💥The bankers keep winning💥
IB earnings crush + a TGIF Update.
If you’re reading this edition the day after the election, why? Go doomscroll on X or TikTok or even YouTube. Pop your champagne or, conversely, go sulk in the corner. Take a few days off to really come to grips with the results. We definitely feel like we need it.
If you are here, maybe you just need an escape. The U.S. political train is just a backdrop for what is the American economic engine. And man is the engine chugging.
It’s on that note that we direct your attention to some lighter reading. Today we go over the investment banks and their relevant quarterly commentary on the restructuring space. Spoiler alert: they’ve been having an absolute field day (year). M&A optimism is in the air but liability management is still providing a healthy amount of restructuring activity. It’s almost like the best of both worlds. Having your cake and eating it too. Win-win situation. Double play. Twofer. We can go on. We won’t, but we could. Yes, we are sleep-deprived so here goes an unedited edition of PETITION….
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Evercore Inc. ($EVR)
We’ll start with Evercore Inc. ($EVR). The firm reported 3Q’24 revenues of $734.2mm, up 29% YoY and adjusted revenues of $739.5mm, up 28% YoY. Advisory fees contributed $593.2mm on an adjusted basis, up 27% YoY. Operating income came in at $122mm and $134.6mm on a U.S. GAAP and an adjusted basis, respectively. Net income was $78.4mm and $90.9mm on a U.S. GAAP and an adjusted basis, respectively. The stock is on a rampage this year:
Here’s CEO, John Weinberg, on the earnings call:
“The liability management and restructuring practice remains quite active. As such, we believe 2024 will be a strong year for this business. Liability management continues to be the primary driver of activity and we expect to see strong activity levels continue into 2025 even as the merger market recovers.”
And any signs of a decrease in activity? Of course not, it’s liability management season baby:
“The restructuring business is actually very, very busy right now. Very active. And what we are seeing is no -- there's been no slowdown. In fact, I think we're at a very high level of capacity right now and really have been. The business is healthy. There's a lot going on. As we've said in the past, the business of -- the restructuring business is really to very large extent about liability management. And we've been spending a lot of time with clients. Rates going down is not going to -- from our standpoint, it's not going to slow down those advisory assignments and the execution of strategies that come out of that. And that's why when we said in our remarks that we don't think that a picking up merger environment nor a rate cut environment is going to slow down our restructuring business. From what we can see, the visibility that we have, we see that that business continuing to perform well into '25.”
We get it: you’re sick of hearing about LM. It sure sounds like you’re going to have to get over it.
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Moelis & Co. ($MC)
Moelis & Co. ($MC) reported $281mm in adjusted revenues for 3Q’24, up 1% YoY. Adjusted net income came in at $18.6mm. The bank’s stock is up YTD, though not nearly as much as EVR (or the other competitors below).
Warning, long spiel on liability management incoming from CEO, Kenneth Moelis:
“I think it will be more liability management than restructuring because the capital markets are open. Really, the Chapter 11 part of financial restructuring usually happens, when you get to a maturity and there’s no other alternative. Chapter 11 is always the last alternative, that kind of a full-scale restructuring is the last alternative. Today, there is aggressive money. There’s risk-oriented money. There’s a lot of capital that will find a way to play in a capitalization and extend maturity. There’s also — again, the liability management exercises we do now are pretty sophisticated. The large institutions are willing to participate and do the analysis. If the company has a valid business usually provide runway.”
“So I think that will be the dominant part of what we call restructuring. I think it’s going to be gradual and continuous, because the size of the credit market just has gotten so much bigger over the last seven or eight years, and it’s — you can almost do a regression and the amount of restructuring, reliability management you have is a direct correlative event to how much issuance happened somewhere between two to four years before the event. There’s just going to be a percentage of issues. And if the market is growing, the liability management market will continue to grow.”
Can someone run that regression for us so we know when we can hang up our hats and call it quits? (Joking, we love our readers too much to stop).
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PJT Partners Inc. ($PJT)
PJT Partners Inc. ($PJT) reported 3Q’24 revenues of $326.3mm, up 17% YoY. Advisory fees contributed $283.8mm, up 16% YoY. Adjusted pretax income was $50.6mm or 15.5% of revenues. Adjusted net income came in at $42.1mm. The stock reflects performance:
Here’s CEO, Paul Taubman, on the earnings call:
“We have high conviction that this restructuring cycle, corporates and sponsors [will] continue to work their way through high interest rates, challenged business models, technological disruption and changing consumer preferences.”
Mr. Taubman continues in the Q&A:
“Yeah, look, I mean, there's so many different dynamics there. What I have said repeatedly and I think I might have been a minority of one was that this was a long tailed restructuring cycle that this restructuring cycle bears no resemblance to what we saw 2020 to 2021. I think when I said that I was out by myself, I think now that's become much more conventional wisdom. We stand by that. This is a multiyear cycle. And even though central banks have moved the short term, if you look at what's happened in the long term rates, you know, have been stubbornly high and the long end of the curve has moved higher, the refinancing walls in the very near term have been addressed. But if you look out 2-3-4 years, there's yet another, another wall of maturities that will need to be addressed. You have a world that speeds up more technological innovation, more disruption, more creation. But when you have more creation, somewhere in the world, you have more destruction. And that's how you end up with more companies needing to rethink the balance sheet that they have because oftentimes the balance sheet that they have was not designed for the competitive environment that they are in.”
Out by himself? Um, ok.
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Lazard, Inc. ($LAZ)
Finally, Lazard, Inc. ($LAZ) reported revenues of $785mm and $646mm on a U.S. GAAP and an adjusted basis, respectively. Adjusted operating income came in at $81mm (12.6% of revenues) and adjusted net income was $40mm. We have another winner:
CEO, Peter Orszag, had some quick comments on the contribution from private capital:
“Year-to-date, revenue associated with our overall interactions with private capital, which spans strategic advisory, restructuring, and liability management, along with capital raising, is up more than 50%, compared to the same period last year. We believe that additional growth will occur as we continue to expand our efforts, and as private markets participate more actively in M&A as the cycle develops.”
With M&A activity expected to ramp up maybe private credit can turn away from LMEs for a bit, let’s see some more chapter 11 filings please.
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Houlihan Lokey Inc. ($HLI)
Ah Houlihan Lokey Inc. ($HLI), our favorite IB, if only because they’re the only ones who disaggregate restructuring revenues. The firm reported revenues of $575mm, a YoY increase of 23%. Financial restructuring contributed $132mm, a YoY increase of 15%. Adjusted operating income came in at $140mm and adjusted net income was $100mm. And so we have yet another player beating the S&P500:
Here’s CEO, Scott Adelson, on the earnings call:
“Financial Restructuring produced $132 million in revenues for the second quarter, a 15% increase versus the second quarter last year, reinforcing our view that the restructuring markets remain elevated. New business activity was particularly strong, driven by a combination of large-cap and middle-market opportunities. This heightened activity is expected to benefit our restructuring business well into fiscal 2026. Additionally, as market conditions continue to improve, we are prepared for some restructuring activity to turn into healthy refinancing activity, which we are well positioned to execute on behalf of our clients.”
And to sum today’s entire edition, here’s UBS analyst, Brennan Hawken:
“For the restructuring activity basically, higher for longer?”
CFO, Lindsey Alley, in reply:
“Yes. For the restructuring, correct, yes.”
⚡️Update: TGI Friday's Inc.⚡️
On November 2, 2024, Dallas-based casual dining chain TGI Friday’s Inc. and 22 affiliates (collectively, the “debtors”) filed chapter 11 bankruptcy cases in the Northern District of Texas (Judge Jernigan). For some reason it took nearly a full 48 hours for the debtors to complete the filing of their “first day” papers, so our initial coverage only skimmed the surface:
Now that the filing is complete, let’s take a look — in as lazy a fashion imaginable given that we’re drinking while watching election results pour in — to see if there’s anything particularly interesting to note ⬇️.
📍Footprint. Other places around the globe cherish Fridays more than we do here in the US:
“For the 52 weeks ending on December 25, 2023, the Company generated global restaurant sales of $1.4 billion. In the same time, the Company generated $62 million in revenue from its asset-light operations in the U.S. and internationally.” We kid, we kid: this is obviously a function of scale.
📍Post-pandemic Operations. The debtors shifted their business considerably in response to the COVID-19 experience. Off-premises sales went from 8% to 25% as the debtors diversified their business towards online and mobile ordering, pick-up, and white-label delivery. The debtors have also been putting franchisees out of their misery, snapping up underperforming or retiring franchisees and, in many cases, closing or assigning them to others. Supply chain issues and inflation also both bit into performance.
📍Gift Cards. This company has … wait for it … nearly $50mm(!) in outstanding customer gift card obligations out there because the cards NEVER expire. Franchisees are concerned that they’re going to be left holding the bag if there’s a rush to restaurants in coming weeks to spend those cards. Per Reuters:
"After hearing the franchisees' concerns at a Monday court hearing in Dallas, U.S. Bankruptcy Judge Stacey Jernigan allowed TGI Fridays to continue its gift card program on an interim basis. The decision allows more time for franchisees to review the gift card program and TGI Fridays' finances before the program is approved for the remainder of the bankruptcy."📍The Franchise Agreements. How much will a TGIF franchise run you in the US? It’s a $50k initial fee followed by a monthly royalty fee of 4% of gross sales plus “a percentage of … net sales to fund marketing and advertising campaigns.”
That 4% sounds rough in an inflationary environment.
As is the mandatory ten year term (with options to renew for two successive five year terms, subject to various terms and conditions).
📍Securitizations. In ‘17, TGI Friday’s Inc. and Citibank NA ($C) entered into a base indenture and management agreement governing a securitization transaction, which included the issuance of two series of notes collateralized by, among other things, the company’s existing and future franchise agreements and existing and future intellectual property. TGI Friday’s Inc. was the manager under the agreements. The securitization entities, including TGI Fridays Franchisor LLC, sacked TGI Friday’s Inc. as manager in early September, due to, among other things, reporting failures. FTI Consulting Inc. ($FCN) has been the back-up manager since.** The company and the securitization entities are now operating pursuant to a transition services agreement which has a number of extensions built in to it which could take it through the end of Q1’25. This termination, however, was impactful. Per the debtors, “As a result of the termination of TGI Friday’s Inc. as Manager, the Company lost a significant portion of its revenue stream as the Company would no longer receive the benefit of the restaurant royalty payments.”
There’s more. The debtors may actually owe up to $30mm to the securitization entities on account of nonpayment of royalties related to both the franchise agreements and IP licenses. This would make the securitization entities the largest unsecured creditors in the cases.
📍Pre-petition Cap Stack. Compounding the lingering effects of the pandemic and the sacking of TGI Friday’s Inc. as manager under the franchise agreements is a dangerous mix of floating rate debt plus insanely high-rate fixed debt. See ⬇️. But much of it, once you get below the Texas Partners Bank (d/b/a The Bank of San Antonio, “BofSA”) component, involves equity sponsor Mr. Anil Yadav, a businessman known in the franchisee space.*
The Yadav Kids Note, the Table Turn Note, and the Freebird Note are all subordinated in right of payment to the BofSA loan.
The debtors cite approximately $51.8mm due to trade creditors, exclusive of employee obligations and customer programs. The top 50 largest general unsecured creditors include a good mix of digital marketing companies and landlords but very few vendors (since many went COD pre-petition).
📍Financing. The debtors have a commitment from Texas Partners Bank for a $23.9mm 10%-interest DIP, comprised of $5.9mm in new money and an $18mm roll-up ($3.3mm of new money and $6.6mm total interim, representing a 1:1 roll-up to new money); they’ll also get to use their lenders’ cash collateral. There’s a 2% commitment fee (1% upfront, 1% at maturity) on the new money portion. The DIP matures in 90 days, subject to certain milestones. At the first day hearing, the UST expressed some concern over the DIP lenders “materially improving” their position by getting super-priority over the assets of certain entities that weren’t original borrowers but those concerns were — despite the restaurants still having “lovely … Tiffany-style lamps” and “buttons and pins” and “flair” — summarily dismissed (Per Judge Jernigan, “I'm not sure any of that is like tremendous new collateral as opposed to the bank already having a lien in the equity.”).
📍Go-forward? The TL;DR is that this is yet another sh*tty sale case and, as of the petition date, there’s no stalking horse purchaser to anchor the process. That said, there were some encouraging signs. Per debtors’ counsel Chris Dickerson of Ropes & Gray LLP:
"...it's envisioned that it will be an approximately 60-day process. As you will note, we do not yet have an investment banker, but we are actively interviewing them and hope to have one in place here this week. That's required, that's a necessary part of our meeting the milestone that requires us to have filed the sale procedures motion within eight days of the petition date, as well as to identify a stalking horse. We have had numerous pre-petition indications of interest in purchasing some or all of the debtors' assets, including one in which we are pretty far down the road and are working to try to bring to the table as a stocking horse bidder. It is our hope that when we do file the sale procedures motion that it will include a stalking horse bidder. As you would expect, in addition to the handful of parties that we had been dealing with prior to the petition date, we have received numerous indications of interest in participating in that process since the filing, and we will, of course, in conjunction with the investment banker that will be hired by the company, subject to your honor's approval, of course, look to involve as many parties as possible so that we can, again, have a value-maximizing process."Man. Hats off to whomever the banker is that jumps into this pressure cooker!
We will update this situation soon once we know more about this supposed buyer.
*Per LinkedIn, Yadav Enterprises is a restaurant franchisee company with 343 restaurants covering six brands; Jack in the Box, Denny’s, El Pollo Loco, Corner Bakery Cafe, Sizzler and TGI Friday’s. These restaurants are operated throughout Northern California, Texas and six Midwest states.
**FTI is represented by Kramer Levin Naftalis & Frankel LLP (Alexander Woolverton, Andrew Pollack, Kelly Porcelli) and Munsch Hardt Kopf & Harr PC (Deborah Perry).
🍾Congratulations to…🍾
ArentFox Schiff LLP (Andrew Silfen, Beth Brownstein, Patrick Feeney, Carolyn Indelicato) and Potter Anderson & Corroon LLP (Christopher Samis, Aaron Stulman, Katelin Morales, Ethan Sulik) for securing the legal mandate on behalf of the official committee of unsecured creditors in the Gritstone bio Inc. chapter 11 bankruptcy case.
📚Resources📚
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.