Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

There is one segment of the investment banking world that people are excited about. The problem is it involves advising companies that are going broke. 

Take a look at FTI Consulting, whose shares are rallying the most in almost a year. Even though its earnings missed analysts' estimates, the firm, which specializes in advising distressed companies, reported that revenue in its corporate finance and restructuring segment increased 20 percent in its latest quarter.

Mopping Up the Mess
Shares of FTI Consulting surged Thursday as investors bet its restructuring business will see growth.
Source: Bloomberg

While consultants like these and some of the boutique investment banks that specialize in restructuring are talking up the prospects for growth, it can be a tricky subject for firms that have much more to gain from helping healthy companies earn money. If you were a CEO, would you want a firm best known for its bankruptcy advisory business running your IPO book? Most firms don't even break out the revenue contribution from restructurings. 

"It's always ironic to talk about how good it is for companies to need to restructure," Stifel Financial Chief Executive Officer Ronald Kruszewski said on a conference call with analysts Wednesday when asked about the performance of the firm's Miller Buckfire unit, which specializes in restructuring. "I always feel a little uncomfortable picking that business."

But the signs are everywhere that banker elbows are being sharpened to compete in this space. The Chapter 11 filing of a U.S. unit of Spain's Abengoa was the sixth bankruptcy involving liabilities of at least $1 billion filed so far in 2016, making this the busiest start to the year since 2009, according to a Bloomberg Briefs newsletter. And still to come is the biggest wave of U.S. oil-related defaults among $237 billion of borrowings. 

For sure, most banks would probably rather not see a boom in their restructuring business because it would most likely be accompanied by further ugliness in their capital-markets and M&A businesses, which are far more important, especially at the big banks.

However, it's a hot topic for analysts trying to sniff out the beneficiaries among the smaller firms that have made it a focus, like Houlihan Lokey,  Lazard, Moelis, Greenhill & Co., Evercore Partners and PJT Partners. So far, their shares have struggled despite the outlook for their restructuring business this year: 

Rough Start
Shares of smaller investment banks are under pressure this year, though some are holding up better than others.
Source: Bloomberg



Quantifying that business is difficult, even for those involved in it.

"What is an M&A situation from a restructuring situation?" Greenhill Chief Executive Officer Scott Bok said at the Credit Suisse Financial Services Forum. "A lot of restructurings end up as M&A transactions. In a difficult market situation, a lot of M&A can be buying things that are in distraught. So it's difficult to categorize them in some ways." 

Paul Taubman, head of PJT, said on a conference call this month that restructuring revenues should be up "substantially" this year, that the firm's backlog is the strongest it has been since the financial crisis and that active assignments have increased more than 25 percent since PJT was created through the merger of his business with Blackstone's advisory unit last fall. It's hard to unpack how much of that new business is a result of the elimination of conflicts of interest that prevented Blackstone from advising on some restructurings, but it's obvious which way the wind is blowing. 

Undoubtedly many bank CEOs would be much more comfortable talking about how they helped their clients go public or make acquisitions. Until that business picks up again, it appears they are going to have to fall back on helping them pick up the pieces. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net