Morningstar | Fear of a Recession Can Cap the Upside Potential of Greenhill
Greenhill has a significant amount of both upside potential and downside risk, and we consequently have a very high uncertainty rating assigned to our fair value estimate. Part of the reason for the divergent upside and downside scenarios for Greenhill is its 2017 recapitalization. The recapitalization plan involved a $350 million secured loan facility that was used to pay off debt coming due, with the remainder earmarked for upwards of $200 million in share repurchases. The repurchases can lead to spectacular earnings per share growth in the right environment, but the introduction of a heavy debt load will become a major issue if the company’s turnaround falters.The high potential upside stems from Greenhill being one of the closest pure plays of the financial advisory-focused investment banks. Typically, over 80% of the company’s revenue is tied to merger and restructuring advisory with the remainder being advising on capital raising and selling interests in private equity funds. Since the recapitalization, the company's deal pipeline and revenue have recovered.While we assess the recapitalization as having been structured well, the debt load is still a tail risk. The loan has a five-year term with the majority of the principal due in 2022. Five years for the loan and the generally three- to five-year vesting of restricted stock units for employees should buy the firm enough time to participate in a strong portion of the financial advisory cycle. However, the tail risk is that global merger activity eventually declines and an exodus of revenue-generating talent ensues. As the company has virtually no tangible assets, paying back the loan is solely based on keeping talent that will generate earnings.Greenhill & Co is an investment bank that provides financial advice on domestic and cross-border mergers and acquisitions, divestitures, restructurings, financings, capital raising and other transactions to corporations, partnerships, institutions and governments. The company serves as an advisor to its clients throughout the world on a collaborative integrated basis from its offices located in the U.S., Australia, Brazil, Canada, Germany, Hong Kong, Japan, Spain, Sweden, and the U.K. The company provides corporate advisory services related to mergers and acquisitions and financings and restructurings and capital advisory services related to sales or capital raises pertaining to alternative assets.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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