LAZ

Business Context and Reporting Period

Lazard Ltd, a Bermuda holding company and preeminent international financial advisory and asset management firm, filed its Quarterly Report on Form 10-Q for the period ended June 30, 2009. The Company operates through two primary segments: Financial Advisory (M&A, restructuring, capital structure) and Asset Management (equity, fixed income, alternative investments). A Corporate segment manages cash, investments, and the commercial banking activities of Lazard Frères Banque SA (LFB).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenue decreased 20% year-over-year for both the three-month and six-month periods ended June 30, 2009, compared to 2008. This was driven by a 15% decline in investment banking fees (due to a 40% drop in M&A revenue) and a 27% decline in money management fees (due to a 33% drop in average AUM).
• Restructuring Impact: The six-month 2009 results included a pre-tax restructuring charge of $62.6 million recorded in the first quarter. This charge, primarily for severance and accelerated RSU amortization, turned an operating profit into an operating loss for the six-month period.
• Financial Restructuring Growth: While M&A fees fell, Financial Restructuring revenue increased significantly (185% for the quarter, 220% for the six months) due to a rise in corporate debt defaults.
• Compensation Ratio: The compensation-to-operating revenue ratio rose to 60.0% for the quarter and 65.9% for the six months (excluding restructuring), exceeding the Company's 57.5% target due to revenue declines and accelerated equity award amortization.

Guidance, Outlook, and Risks

• Outlook: Management expects 2009 to remain challenging. While market conditions showed signs of recovery in Q2 2009, the outlook for the second half of the year remains uncertain. The Financial Restructuring practice is expected to benefit from continued high default rates.
• Liquidity: As of June 30, 2009, the Company held $896 million in cash and cash equivalents and had approximately $215 million in unused lines of credit. The Company is in compliance with all debt covenants, including a Consolidated Leverage Ratio of 2.05 to 1.00.
• Key Risks:
  • Market Volatility: Continued declines in equity markets directly impact Asset Management fees and AUM.
  • Reserve Primary Fund: The Company holds a receivable of approximately $7.8 million from the Reserve Primary Fund, which is in liquidation. While the Company expects to recover the carrying value, litigation and liquidation processes pose a risk of diminution in value.
  • Regulatory Changes: New policies in New York and other jurisdictions banning placement agents for public pension funds may impact the Private Fund Advisory Group.
• Subsequent Event: On July 15, 2009, Lazard acquired The Edgewater Funds, a Chicago-based private equity firm, to establish a new private equity business.

Investor Verification Checklist

• Restructuring Charge: Verify the composition of the $62.6 million Q1 restructuring charge and the remaining liability of $21.7 million as of June 30, 2009.
• Reserve Primary Fund Exposure: Monitor the status of the $7.8 million receivable from the Reserve Primary Fund and potential litigation outcomes.
• Compensation Policy: Assess the sustainability of the compensation ratio exceeding the 57.5% target and the impact of accelerated RSU amortization on future earnings.
• AUM Trends: Track the recovery of Assets Under Management, which declined 34% year-over-year in average AUM for the six-month period.
• Debt Covenants: Confirm continued compliance with the Consolidated Leverage Ratio (max 4.00:1) and Interest Coverage Ratio (min 3.00:1) under the Credit Facility.