Lazard: Investment Bank's Government Debt Business Squeezed by China, New Rivals

It was the kind of job the bankers working out of Lazard Inc.’s Paris office were known for: Fly into a country drowning in debt—in this case, Zambia—and help rescue it from financial ruin.

For decades, Lazard dominated these developing-world restructurings. Just about anytime a hard-pressed government fell hopelessly behind on bills, a few dozen bankers would arrive, usually with Lazard’s team at the center, to hash out new terms in a matter of months.

But the negotiations over Zambia’s $13.4 billion debt would be different, marking a turning point for Lazard and other emerging ­markets turnaround specialists. China held up the process by seeking more favorable terms for itself, wielding its newfound clout as the developing world’s biggest lender against a growing crowd of assertive Wall Street bondholders.

The restructuring took three years altogether, finally ­resolving in late May. The haggling left Zambia locked out of international markets during deadly droughts, forcing the government to reshape its budget to focus on food security. Because the country relies on hydropower, it had to lean on neighbors for energy. National authorities did everything they could to support the talks, but it was out of their hands, according to Masitala Mushinga, director of debt management at Zambia’s Finance Ministry. “Elephants were there fighting, and we’re right in the middle,” he told a debt conference in Paris as the deal closed.

The rarefied world of government debt restructuring is getting tougher for everyone—even Lazard, a 175-year-old company whose executives played a role in financing the California gold rush in the 19th century, saving New York City from near bankruptcy in the 20th and restructuring Greece’s debt in the 21st. “One day there will be a case study in universities of all the difficulties” that Zambia and Lazard overcame to reach a deal, says Pierre Cailleteau, who leads Lazard’s sovereign advisory team.

Along with the demands of China and debt investors, Lazard faces more vigorous competition, including from its own former bankers. In the old days it could have called the shots without taking much account of private creditors and bond investors, according to Michael Papaioannou, an economist and International Monetary Fund adviser. Now “the processes are more prolonged and more protracted,” he says.

Raising the stakes, developing nations borrowed heavily as interest rates were near rock-bottom levels over the past decade. They now owe about $28 trillion, the rough equivalent of the entire US economy. Many in the business expect more governments will need help managing their debt loads, according to interviews with more than a dozen bankers, investors and government officials. Over the next two years, countries with the lowest credit ratings must repay global bondholders $80 billion.

These countries’ struggles represent opportunities for Lazard—and others. Late last year, Matthieu Pigasse, a former Lazard star banker who helped lead the Greece restructuring, took aim at his former employer. He poached two other key bankers to set up a rival sovereign advisory team at Centerview Partners LLC, a New York-based investment bank co-founded by dealmakers Blair Effron and Robert Pruzan.

One of those bankers, Hamouda Chekir, has a relationship with officials in Ecuador, a repeat restructuring client that’s defaulted 10 times since the 19th century. Centerview has also won contracts with governments in Africa and is pursuing deals in Latin America and eastern Europe, according to people familiar with the matter. “We play to win,” Pigasse says. In just its first six months, his team has grown to 11 bankers, including new hires and existing Centerview staff, says Pigasse, who declined to identify the mandates they’ve won.

Pigasse is a prominent figure in finance and French media, where he long held an interest in the newspaper Le Monde. And even the furnishings of his Paris office underscore the threat he poses. The word “combat” is etched into the top of his custom-made bookcase, the top row featuring copies of a book about British punk rockers the Clash (Pigasse wrote the preface). “We want to become the largest player, and we believe we can and we will,” he says.

Another former Lazard banker, David Gadmer, has helped set up a sovereign advisory unit at investment bank Houlihan Lokey Inc., best known as a go-to adviser for midsize companies. Houlihan is pursuing restructuring work in emerging markets for governments, state-owned enterprises and private corporations, says Joseph Swanson, senior managing director at the Los Angeles-based firm. “Hiring someone in sovereign advisory makes all the sense in the world,” he says. “The largest parts of these economies are often owned partially or completely by the government.”

Yet another Lazard veteran, Eric Lalo, joined Rothschild & Co. in 2019 to lead what’s now the most established rival team. New York boutique investment bank Moelis & Co. has explored hiring bankers in that line of business, too, but so far has decided against it, according to people familiar with the matter. And there are smaller European stalwarts of the business, such as Paris-based Global Sovereign Advisory and London’s Newstate Partners, always looking for an opening to grab a few more customers. Some of those firms are also prepared to negotiate on behalf of creditor groups, including hedge funds that buy up developing nations’ debt.

Lazard, by contrast, has worked exclusively with governments, staying on one side of the table. That position worked well for decades, helping the company avoid conflicts of interest while serving as arbiter in quick and tidy deals. But with more creditors championing their own interests, those old norms are being tested.

For decades, whenever crises erupted in a developing country, the same faces showed up. They almost always came from Paris and had been educated at France’s elite international research university, Sciences Po. “It used to be a very clubby, old-White-man world, where they sat on the same planes, smoked cigars together and went to the same haciendas in Mexico,” Mitu Gulati, a lawyer who was involved in the 1994 Mexican peso crisis, says of the Paris crowd.

No industry league table tracks the top participants in ­sovereign debt restructuring because it hasn’t been necessary. The biggest players are clear. Bankers from Lazard, based in New York but with deep French roots, land the most mandates. Its main competitor is Rothschild, controlled for more than 200 years by seven generations of the storied French family—but with a younger sovereign advisory practice. (Rothschild now represents Ukraine’s government in its debt restructuring.)

In the wake of the 2008 financial crisis, when Lazard led Greece through Europe’s largest modern sovereign debt restructuring, its team reaped about €25 million ($27.6 million) in fees.

The firm parlays those roles into additional, high-profile relationships—for example, signing up corporate clients who want insights into the countries where they work. In Greece that advisory business eventually led to the restructuring of state-owned Piraeus Financial Holdings SA, the nation’s consumer bank.

Lazard’s financial advisers call on past government clients to help them issue new bonds, according to a person familiar with its practices. And the sovereign advisory group has helped introduce the firm’s corporate bankers to governments in Africa looking to smooth the way for major transactions.

Although most sovereign debt advisers still hail from France, the business is rapidly becoming more global. Some dealmakers are studying Mandarin so they can work more directly with China. “I’ve seen more effort now on all sides of the table to understand each other better,” says Melissa Butler, a partner at law firm White & Case in London who focuses on emerging-markets securities. “Everyone is quite interested in how everyone else sees the world.”

Lazard’s Cailleteau says his team of about 20 bankers is still dominant and carries more weight than rivals with foreign ministries. The bank has secured major business in the past several years. Its clients include Ethiopia and Ghana, whose finances have buckled. It’s also worked with Sri Lanka, which is so strapped that its central bank recently used tea leaves to pay for $20 million of oil imports.

Cailleteau is emphasizing teamwork to keep the stiffening competition at bay. “Lazard long had a reputation of being a constellation of star bankers working on their own,” he says. “We have a no-less-talented team but are more humble, better organized and, in the end, much more efficient.”

Last October a global dealmaking slump pushed Lazard toward its first full-year loss since the financial crisis. Its revenue declined 9%, to $2.52 billion. Financial advisory work, including debt restructuring and mergers and acquisitions, made up 56% of its business, with most of the rest coming from money management.That month the company promoted Peter Orszag, an economist who worked under Presidents Bill Clinton and Barack Obama, to chief executive officer. His goal: to revive Lazard’s fortunes and double revenue by 2030. Orszag is off to a strong start, with the firm notching record revenue in the first quarter. In the three months that followed, the financial advisory arm set a revenue record of its own.

Analysts tracked by Bloomberg estimate Lazard will post a $263 million profit this year, then boost it about 50% in 2025—returning it to the level of years past. (Lazard doesn’t break out the results of its sovereign advisory business.) The firm’s stock is up more than 40% this year.

Shortly before Orszag rose to CEO, Lazard established a new geopolitical unit, with a roster of advisers including former spy chiefs and diplomats to complement its sovereign and corporate services. “Lazard has always been known for combining business and geopolitical insights, so our sovereign work fits with that model,” Orszag says. “It’s not always the highest-revenue part of Lazard, but it is an important part and a high-prestige part.”

Gillespie reports on banking and Fieser covers emerging markets, both from New York.