Ken Moelis, founder and CEO of the boutique investment bank Moelis & Co., has represented many high-profile clients over his decades as a corporate dealmaker — from Ted Turner and Steve Wynn to Donald Trump and the rulers of Dubai and the Saudis. When he started on Wall Street, liquidity was a major issue for C-suites, and access to good stock market information was hard to come by.
"We used to dial the phone at 4:01 p.m. in the afternoon and make calls to CEOs and say, 'We saw a lot of buying and selling, and the stock closed at ...' It was magic just telling them that," Moelis said at the Baron Funds conference in New York City on Nov. 9. "Today's client knows more about capital markets than I do because of the time it took me to cross the street on the way to a meeting with them," he said.
Ron Baron, the billionaire founder of the mutual fund company, has been an investor in the banker's company since Moelis took it public at $25 a share in 2014. The stock was trading at $41 on Monday and had reached as high as $61 earlier this year — Moelis briefly became a billionaire himself during that runup — before the entire banking sector slumped over the summer and, even more precipitously, since October.
Moelis is less worried about his business than those corporations that have loaded up on cheap debt during the era of low interest rates.
"Access to capital was the whole thing in the '80s. The world has changed," Moelis said at the Baron conference. "Liquidity in the world markets is unbelievable today. Capital is no longer a barrier. Capital is being thrown at you by multiple sources."
And that may soon become a big problem, Moelis said, due to the direction in interest rates. He provided a note of caution about debt at the Baron conference, as well as some other lessons on capital markets deal-making, a few of them unconventional.
Moelis is intimately familiar with high-stress debt situations, from his representation of Trump at a time when Trump companies were facing bankruptcy to representation of Dubai went it was staring down hedge fund creditors in the late 2000s. He expects a wave of indebted companies to face critical restructuring issues before the current economic cycle resets. The reason: interest rates.
The Federal Reserve didn't raise interest rates at its meeting last week, but it is expected to raise rates one more time this year when it meets again in December. It won't take a major move up in interest rates to start causing trouble in the high-yield debt marketplace, according to Moelis.
"There is a lot of leverage in the world and you don't need a big move in interest rates, and they are moving up," Moelis said.
Moelis pointed to the current default rate in the high-yield bond sector as a warning sign. Currently, only about two percent of paper defaults. During the financial crisis, the default rate was above 10 percent. While 10 percent might not even seem that high, Moelis said the important point is that "there is a lot of room between two percent and 10 percent."
The concerns Moelis has about levered companies is reflected in research from Moody's Investors Service. Moody's noted earlier this year that the ratio of corporate debt to GDP was at a record, and noted that the previous times the debt-to-GDP ratio was this high all coincided with market crises and recessions — 2009, 2001 and 1990. Yet in all of those previous three cases, the default rate posted was substantially higher — 11.1 percent, 10.5 percent, and 10.1 percent, respectively. Moody's estimates that the 2019 high-yield default rate would be in the range of two percent; it has been roughly 3 percent this year. The rating agency also predicted that a "particularly" large wave of junk bond defaults is coming.
"At some point in this cycle there will be a lot of restructuring," Moelis said. That might be good for him — his bank has one of the top restructuring businesses on Wall Street — but it also will place many companies on the fine line between existence and extinction. "It's a key moment to keep a company out of bankruptcy," he said.
Moelis has made some good calls in recent years. Among them, one from September 2016: he predicted Trump would win the presidency.
Working with Trump led, not surprisingly, to another "art of the deal" issue — getting Trump to pay Moelis for his banking services. Nudged on by Ron Baron, Moelis told attendees at the Baron conference a story that has become one of his staple anecdotes about his relationship with Trump.
Moelis met Trump in 1992 when he had just started working for Donaldson, Lufkin and Jenrette, and hadn't done banking for him yet.
"I flew into New York on the red eye. You had to caffeinate yourself for Trump, and I had a 7-Eleven Big Gulp of coffee. We met in one of his conference rooms and after 20 minutes, classic Trump, he looks at me and says, 'How much?'
Moelis threw out a number — "looking back I should have just doubled it," he recalled at the Baron conference. "Obviously, I wasn't getting it."
It came down to Moelis and Trump being $1 million apart. "Donald said after five minutes, 'I will flip you for it.'"
Moelis had his doubts, working for a new firm and wondering whether it was even legal to flip a coin for a million dollars, and wondering whether he could ever tell his new colleagues. But "I thought if I don't flip, I lose, so it is at least 50-50."
But at the last second, Moelis remembered the most important part of a coin flip deal.
"I said, 'Let me see the coin.' It was embarrassing, but it was a million dollars."
The coin was legitimate. But it wouldn't matter. Moelis flipped the coin in a high arc, too high, he soon realized.
"I see the coin bouncing and I know it will go off the table on his side, and know if it hits the floor, I will lose a million," Moelis said. "I dove, and got there too late."
"Heads, you lose," Trump told him, already with the coin in hand.
Moelis said that to this day he has told Trump, "If I really lost, you would have left it on the floor."
Moelis has had plenty of clients who have sat across the table from creditors at times of crisis, and his advice to one high-profile, high-energy and talkative client who has a history of considering himself among the world's greatest dealmakers, was simple: let the banker do the negotiating.
Moelis and Trump were about to go into a room with 15 lawyers representing creditors. Moelis asked Trump to say nothing and let him do the talking. Moelis remembers aggressively offering creditors a "take it or leave it" deal and telling them they had 10 minutes to decide.
When Moelis and Trump left the room to give the creditors their time, Trump turned to Moelis and said, "Can we do that?" Moelis said "I don't know, but neither do they."
The art of that deal ended in success.
This story has been updated to reflect the fact that Moelis & Co. has one of the top restructuring businesses among Wall Street banks.