Live from Barnes Buchanan: Bill Polk's outlook
The conference is about to begin. I'll have to check with Mike Barnes on numbers, but it's a full house here. More attendees than I've seen in the past 4 years. And guess what? There are a lot more women in the audience. In my book, that's progress. Bill Polk is opening the conference-- it's the 15th annual Barnes Buchanan this year. Polk says "More security transactions born in back of Breakers' Fish Bar than anywhere else on the planet." One year ago we were in crisis; Where are we today? A little history: "Banks used to be thought of as stodgy...doing things other than blowing up the world economy." Starting in 1980s shift on Wall Street to a more risky "transaction culture." That lasted until costliest day Wall Street history, Sept. 15, 2008 Lehman Brothers went bankrupt" It signified the end of era...It was the "18 days of September," the "parade of horribles" other bank failures, bailouts, lack of bailouts. Last year a world in crisis. Today a far cry from a year ago... A yellow happy face on the screen now."Almost here," Polk says Improved market sentiment; unit-tranches and second lien loans starting to make a comeback; pricing decrease but less than large corporate market; focus on maintaining discipline. What about depth of liquidity? How big can club deal get? This a challenge. Some notes from slides: Bank market capacity up and budget up. M&A and LBO expected to drive market... Mezzaninie will continue to be important in middle-market sponsored deals in 1Q10. Pricing come down from 18 percent last year to 15 today. So....cash now available in banks and non-banks and pressures form on high. Lenders getting more aggressive. Deal structure much more conservative than mid decade, but getting more aggressive. Why so much money? Star of show is high-yield bond market and to lesser extreme mezzanine market. Second part of story is CLO story...institutional investors like hedge funds and CLOs... CLOs buy into a lot of debt right now. They need to put money to work "while they can still breathe." "Investor money needs to be put to work." What about regulation? "Washington become bigger force in market than ever been in history." Stimulus funds, bail outs etc.... Obama not pro-business? There's some word out there about this. It's true, Polk shows slide, that not much private sector experience among Administration appointees. House sweeping reform bill... Senate hasn't done anything Not full picture affect of regulation yet, but know that higher capital requirements DEBT Burden and our fiscal future. State and local economies have trouble paying bill now.. They don't have the money printing presses that fed gov't has. Not all states equal, for example Wyoming and Nebraska have budget surpluses ex.. this is important because state and local government are big customer of security industry.. Watch your receiveables if do business with these guys. Lenders: Who's at BB this year compared to years past? Lots of changes. Many here in early years, not even in existence today. "One thing for sure, change in banking is constant." What does this mean to those at Barnes Buchanan today? Pay attentioin to a five C's: character, collateral, cash flow, conditions...there was one more, but the one Polk wanted to talk about is conditions. Conditions in this industry. "The tailwinds are exceptional." The security market is "extremely complex, driven by many forces." Increasingly, the lines blur between what's defense and what's security. As an example, Northrup Grumman moved its HQ to Wash DC, they're redefining themselves as security company. An interesting survey in Foreign Policy magazine of Top 100 global thinkers: what will be 2010 global game changers be? "If you look at what some said...92 percent of answers have at their core a security threat. So, at high level have awful lot of loft and tailwind with us." Some conclusions Strong strategic and financial interest in sector. Sector perceived as safe harbor in the storm. Industry credits remain sound. Certain subsector of security are populated with experienced lenders still in the market for new loans. Tailwinds continue to drive most security sectors Credit is relatively more expensive and restrictive compared to mid-decade, but terms more favorable. Transaction economics are getting much more favorable and buyers to step back into the maarket.. Specialty lenders remain willing to advance at levels perceived to be highly risky by generalist lenders. Cost of capital cheaper than other industries.