London!!

In the rush leading up to the London trip, I haven't had a chance to write Part Two of the Conference.  In any case I will have to revert back to my notes (conveniently still on my work desk), so that will have to wait a little longer.

I had lunch with a contact based in London, who confirmed what I've only read about to date; essentially, the London market is stuffed.  Deal volumes are down, only mild improvements in debt overhang, with recession prospects and a depreciating sterling likely to magnify the problems.  While the investment banking employment market is not entirely dead, you do need to look harder for the right opportunities.  It was certainly a very informative chat over a couple of beers (plus some free advice on the London lifestyle), and certainly someone worth staying in touch with.

An interesting development in London (and one more than likely to be repeated in Australia) is the increased use of mezzanine debt and equity/quasi-equity to take up the slack from senior debt.  While more expensive, the non-cash nature of the costs means that it improves the cash conservation of a deal, improving debt serviceability to make the deal palatable for senior and subordinated debt investors.  

We are seeing a slow but steady move towards mezz debt in Australia; in fact this was one of the key topics discussed at the conference.  How well it gets accepted I think will depend on arriving at terms that maintain the right risk-return metrics as well as the senior ranking against equity.  Will mezz holders get pro rata benefit from dividend recaps?  Are equity kickers the way to go?

Overshadowing all this (and may possibly render it all moot) is that the credit crisis has not fully unravelled, and it is now widely accepted that it is impacting hugely on the economic fundamentals.  Combined with higher commodity prices feeding into higher inflation expectations, the questions will need to move from "how long will the credit crisis last" to "how long will the slower growth in the developed economies last".  One imagines that economic fundamentals will take far longer to turn around than declines in the debt or equity markets, but one that feeds back to the prospects of those tradeable securities.