DLA Piper Capital Push Shines Light on Bank Borrowing

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November 20, 2008 5:27 PM

DLA Piper Capital Push Shines Light on Bank Borrowing

Posted by Nate Raymond

DLA Piper may not be the only firm wanting to change its relationship with banks.

On Wednesday, DLA Piper announced it would ask its 275 income partners to contribute capital to the firm and reduce equity partner compensation to shrink its reliance on bank credit lines. The news comes in a year when firms not only increased their borrowing from banks but are also taking longer to pay down their lines of credit.

Bankers say many law firms dug deeper into their credit lines this year than they have in the past. Citigroup, a dominant lender to U.S. firms, has $6 billion in loans outstanding to legal institutions, says Dan DiPietro, client head at the bank's law firm group. At the end of the third quarter in September, Citi's lending was up more than 30 percent over last year, DiPietro says.

"What has happened is a lot of firms have come in to make new loans or increase lines," he says. "We're quite surprised by the increase in magnitude of our portfolio."

Bankers and lawyers also say because of financial conditions, law firms going in to renew their credit facilities have or will experience higher rates than in the past. Some troubled firms have been forced to go in to renegotiate their credit lines mid-year, says Peter Gilhuly, a Latham & Watkins restructuring partner who has advised law firms on such matters.

"The banks think if there's greater risk they don't want to lend, and if they are going to lend it's going to be expensive," he says.

Now, as the year comes to a close, bankers say firms are taking longer to pay down their credit lines.

"What we're seeing this year is cash collections have been slower, and billings have been lower, resulting in [firms] being later in the year before they get out of their credit facility," says Andrew Johnman, head of professional services at Barclays.

Jeffrey Grossman, a managing director in Wachovia's legal specialty group, says firms in the bank's portfolio are 30 percent from the levels they usually pay down.

"It's pervasive," Grossman says. "It's across the whole industry. It's not just New York City. It's not one practice area. It's not one geographic location."

For its part, DLA says it is "experiencing no difficulty in paying down our credit facility."

"Our performance in this regard this year is quite consistent with our performance in the past," executive director Steven Colgate said in a statement. "We are fully compliant with all of our covenants."

Other firms could face trouble, though, if they don't pay down before the year is out. Bankers and finance experts say law firm credit agreements usually require firms to zero out the lines for 30 consecutive days. Bankers say most firms should be able to accomplish that task, but acknowledge the possibility a few might not. "The concern is...whether they will be able to be in a position to [clean up their lines]," Wachovia's Grossman says.

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