A Discussion on the Implications of the Recent Market Volatility

In this episode, Larry Wieseneck, Co-Head of Global Investment Banking at TD Securities and David Erickson, Senior Fellow at The Wharton Business School, discuss the latest market volatility due to the Silicon Valley Bank and Signature Bank failures, and the acquisition of Credit Suisse by UBS. They speak about the impact on the markets in the near term and share advice for companies on how to manage their business and balance sheet during this time.

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Transcript

Voiceover:

Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Larry Wieseneck:

Hello everyone. I’m Larry Wieseneck, co-head of Global Investment Banking at TD Securities, and welcome to our podcast. As always, I’m here with my good friend and former colleague, David Erickson, senior fellow at the Wharton Business School. Today, we’re going to discuss the implications of the recent market volatility, which is culminated with the failures of Signature Bank, SVB and most recently, the acquisition of Credit Suisse by UBS. This is our first podcast since the close of the acquisition of Cowen by TD Bank, so we’ll also be touching on that. David, let me turn it over to you.

David Erickson:

Thanks, Larry. Let’s start with really the market turbulence that we’ve seen really the last 10 days or so. It obviously is awakens the memories I assume, for both of us during the financial crisis. How do you see the events of this past week or so impacting the markets in the near term?

Larry Wieseneck:

The challenges that emanate whenever you see events that feel to the market at least as if they came from like a lightning bolt from left field are hard to quantify. Let’s start with the reality is many of these were the long term in the making, whether we talk about Credit Suisse and a series of events over the last decade or more that highlighted some challenges with their particular business model, risk, et cetera. Whether we talk about SVB that because of the significant growth in their client base and therefore the deposits that occurred and then that changing significantly when we began a new interest rate regime and rates rose, in both cases there were elements of this that were apparent for 2, 3, 4, 5 years, but for the market, it went from it being okay to no longer working almost overnight.

When those kind of things occur, the one thing that is clearly common, because it’s a very different set of facts than maybe what created the global financial crisis, but what is common is the reaction is a significant change in liquidity, and that reduction in liquidity across almost all areas of the market is something that we expected as soon as we saw the challenges at SVB. It’s what we’ve seen now over the last 10 days or so where all the markets, well, the best way to say, they’re not deep, they’re very shallow, and that’s true both in terms of the secondary market and then it rolls into primary where we have a very, very quiet environment because with this kind of volatility and more importantly, with this much uncertainty in both the banking sector and then therefore the economy, that makes it hard for deals to get done.

David Erickson:

Given that view, what’s your current advice to CEOs and CFOs of TD Cowen clients? Obviously that advice is probably different for an early stage company that is not cash flow positive versus a more mature company. what are the two or three things that makes sense for all of them to do in today’s environment?

Larry Wieseneck:

Maybe we’ll break it up into just how they manage their business and their balance sheet, and then we’ll roll into deal making as a second piece. I think on the first one, it’s really an extension of what we’ve discussed in our podcast over the last, I’d even say three years because it’s very similar what we talked about at the beginning of the pandemic. Then when the environment got a little bit more ebullient, we reminded people. Then as it’s gotten more challenging the last 12 months we talked about again, which is reminding folks that cash is king. At times when capital and is being thrown at companies, you want to make sure that you don’t go spend it on frivolous activities. When capital becomes more dear, it becomes critical that you apply it in the right places. That message is more true today than probably any time in the last three years.

Making sure that every dollar that you have at your disposal is used in a way that is thoughtful and is strategic is, I think, the most critical thing that companies can do. On our last podcast, we talked about haves and have nots. Those are in a position where they have strong balance sheets, they’ve got cash on hand if they need to tap into existing loans that they can pull down, et cetera, having that available for them so that when there’s challenges in the market like there are today, they’re in the position to be able to be opportunistic. That could be just steady as you go, continue with your plan when some of your competitors by definition are distracted because they’re not in as strong a position. For those that want to be a bit more aggressive, it might be buying assets from those who are in more challenged positions.

This is definitely already been a market where we feel that fit and focused is important. One doesn’t have to stray very far to look for business opportunities. A lot of the M&A dialogue we’re having right now is about businesses going deeper in their space, buying a portfolio maybe from someone that’s got three business lines, who decides that in this environment they should really only focus on two. A better player in that third business line comes in, takes that asset off their hands. Both firms are stronger because of it. We think in terms of fit and focused right now as being a very important theme. Stay true to your core. Don’t take on new ancillary areas right now. I say that because often as bankers we jump into the kinds of deals that people can do. Can you raise money here? Can you buy this business?

It starts at home, right? Make sure the base is strong, make sure you can compete in your core and then decide what are things you can do around that. I would say that’s the number one thing we’re saying to everyone. That’s true whether it’s a growth company that has to worry about the fact that they can’t raise their C round. Whether it’s a company that is significantly cash flowing, but now all of a sudden the ability to borrow against those cash flows is more limited than it was before. In all those cases, it comes back to strategy and execution first, and then making sure your financing or in the case of M&A, that your M&A ambitions are in service of the strategy. That to me is kind of one, two, and three.

David Erickson:

The two lessons to reinforce those points. I guess the two lessons that I use in our strategic equity finance class to the students is one is raise money when you can have to, because sometimes when you have to, it may not be available or it’s going to be very expensive. The second is hope is not a strategy.

Larry Wieseneck:

David, the hope is not a strategy I think is really important right now. One of the things that, again, in one of our recent podcasts with Grant Miller, our head of capital markets, equity capital markets, we talked about where boards were and that oftentimes we found managements who understood the need to, if there was an opportunity to raise capital, let’s say if it’s a public company, maybe it was through a pipe, maybe it would be through an equity deal that would be at a significant discount. What we were sensing was 12 months to 13, 15 months into what has been a repricing in the equity markets, the management teams had gotten comfortable with that, but not all of the boards had [inaudible 00:08:25]. right now, et cetera. I think what that gets to is for a number of those folks now there’s no bid for a deal.

It is really important that one is sober when they analyze the environment in a challenging market like we’re in now, which is what can you get done? Not what you want to get done, not what is ideal, but if you need to fund your ambitions or even just fund the base plan, then you have to look around the market, determine what can get done, and then if it’s critical, get it executed.

David Erickson:

Back to your fit and focused M&A strategy or example that you used earlier. One of the things that I’ve observed is that there’s a lot of dry powder in the private equity space. I think it’s something like Bain has, I think reported something like $3.7 trillion in the private equity space in terms of dry powder to deploy in various investments globally. When you talk about companies that had three subsidiaries and may go down to two, are you seeing more activity from the private equity firms or are they as cautious as everybody else or even more cautious I would say?

Larry Wieseneck:

It’s a great question. Yeah, I think they might even be more cautious. I think there was an expectation at the beginning of the interest rate regime change, so we’ll just call interest rate regime change when the Fed began to tighten again after a very long period of easy money. That was correlated with, again, the equity market sold off a bit before it, but we’ll just call that the beginning of the turn in the equity market for this purpose, I think there was a view that with the amount of private capital available, private equity would be basically down bid, and would step in. We’ve seen a lot less of that than just the amount of cash in the sidelines would suggest. I think one of the reasons is that at the same time that we’ve experienced the equity markets selling off, and then now this volatility most recently added to the equation, again, we’ve been in a rising interest rate environment and now we add to that a more constrained liquidity environment, certainly as it relates to the leverage loan market.

It might even begin to extend into private credit. We’ve seen private credit hold up pretty well, but the pricing is way wider than where it was before. From a private equity standpoint, they too have to get comfortable with the new environment. You can’t help but make analogies to the financial crisis. If you go back to the beginning of the rebuild of the private equity bid, which really took three to, I’d say three to six months before you started seeing the breaking of the dam post the events of September 08. Those deals that came forward were being done at much, much higher equity checks on a relative basis and much lower debt checks in order for the deals to get done. Then, as every six months go by, a little bit more debt available in the deals, a little bit more debt, a little more debt, until we ultimately got to an environment that was pretty ebullient.

I do think that you have the same issue here, which is that because of the increased cost of financing, spreads widening, still working through leveraged loans sitting on some banks’ balance sheets, et cetera, we’re going to see the deals that do get done have a slightly different dynamic than what would’ve been done 12 or 16 months ago. That’s going to take time before it starts to grow in terms of number of deals. I do think that’s where the opportunities are. I think we will see private equity take up a greater share, and I think it’ll be an interesting environment where it’ll be private equity funds. We’ll also see, and this might be what we start to see in areas where we anticipate seeing an uptick in workouts. Doesn’t mean bankruptcies, but I do think we’re going to see more businesses do some form of whether it be a pre-pack, whether it be a sale, because they’re not sure they can get the financing done.

I think that we’ll see the private equity funds that are agile around complex capital structures and are willing to basically come into distress situations that that’s likely to be a big opportunity if the market continues to be challenging because there should be better return profiles there than in your standard private equity deal at the moment.

David Erickson:

This is our first podcast since the TD Cowen deal closed. For those companies that have been longtime Cowen clients, what additional capabilities does this bring for them that you guys are offering that you couldn’t do before or expands what you could offer before? Similarly, for longtime TD clients, what additional capabilities does this bring?

Larry Wieseneck:

I think the best way to answer that is really to focus it on the US market because in Canada, TD has been a full service corporate investment bank, at least TD Securities has for a very long time in the US market. This really brings together two organizations that delivered against more limited plans based on where they were in their growth trajectory. From the standpoint of what’s now, TD Cowen, my legacy firm, Cowen and Company, Cowen, we were focused on the areas where balance sheet was less relevant. The types of clients where, particularly now from a banking standpoint, where decisions were being made on who their advisor might be, that was independent of whether you had the tools of a large balance sheet because we were an independent investment bank. Our skillset was in all forms of M&A discussions, raising capital both in the private markets and then in public equity.

We didn’t have the ability to participate in, for example, the leverage loan market and be involved with larger LBOs. We didn’t have an investment grade debt offering because again, that at this point is almost exclusively the province of balance sheet banks. We couldn’t provide solutions for risk management around foreign exchange, interest rate risk, et cetera. We now can deliver those in a integrated fashion for the moment by bringing in our partners from TD Securities America. Over time, as we move towards integrated framework, delivering that seamlessly for our clients.

I’d say the flip side is true for historical TD clients in the growth of the America’s business for TD, they leaned into their historical strengths, which often were not in the same sectors as us. TD growing out of their Canadian roots, very strong in asset heavy areas, natural resources for one. Areas like the communications infrastructure space, real estate, et cetera.

Their initial growth into the US was in those areas, and they started with balance sheet relationships, extended it first and foremost into investment grade debt, some of the risk management tools. Now with the Cowen acquisition meaningfully by delivering a full service equities platform, equity capital M&A, we now can deliver to the TD clients a much broader tool kit as well. I think for all of our clients, what we now can bring is a full Penelope of solutions. I don’t like to say products because I don’t think of these elements as products. Rather, it’s a toolkit so that when we work with a client and understand what their opportunities are and their challenges, we can deliver to them whatever the right solution suite might be. I think that’s an exciting time for us, certainly with as I say our corporate and private investment clients, private equity venture, et cetera.

David Erickson:

Obviously at an important time for the markets and as well as for many of these companies, obviously those additional capabilities are obviously, hopefully going to be well served.

Larry Wieseneck:

I think the other piece, and this is more about just insight. One of the things that over unfortunately too many years that you and I worked together, not that I didn’t like working with you, but we’ve just been working for so many years again here in my experience with TD Cowen and now TD Securities, it’s not always about what transactions you can or can’t do, it’s the insights that you get from your partners. Even just in the last 10 days with the volatility of the market, being able to be a participant in calls where we share what we’re seeing in the FX market, what we’re seeing in investment grade credit, what’s happening on the short end, what’s happening in bank equities, what’s happening in tech names, it allows us to have a richer sense of where the depth of the market is, what market participants are saying.

We can then deliver that to our long only clients on the investing side, deliver it to our hedge fund clients, but then interpret that information for our banking clients. That richness of information goes up geometrically, every time you add another tool in terms of area of trading capability, you have more insight for them. I’d argue that it really is exciting to be in a position to hold people’s hands through this period. I’d also say that one thing that’s clear from other periods of challenges we’ve gone through, whether it be more recently the events of March and April of ’20, when the pandemic set in, or if we look to the events of 2016 when the leverage finance market shuttered for significant period, we go back to the financial crisis, we go back to the dot-com bubble. As quickly as these things come on the flip side, as they start to repair, animal spirits kick in again, and the opportunity to finances there, et cetera.

I don’t know how this will play out. You might have a different view than me, but this very well could continue to get worse. We could see that what just happened was as people referred to the Bear Stearns moment, and it could be 3, 4, 6 months down the road and we get to an even worse moment, or we could see that the events of the central bankers around the world, the recognition of the challenges with Credit Suisse and the activities of what’s occurred in Switzerland, this might be what forms the bottom. We see that more soon than we anticipated. Investment grade debt deals start getting done again, higher deals get done again, equity deals start coming too, et cetera. I don’t have a crystal ball. What I know is that, and this is what all of our bankers are hopefully doing, is staying close to our clients, listening to their fears and their concerns, providing advice and how to navigate it, and then being there to hold their hands and hopefully execute for them when the window is open for whatever they need to get done.

David Erickson:

I think it’s been very helpful, I think, Larry, in terms of you providing some interesting insights and advice, and let’s hope for less interesting times to turn around the markets and stabilize the markets in the near term. For now, I think it’s good that you’ve given people to put some things in their toolkit as we kind of weather what’s the current environment. Thank you for the time today, Larry. I’ll let you close it out for us today.

Larry Wieseneck:

Well, thank you David for participating in these conversations with us. We always appreciate it. Once again, thank you to our listeners for joining us and look forward to our next conversation. Thanks again.

Voiceover:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.

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