I had the pleasure of attending Goldman Sachs' Global Industrials Conference last week. I will spare you the details on the various updates from the manufacturing and cyclical company managements, as well as the railroad execs' reactions to Berkie's bid for Burlington Northern Railroad. Suffice it to say that the corporate executives were generally in accord that the bottom of the "great recession" had been seen; so too were they in general agreement that there was no "V" shaped recovery in sight. Perhaps the most interesting comments came from the Goldman executives who served as the lunch speakers at the conference. I believe some of the commentary yielded insights into the economy's impending peregrination through the valley of debt.
On Wednesday the lunch speaker line-up consisted of three Goldman Sachs executives: cyclicals I-banker, Matt McClure; Bruce Mendlesohn, a leveraged transaction restructuring advisor; and cyclicals private equity fund manager, Jack Daly.
McClure, the banker, told the audience what you would have guessed, that with great gobs of cash on corporate balance sheets, a sense that the crisis has passed and not much in the way of organic growth opportunities, corporate acquirers are again entertaining transactions.
I would aver that this trend, if allowed by the now more vigilant antitrust regulators, portends more industry consolidation, and increased layoffs in the near term. This to be followed by continued productivity growth but ultimately increased pricing power.
Daly, the private equity investor who actually was last to speak, cracked wise that normally the restructuring consultant would bat clean-up to the LBO artists. He admitted that private equity investors generally were up to their eyeballs in alligators due to now problematic pre-crisis deals in their portfolios. He noted (with graphics depicting comparisons of 2007-era leveraged loan rates and corporate bond rates) that his ilk no longer enjoyed a cost of funding advantage over corporate acquirers, who would be more likely to lead the charge in the current wave of M&A. In answer to an audience question he confessed that in some cases private equity funds were being asked by their limited partners not to draw on committed capital to do any deals in the current environement. Basically private equity investors are still hiding in their bunkers, but they are starting to put up periscopes and survey the battlefield for opportunities.
By far and away the presentation that was most interesting to me, and gave the greatest insight into likely future trends in the economy, was given by Bruce Mendlesohn, a managing director in Goldman's leveraged restructuring advisory group. Mendlesohn addressed the aforementioned mountain of LBO debt to be repaid or refinanced over the next three years (see chart).
