Bankruptcies have continued rising in the past few years as companies struggle in this high-interest rate environment. Data by S&P shows that there were almost 600 major bankruptcies during the year, with the most notable ones being WeWork, Lordstown Motors, Rite Aid, and Bed Bath and Beyond being the top ones.
Bankruptcies trend to continue in 2024The situation, unfortunately, will continue this year as many companies that borrowed in a low-interest rate environment hit a wall of maturities. In a recent note, Howard Marks, one of the best investors of our generation warned that the crisis in the real estate sector will continue worsening.
He expects over $1 trillion in challenges in the next two years while Allianz estimates that $3 trillion of debt will mature in the next five years. Worse, this strain is expected to happen in all major economies, including the UK, China, and Germany.
There will be $1 trillion in commercial real estate defaults over the next 2 years warns Cantor Fitzgerald CEO Howard Lutnick pic.twitter.com/MYJy2uXDhZ
— Barchart (@Barchart) January 23, 2024Another important fact to remember is that many publicly traded companies in the US have become zombie firms. This simply means that they constantly earn less money than they owe in interest costs. This figure is hovering at over 12% of all publicly listed companies and includes the likes of Mattel, Valaris, and Sunrun.
Therefore, analysts see a wave of defaults this year although the trend will likely be slower than what happened in 2022. In all, the estimate is that the need for bankruptcy and restructuring advice will continue rising in the coming years.
Houlihan Lokey stock to benefitBankruptcies and defaults are usually bad things as they lead to job losses and uncertainty in the economy. However, some companies tend to benefit when they happen since they specialize in providing advice.
Houlihan Lokey (NYSE: HLI), a company that most Americans have never heard is expected to be one of the top beneficiaries. This also explains why its stock has surged by over 45% from its lowest point in 2023.
Houlihan Lokey is an investment bank known by most corporate executives globally. It is known for handling some of the most complex bankruptcies and restructurings in the world. It is the one helping China’s Evergrande navigate its restructuring process.
Historically, Houlihan Lokey has handled some of the biggest bankruptcy cases like Lehman Brothers, Worldcom, General Motors, and Washington Mutual, among others. Therefore, it is seeing more demand for these services.
Its financial restructuring revenue jumped by 17% to $115 million as its transactions rose from 24 to 31 during the quarter. The management expects that demand for restructuring will continue rising in the coming years. In his statement, the CEO said:
“Since this restructuring cycle is not the result of a one-off crisis, we expect to experience elevated revenues over the next couple of years versus a significant revenue spike and subsequent drop as we experienced in previous cycles.”
I also expect Houlihan Lokey will do well as other areas of investment banking recover. This is notable because the company is one of the top providers of M&A and fairness opinion services in the US, as shown below. It leads in key sectors like business services, healthcare, industrials, technology, and financial services.
Therefore, the company is starting the year with numerous tailwinds in the key sectors it operates. It also has technical tailwinds. The chart shows that the stock remains above the 50-day and 100-day moving averages. It is also nearing the key resistance point at $123.50, its highest point in December last year.
Therefore, a break above this price will likely lead to more upside in the coming months. If this happens, the next price to watch will be the psychological level at $150.
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