Dewey & LeBoeuf Sells Bonds as Law Firms Search for CapitalCarlyn Kolker
Dewey & LeBoeuf LLP raised $125 million in a bond offering to refinance existing bank debt, a rare action by a U.S. law firm, according to two people familiar with the transaction.
The New York-based, 1,200-attorney firm announced the private placement yesterday without disclosing the amount. Partner Richard Shutran declined to reveal the interest rate for the bonds, saying it was more favorable than the firm’s bank loans.
Debt in a private placement is sold directly to institutional or private investors and isn’t registered with the U.S. Securities and Exchange Commission. Law firms typically rely on bank loans and partners’ contributions to provide capital rather than outside investors, according to bankers and consultants.
“You don’t hear a lot of open talk in the market about firms looking to raise outside capital,” said Kent Zimmermann, a Zeughauser Group consultant. “It could be one of those things that once one or two firms do it with success, the pack will follow.”
Units of banks including JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Barclays Plc and Bank of America Corp. have groups dedicated to law firm lending. In recent years, the banks have bolstered or formed such groups to take advantage of an industry with conservative borrowing habits.
Owning Law Firms
Ethics rules and state laws prohibit nonlawyers from owning law firms, which prevents raising capital by selling shares. They must raise money in other ways, said Stephen Gillers, a legal-ethics professor at New York University.
“In the United States, you cannot have nonlawyers with ownership interests in law firms, and you cannot have passive equity investments in law firms,” Gillers said. “On the other hand, law firms can borrow money. As long as it’s debt, it’s OK.”
Firms might tap alternative financing sources as they try to expand market share, Zimmermann said.
The Dewey bond buyers were insurance companies, Shutran said, with maturities of three to 10 years. JPMorgan was the placement agent.
Dewey & LeBoeuf is the product of the 2007 merger of Dewey Ballantine with LeBoeuf, Lamb, Greene & MacRae. Clients include Deutsche Bank AG, Walt Disney Co., JPMorgan and MetLife Inc. The firm says it had gross revenue of $914 million in 2009.
Dewey’s is the first law firm private placement since the credit market seizure and one of just a handful ever, according to more than a dozen bankers, lawyers and consultants.
“They tend not to get a lot of coverage because they are by their nature private,” said Tony Williams, a consultant at London-based Jomati Consultants.
Predecessor Dewey Ballantine issued a private placement in 1990 to fund the firm’s move to a building in Midtown Manhattan, Shutran said.
Private placements offer law firms the chance to borrow for 10 to 15 years instead of the typical bank term of three to five years, said Keith Wetmore, chairman of Morrison & Foerster, a 1,000-lawyer firm based in San Francisco.
“You need a pretty good balance sheet to interest institutional investors.” Wetmore said. “Not every law firm is going to have that.”
The firm issued bonds in 2001 and again in 2002 to refinance debt that had been incurred to finance office build-outs, and may consider another in the future, Wetmore said.
Deterrents include fees, which can exceed $5 million, and loan covenants that may require the borrowers to maintain certain levels of cash flow or profitability, Williams said.
The U.S. rules on law firm ownership are intended to protect the attorney-client relationship, said Gillers of New York University.
“It amounts to the American view that nonlawyers should not have ownership or management control of law firms, because that will threaten the devotion of law firms to their clients,” he said.
England and Wales will allow law firms to sell shares on an exchange and merge with companies for the first time in 2011, when a law passed in 2007 goes into effect.
Australia was the first country in the world to allow outside public investments in law firms. In 2007, Melbourne- based Slater & Gordon Ltd. began selling shares.
U.S. law firms tap banks for revolving credit or term loans. The banks offer business services such as payroll, retirement accounts, currency exchanges and investment advice and loans to law partners.
“We’re not just talking about a credit relationship,” said Sharon Weinberg, managing director at JPMorgan Private Bank and head of the law firm group. “We’re talking about an array of relationships. The more complex the firm, the more we can offer it.”
Law firms have typically weathered the financial recession better than other industries, making them attractive customers to banks, said Jeffrey Grossman of Wells Fargo’s law firm group.
“As revenue decreased, they protected their profitability,” Grossman said. “That’s not what happened to the rest of corporate America.”
Law firms starting in 2007 have fired attorneys, cut pay, delayed start dates for incoming associates, and closed offices and reduced promotions to partner during the recession.
While law firms aren’t rated by rating firms banks create their own models to review the firms’ balance sheets, Grossman said.
“If law firms were rated, they would typically be investment grade,” he said.
Citigroup has focused on law firm banking for more than 35 years, according to Dan DiPietro, chairman of Citi Private Bank’s law firm group. JPMorgan and Wachovia, now a unit of Wells Fargo, established dedicated law firm groups in the past six years with hires from Citigroup.
More law firms tapped their lines of credit or set up new ones during the credit crisis, said DiPietro. Loans to law firms from Citigroup increased 30 percent in 2008 and another 10 percent in 2009, he said. The bank has about $5 billion of loans outstanding to law firms, he said.
Law firms are increasingly asking their partners for more contributions to fund a firm’s capital, DiPietro said.
“We have entered a period of much greater uncertainty,” DiPietro said. “Firms want to be more conservative. They want more capital to ride through times of uncertainty.”
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