Herbies tops charts in The Lawyer’s first-ever ranking of net debt

Herbert Smith Freehills (HSF) has come top of the charts of UK firms ranked by debt in new data compiled by The Lawyer.

Last year the firm reported a net debt of £124.9m in its global LLP accounts, more than any other firm that filed accounts in the UK market for the 2012/13 period.

HSF’s debt figures are based on a seven-month period between 1 October 2012, the date of the merger between legacy Herbert Smith and Australia’s Freehills, and 30 April 2013.

The firm’s closing net debt figure as of 30 April last year of £124.984m represents 26.6 per cent of HSF’s seven-month turnover of £469.4m.

One source familiar with the firm said the high level of debt was a reflection of the moves HSF had made in recent years to “reshape” the business, primarily through international expansion.

“HSF is investing and reshaping its business significantly on a truly enormous scale,” said the source. “And there are integration costs associated with that.”

Earlier this year when The Lawyer first reported on HSF’s debt the firm commented: “Our debt levels are in line with the operations of a firm which following our October 2012 merger is nearly twice the size of legacy Herbert Smith and in a period of significant investment including a range of integration projects, and expansion focused on our new offices in New York, Seoul, Frankfurt and Berlin. They are structured to meet our requirements over a number of years and are consistent with what we would expect at this point in our trading and investment cycle.”

When contacted for this story HSF repeated this statement.

The Lawyer’s research reveals that there is a big jump in the total net debt table from HSF to Simmons & Simmons in second place with £46.7m of net debt.

Simmons’ senior partner Colin Passmore highlighted the complex nature of law firm financing when he clarified the debt position at his firm.

”For over 10 years, the firm has financed its working capital requirements through a single loan facility instead of calling for individual capital contributions from partners, backed by partner capital loan arrangements,” said Passmore. ”The loan facility is guaranteed by partners such that the economic effect is similar to the partner capital loan arrangements that other firms use. When comparing the firm’s debt position with other firms, it is worth noting that £47.8m of the net debt as at 30 April 2013 is represented by the working capital loan facility and these should be ignored for comparison purposes: hence on a like-for-like basis, the firm had positive net cash balances of £1.0m as at that date. In addition to this facility, the firm has normal loan and overdraft facilities of up to £25m available.”

DAC Beachcroft comes third on this metric with £38.7m of net debt while in fifth place is Berwin Leighton Paisner, where net debt rose by 134 per cent between 2012 and 2013 from £14.784m to £34.594m.

The findings on total debt are among dozens of other metrics included in The Lawyer’s first-ever analysis of the levels of debt at the UK200 firms.

The report is a snapshot of the debt position at a majority of the largest firms in the UK legal market, with data taken from a sample of 153 LLP accounts filed for 2012/13. The statistical data confirms that across the UK legal market the debt trend is upwards.

The total net debt of the 153 firms listed in 2013 was £820m, a 2 per cent increase on the 2012 total of £805m.

Of the sample 153 firms, 64 saw their debt level increase between 2012/13, 49 saw it decrease and 40 firms saw it stay the same.

Other metrics analysed in the research include net debt per member, year-on-year change in net debt and debt as a proportion of total turnover.

Among a wealth of other standout findings, Lewis Silkin’s net debt grew by 10,493 per cent from £11,809 to £1.25m between 2012 and 2013; Browne Jacobson saw its debt grow from £1.258m to £8.399m, a 567.5 per cent increase, while Berwin Leighton Paisner’s net debt rose by 134 per cent from £14.784m to £34.594m.

Other firms that saw an increase in net debt of above 100 per cent between 2012 and 2013 are Ledingham Chalmers (396 per cent), Matthew Arnold & Baldwin (146 per cent), RPC (123 per cent) and Bindmans (107 per cent).

Forty-four of the 153 firms had no net debt listed. Of those 44, five (BP Collins, Boodle Hatfield, Capsticks, Digby Brown and Furley Page) had debt the previous year but had cut it to zero during the previous 12 months. Of these five, PI-focused Digby Brown saw the biggest reduction, from £931,553 to nought.

Just two firms (Trowers & Hamlins and Pinsent Masons) had no debt in 2012 but had borrowed during 2013. Both firms added around £5m in net debt over the 12-month period (Trowers added £5.197m while Pinsents added £5.857m).

None of the four magic circle firms – Clifford Chance, Allen & Overy, Freshfields Bruckhaus Deringer and Linklaters – had any net debt listed.

The Lawyer analysed 153 LLP accounts of firms in the UK200 2013, taking the net debt figure listed in each firms’ cash flow statement.

Firms are not always consistent in terms of what the net debt figure includes, with ‘loans and other debts due to members’ sometimes included and sometimes, quite legitimately, not.

Its omission or inclusion could have a significant impact on the level of debt shown.

Debt can kill a firm but it can also fund ambition. Our first-ever market snapshot shows firms in the UK 200 getting into it in a big way. Click here to get the full picture: Debt: Red Lines