Firms Bolster Debt Advisory Services

Mid-market investment banks are beefing up their debt advisory practices to help sponsors tap into the ever-shifting credit markets, be it for rescue financings, re-financings or to finance fresh transactions.

Among those doing so in the last few months are Houlihan Lokey, which more than doubled the size of its debt advisory team by absorbing the Los Angeles-based debt financing team of Libra Securities; Raymond James, of St. Petersburg, Fla., which has hired two New York executives to help lead its debt origination and restructuring group; and Lincoln International, Chicago, which has an offer out to a potential vice president to add to its 10-professional debt advisory group. Meantime, Monroe Capital, a Chicago lender, recently launched a debt advisory business.

“Two years ago, sponsors had the ability to pick up the phone and make three phone calls, if that many, and finance a transaction,” said Scott Adelson, co-head of investment banking at Houlihan Lokey. “In today’s environment it’s unclear if those same lenders are putting money to work at all, let alone whether they’re the right party to reach out to to finance a transaction.”

Debt advisory work is an attractive business for investment banks at a time when M&A advisory and underwriting activity is slow. In addition to retainers, investment banks charge success fees in the neighborhood of 1 percent of senior debt raised, 3 percent for high-yield, and perhaps 3 percent to 5 percent for mezzanine.

At the same time, demand for debt advisory work appears to be growing. Revenue generated by the debt advisory group at Lincoln International is on pace to double from last year, according to Ronald A. Kahn, managing director. “We’re getting calls from private equity firms that probably a year or two years ago would not even have taken my calls,” said Kahn.

To help meet that demand, eight bankers from Libra Securities have joined Houlihan Lokey, more than doubling the size of the investment bank’s debt advisory team. Jess Ravich, a Drexel Burnham Lambert alum who founded Libra Securities in 1991 to buy and sell distressed securities in the wake of the savings and loans crisis, is taking the reins as managing director and head of the Debt Capital Markets group.

Libra Securities has been best known for raising mezzanine financing from hedge funds and pension funds on behalf of casinos and others in the gaming industry. (Three of the four near-to-closing deals that the firm is bringing to Houlihan Lokey are gaming deals.) The firm has also helped clients raise money up and down the capital structure, and in a variety of industries. So-called “hairy” or “story” credits have been its specialty, where the firm has had to explain complex situations to potential lenders and investors. The principals are also known for investing their own money in deals, and for engaging in a modest amount of trading, although it’s not clear if Houlihan Lokey has an appetite to continue those businesses.

Libra Securities has done a “meaningful amount of work” with financial sponsors, according to Adelson. Clients, according to another source, have included Ares Management, Apollo Management, Cerberus Capital Management, DDJ Capital Management and Levine Leichtman Capital Partners. One of the firm’s higher-profile deals was to help raise debt financing to back the acquisition of Planet Hollywood Resort & Casino in Las Vegas by Bay Harbour Management and other investors earlier this decade.

Also on the hunt for more debt advisory work, Raymond James since August has added two New York-based executives to help lead its roughly 20-banker Debt Origination and Restructuring group. They are Jeffrey Abt, an alum of loan groups at Goldman Sachs and Lehman Brothers who will lead debt origination and debt advisory work, and David Abell, who left private equity shop Oracle Partners to co-lead the group’s debt advisory practice and to oversee transactions for distressed companies.

Raymond James, which earlier this year acquired mid-market investment bank Lane Berry & Co. International LLC, plans to help mid-sized companies raise anywhere from, say, $40 million to $500 million, from asset-based lenders, commercial banks, hedge funds, mezzanine providers and others. The firm sees a big opportunity to serve companies and sponsors abandoned by their traditional bankers in the wake of the credit crisis. “I can definitely see this as a business that’s going to [reach] 15 to 20 financings a year,” said Abt.

Monroe Capital, meantime, continues to build up the credit advisory service it started earlier this year, led by Mark Gertzof and Christopher Gentry. The firm recently added two directors and two managing directors to bring the payroll up to six full-time bankers. Monroe Capital is working on three active transactions, including a restructuring, a refinancing involving a distressed company, and a growth financing.

“It’s been going well” said Gertzof of the start-up effort. The credit market is “definitely thawing, but it continues to be fragmented and therefore companies and investors are in need of our service, which is to help them tell their story in a credit-oriented way to the right investor base.”