How Banks Changed, Après Credit Crunch, Towards Law Firm Clients

The American Lawyer compiled a report in early 2009 that showed how banks were viewing–and dealing with–law firms, mid-recession.  The lessons inherent in this scenario might prove beneficial now that the economic tide has turned.  Even ’though law firms have once again begun to pay off their short-term debts faster than was done a few years ago, it’s helpful to see how banks changed in their treatment of law firm clients during those lean years.

Understandably, a couple of years ago, lending institutions were anticipating devastating news.  Sure enough, says the piece in Law.com, “Early in 2008, banks say, firms raced to secure either new or bigger credit facilities and bit into them as business slowed.”

In January 2008, for instance, the now-defunct Howrey firm needed a loan.  Like most Biglaw firms, it required extra capital during the early part of the billing year when collections were low. In order to pay associates, other staffers and overall expenses, it relied on its short-term credit line(s) until clients pay their bills.

Howrey got whiff of the coming slump, so it asked Citigroup Inc. for a “beefed up” credit facility. Citi agreed. The rates were locked in for two years (as opposed to the more common term of one year).   Citigroup (which ultimately had some troubles of its own), having sensed the downturn as well, agreed to give Howrey a 25 percent larger credit facility with one catch: the firm needed to be more forthcoming with financial information.

Back then, Howrey agreed to report to Citi once a month—not just quarterly—for the next two years. Additionally, when partners came and went, that information, too, was wanted on a monthly basis—and not annually, as had previously been provided Citi by Howrey.

Bankers also came calling a bit more often, “especially,” says Law.com, “to scope out the firm’s exposure to the fall’s bank failures and mergers.”


In addition to the financial forecasts which bankers must have had on their minds, they had to also have been thinking about the then-recent break-up of another firm, that of Heller Ehrman and Thelen.  According to Law.com, the firm “dissolved not just because partners fled, but because of heavy debt commitments….”  Per the dissolution papers, Heller was $54 million in debt.

At the time, Citi was trying to prevent other bust-ups.  The lawyer in charge of law firm dissolutions made it clear that he was working on a few loan restructurings.

As things got increasingly dour, one firm, having let is credit line expire, depended on capital contributions from its partners.

And whereas banks used to give credit for free, firms found that they now had to pay for their credit lines.   Additionally, rates doubled—from below 1% in 2007 to 3% in 2009.  Andrew Johnman, head of professional services at Barclays plc, said, then, of the top 50 firms: “If they need additional money or if they need an amendment to their credit facility, then we reprice it to current market pricing.”  Finally, the banks wanted deposits. The banks called this latest demand a “more complete” banking relationship.

On a positive note, one message that came through loud and clear was just how far banks would go to work with their law firm clients.  Citigroup—which later needed bailing out—was right there, throughout…and ready to negotiate.  For more, go to:

http://www.law.com/jsp/article.jsp?id=1202427211781&slreturn=1&hbxlogin=1

-EM

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