LAZ

Business Context and Reporting Period

Lazard Ltd (Lazard) is a preeminent international financial advisory and asset management firm incorporated in Bermuda. The company operates primarily through two segments: Financial Advisory (M&A, restructuring, capital structure) and Asset Management (equity, fixed income, alternative investments). This 10-K covers the fiscal year ended December 31, 2008, a period characterized by extraordinary disruption and volatility in global financial markets, which significantly impacted the firm's operations.

Key Financial Metrics

Note: 2008 results include a significant non-cash charge related to the LAM Merger (see Material Changes).

Material Changes vs. Prior Period

• Revenue Decline: Net revenue decreased 19% due to a slowdown in global M&A activity (Financial Advisory revenue down 18%) and a 36% decline in AUM driven by market depreciation and foreign exchange impacts (Asset Management revenue down 15%).
• LAM Merger Charge: In Q3 2008, the company completed the merger of LAZ Sub I, LLC into Lazard Asset Management LLC. This resulted in a pre-tax charge of $199.5 million (primarily $197.6 million in compensation expense), reducing operating income by approximately $200 million and net income by $108.6 million.
• Adjusted Performance: Excluding the LAM Merger charge, 2008 operating income was $224.7 million (14% margin) and net income was $111.8 million. Even on an adjusted basis, profitability declined significantly compared to 2007 due to market conditions.
• Debt Reduction: Total debt decreased by approximately $500 million, primarily due to the repurchase of $437.5 million of 6.12% senior notes and other senior notes during the year.
• Investment Losses: The company recorded net investment losses of $139 million in 2008, including markdowns on debt securities and private equity investments.

Guidance, Outlook, and Risks

• Outlook: Management expects 2009 to remain a challenging year. While M&A activity is expected to remain low, the Financial Restructuring practice is anticipated to benefit from increased corporate defaults.
• Cost Management: The company targets compensation and benefits expense to not exceed 57.5% of operating revenue. In 2008, excluding the LAM Merger charge, this ratio was 55.6%. In February 2009, the company announced workforce reductions expected to result in a pre-tax charge of approximately $60 million in Q1 2009.
• Liquidity: As of December 31, 2008, Lazard held approximately $1 billion in cash and liquid securities and had $229 million in unused lines of credit. The company is in compliance with all debt covenants.
• Key Risks:
  • Market Volatility: Continued disruption in credit and equity markets could further reduce AUM and M&A volumes.
  • Counterparty Risk: Exposure to financial institutions, including a $11.4 million exposure to Lehman Brothers (fully reserved) and a $16.4 million receivable from the Reserve Primary Fund (partially redeemed).
  • Regulatory Changes: Potential new regulations regarding executive compensation and capital requirements following government interventions in the financial sector.

Investor Verification Checklist

• LAM Merger Impact: Verify the long-term annual pre-tax charges of approximately $7 million associated with the LAM Merger service provisions and interest expense.
• Receivables Quality: Review the status of the $16.4 million receivable from the Reserve Primary Fund and the $11.4 million fully reserved exposure to Lehman Brothers.
• Compensation Ratio: Monitor the ability to maintain the target compensation-to-revenue ratio of 57.5% amidst continued revenue pressure and potential workforce reduction costs.
• Debt Maturities: Confirm the schedule for senior debt maturities, noting that no principal payments are due until 2015 for the 7.125% notes and 2017 for the 6.85% notes, with the 6.12% notes fully repurchased.
• AUM Flows: Assess net asset flows versus market depreciation to determine if the 36% drop in AUM is primarily market-driven or due to client withdrawals.