2018 - 07:12 Permalink

Don't worry dear slaves! The OWNERS and their foremen know very well what to do in the upcoming "crisis"!


After all since 2007/8 the top changed its amount of controlled money from USD 69.2 trn (2010) to a nice amount of USD 128.7 trn in 2017!


So keep performing your programming... and do not stress!