Buy Houlihan Lokey stock if Deutsche Bank is right about defaults

The number of companies filing for bankruptcy is rising and analysts at Deutsche Bank believe that a new wave of default is coming. Some of the most notable companies that went burst recently are Vice Media, Bed Bath & Beyond, and Virgin Orbit. If Deutsche Bank is right, then investing in Houlihan Lokey (NYSE: HLI) stock could make sense.

Wave of defaults ahead

The biggest economic news this week was news that the House of Representatives voted to extend the debt ceiling. As a result, the US will not default on its obligations if the Senate passes the deal as most analysts expect. However, analysts at Deutsche Bank believe that a wave of default in the corporate sector is coming.

The bank cited the fact that the Federal Reserve and the European Central Bank have been in an extremely hawkish state, which has seen them push rates to the highest level in over 15 years. And with inflation proving sticky, the two banks could continue hiking rates this year.

This is happening after companies spent the last decade accumulating billions of debt to take advantage of low-interest rates. Many companies, including Bed Bath & Beyond, borrowed heavily to finance their buybacks.

While US public debt has surged to $31 trillion at a faster pace, corporates also have a mountain of debt. As shown below, total nonfinancial corporate debt has soared to over $12.7 trillion. In 2010, these corporations had over $6.7 trillion in debt. 

As I wrote in this article, the commercial real estate sector is the most at risk, with most maturities coming up in the next few years. 

Houlihan Lokey and restructuring

A wave of defaults will need experienced companies that specialize in restructuring. This could benefit boutique investment bankers like Evercore, Moelis, and Lazard. I believe that Houlian Lokey will be the biggest beneficiary.

Houlihann Lokey is an investment bank that most people have never heard of. But most corporate executives in the US and abroad know it well because of its reputation.

While Houlihan offers several services, the company is well-known for restructuring. In the past few years, the company has handled the biggest bankruptcies in the US, including Lehman Brothers, Washington Mutual, Worldcom, General Motors, and Enron. 

In all, it has handled 12 of the biggest bankruptcies in the US. And most recently, it worked on Evergrande, the biggest real estate company in China. According to Refinitiv, the company handled 58 restructuring deals in 2022, almost double what the second company handled. 

Restructuring specialists deal with companies that are either dead or dying. However, there is a lot of money to be made in such scenarios as evidenced by the huge sums that the current FTX CEO is making. These firms are usually the first in line when it comes to payments. Speaking of restructuring, Houlihan’s CEO said this in the last earnings call:

“With very tight debt markets, leveraged companies are turning to restructuring or liability management to find solutions. The pending debt maturity walls in 2024 and 2025 are putting increasing pressure on companies to do something.”

Despite the strength in restructuring, Houlihan Lokey stock has dropped by 14% from the highest level in 2022. This pullback is mostly because of its exposure in other parts of investment banking that are struggling like M&A. Still, its restructuring business will likely offset the weakness in these businesses.