Breakfast Forum: The Current State of the Capital Markets 2009

Andrew D. Kanaly, Chairman & CEO
Kanaly Trust

Drew joined Kanaly Trust in 1983 and has more than 26 years of experience in trust and investments. Since earning his BBA in Finance from the University of Houston, he has attended the American Bankers Association's National Graduate Trust School at Northwestern University; the Texas Bankers Association Regional Trust School at Southern Methodist University; and earned a Certified Trust and Financial Advisor (CTFA) designation. As an account officer, Drew manages the on-going investment strategies and personal financial programs of 110 family relationships. He specializes in investment management, charitable trusts, and family limited partnerships.

Tom Hargrove, Managing Director & Co-Founder
GulfStar Group

Tom is a co-founder of GulfStar Group and has more than 25 years of investment banking experience. Prior to GulfStar's formation, he served as a Senior Vice President of Rotan Mosle Inc. (1986 to 1990) and First Vice President at Underwood, Neuhaus & Co., Inc. (1979 to 1986), where he was responsible for institutional private placements. Prior to 1979, he served as Assistant Vice President in the Corporate Finance Department at First City National Bank. Tom received a BA in Economics from the University of Texas.

Tom Fish, Vice Chairman
CB Richard Ellis

Tom joined CB Richard Ellis (then L.J. Melody & Company) in 1996. Since then, Tom has been one of the company's top originators and has completed debt and equity transactions in excess of $3 billion. In addition, Tom oversees loan production for Melody's Southwest Region and is leading the company's Resolution Strategies Group, which helps borrowers restructure their existing debt. Tom has been in the real estate finance industry since 1987 and was previously an originator for and co-owner of Post Oak Partners, a Houston-based real estate finance firm. Tom holds a BBA in Finance and Marketing from the University of Texas.

Paul Murphy, Jr., Chief Executive Officer
Amegy Bank of Texas

Paul is one of Amegy Bank's first employees and helped develop Amegy into one of the best performing banks in the nation. He has held board positions including the Houston Endowment, Inc., the Federal Reserve Bank of Dallas - Houston Branch, St. Luke's Episcopal Health Care System, Kinkaid School, Children's Museum of Houston, Mississippi State University Foundation, and the Greater Houston Community Foundation. He is active in the Young Presidents Organization and is a member of the Governor's Business Council. Paul holds a Bachelor's degree in Finance from Mississippi State University and an MBA from the University of Texas at Austin.

BoyarMiller Breakfast Forum Update: The State of the Capital Markets — Industry Experts Offer a Mid-Year Perspective

In September of last year, BoyarMiller held its annual "Current State of the Capital Markets" breakfast forum during which industry experts detailed their assessment of the markets, as well as predictions as to how the markets would fare in the months and years to come. The panel included Tom Hargrove, GulfStar Group (Private Equity/Mergers & Acquisitions); Drew Kanaly, Kanaly Trust (Equity/Public Markets); Tom Fish, Jones Lang La Salle (Real Estate); and Paul B. Murphy, Jr., formerly with Amegy Bank of Texas (Commercial Banking).

At that time, the general consensus of the four industry veterans was that while the markets will eventually improve, many will continue to falter for the near future, particularly in real estate. To continue the dialogue, BoyarMiller recently asked the group to provide their thoughts on how the capital markets have performed since the September forum.

Tom Hargrove, Managing Director and Co-Founder— GulfStar Group
The merger and acquisition market began to improve in the fourth quarter of 2009 after the financial crisis in the first half of the year. Publicly announced multiples and transaction volume increased in the fourth quarter over the third quarter.

The credit markets have been improving in 2010, and GulfStar is seeing some renewed activity in cash flow lending. Leverage multiples are still at historic lows, but there is increased interest from lending sources.

The energy markets, which continue to drive much of Houston's economy, have also improved in 2010 with the oil price staying in the $70-80 per barrel range early, and recently breaking out above $80 per barrel. The rig count has also steadily increased from 1,170 in March 2009 to 1,396 in March 2010. The natural gas price, however, is now below $5 per McF. If the price of natural gas improves and remains over $5 per McF in 2010, then the Houston economy and mergers and acquisition activity will increase significantly in the second half of 2010. In addition, the refining and petrochemical service companies have seen improving conditions. There were many projects, both process improvement and maintenance related, that were delayed in 2009, which bodes well for the second half of 2010.

GulfStar Group has seen increased activity in transaction volume in the first two months of 2010, and they believe this trend could accelerate if the outlook for the economy continues to improve. The specter of increasing tax rates in 2011 could incentivize sellers to market their companies to close transactions in 2010.

Drew Kanaly, Chairman & CEO — Kanaly Trust
Since September, stocks have moved sideways through year-end as predicted, but the pull back has not materialized. There was a nice earnings driven rally to start 2010.

The recession indeed did end last summer as predicted. Employment continued to deteriorate and job losses continue, but at a slower pace. Monster rally abated as predicted, but 2010 is off to a nice start. Credit markets have improved, but the refinancing has just begun.

Overall, the only surprise has been the very robust earnings out of corporate America. Credit concerns have expanded to sovereign debt to include Greece, Spain and Portugal. The dollar has strengthened considerably since September, and commodities have weakened. Kanaly Trust continues to focus on mounting total U.S. debt issuance and the withdrawal of massive fiscal stimulus from both federal and government programs, and they expect good GDP numbers for 2010 and weakness going into 2011.

Tom Fish, Executive Managing Director/Co-Head Capital Market Group for Real Estate Investment Banking — Jones Lang LaSalle
The capital markets have obviously stabilized and the lack of liquidity in the market was quickly cured. Capital abhors a vacuum, so there is a lot of money out there looking for deals. The problem that persists is valuation. There are two components of valuation - multiples and the income they are based upon. The multiples are coming back up because of the abundance of liquidity. But the incomes are either still declining or have stabilized at a low point, which still impedes value more than a return of higher multiples can offset.

So, values have come off their lows, but there is still a significant gap between current values and the existing capital structures in most transactions. In other words, buyers are saying, "I have the money ready to go to buy at X," while the owners are saying, "I can't sell at X or I will lose money. I can sell at 1.25x."  But 1.25x won't get a deal done; consequently, there are very few transactions taking place. Slowly but surely, some owners are willing to recognize losses and transact. However, many more owners would rather wait for better days in the future than to recognize losses right now. Thus, we are in the midst of a low transaction environment because owners are restructuring, extending terms, deleveraging and waiting for a "better day." In the meantime, while an owner was hoping for an 8 percent total return and is only getting a 5 percent return, they aren't totally displeased because alternative investments aren't providing any better opportunities for them. 

Steve Stephens, President — Amegy Bank of Texas
It is increasingly evident that the credit problems for the Texas banks are measurably less than the nation. In general, the economic storm that hit Texas almost two years later than harder hit regions may also clear out sooner and allow Texas to recover at a faster pace. While commercial real estate challenges will persist for some time in this region, the improving energy sector and other fundamentals in the Texas economy have restored some baseline confidence in many other business segments.

Most Texas banks have built their reserves for ongoing credit problems and are looking for good loan opportunities to better employ increasing liquidity. However, the credit test is justifiably more restrictive given continued uncertainty. Regulatory scrutiny and the political environment will keep most banks operating at lower throttle levels, but there will still be plenty of banking options available for good business.

NOTE:  Paul Murphy, former Amegy Bank of Texas CEO, originally served on the panel for this program. In December 2009, Murphy resigned from Amegy Bank.  Steve Stephens, President of Amegy Bank, provided the update for the Commercial Banking segment.

Tom Fish recently made a move from CBRE/Melody to serve as the Executive Managing Director/Co-Head Capital Market Group - Real Estate Investment Banking at Jones Lang LaSalle.

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