Firms “negligent” if they shun debt

Many of the UK’s leading law firms are not putting debt on their balance sheets depite record low interest rates, solid deals markets and the continuing need to remain competitive. In contrast, some of the UK’s largest firms have recently taken advantage of the highly favourable lending conditions to put in place multi-million pound facilities.

Last year Herbert Smith Freehills (HSF) conducted a major refinancing with a syndicate of nine international banks, ultimately putting in place a new multi-million pound, multi-currency, non-recourse facility worth in excess of £128m.

The firm’s global CFO Nick Willmott said a range of factors including the robustness of HSF, its strong financial track record and experience of its management team, together with the long-term relationships it has with its banks helped it achieve the amount it wanted at “attractive pricing that reflected investment grade credit”.

“It was a very economically rational decision to put debt onto the balance sheet,” added Willmott. “There is a much more client-friendly, borrower-friendly market currently, law firms are becoming more sophisticated and debt isn’t imprudent in the context of the balance sheet. On the contrary, I’d say it would be imprudent not to have a long-term, committed facility in place.”

More detail on HSF’s borrowings and its approach to debt are included in The Lawyer’s UK 200 Financial Management report, part of this year’s new UK 200 series, which has analysed debt and lockup levels at more than 100 top 200 firms.

The data confirms that while many firms are taking advantage of the current conditions, other firms remain steadfast against on balance sheet borrowing with several telling The Lawyer “we have no debt”.

In the report Clyde & Co CEO Peter Hasson pulls no punches when he argues in favour of on balance sheet debt.

“Law firms have an irrational fear of debt,” said Hasson. “I’d say it’s almost bordering on professional negligence with interest rates this low not to have any debt in your structure.”

At the end of the 2014/15 financial year Clydes had gross borrowings of £53.51m and net debt of £41.59m. Over the last 10 years the firm has grown its total revenue by an average compound annual growth rate of 240 per cent.

DWF is another firm that last year took advantage of the benign debt markets, putting in place a £45m facility with a syndicate of five international banks.

DWF’s managing partner and CEO, Andrew Leaitherland pointed out that last year the firm made significant strategic investments in talent, technology and infrastructure that took a long-term view to increasing his firm’s market share over the next five years.

“Specifically, our investments to support international growth, our £12m investment in technology which is helping us deliver a better service to our clients and help our people, the launch of our tech arm 15squared, plus the launch of our new service delivery models which were a defining aspect of last year,” said Leaitherland.

“We’re confident that these substantial investments will put us in a stronger position for the future. The visible and recurring cash flow of the firm as it grows both its commercial and insurance businesses has enabled a successful refinancing, a clear indication of strong confidence by the banks in our planned national and international growth.”

Barclays’ head of professional services Andrea Delay confirmed that since the end of the financial crisis the borrowing conditions for most law firms have become more favourable.

“The banks have more credit appetite, the interest rates are low, it’s a borrower-friendly market in terms of appetite and price,” said Delay. “I’d also say that some law firms are starting to feel that having a committed facility is a sensible thing to do. I say to clients having no debt is not necessarily a good thing.

“It’s more prudent to have some sort of committed debt facilities. We’ve seen an increase in firms using three, four and five-year revolving credit facilities (RCF).”

Professional services sector specialist Steve Arundale of NatWest echoed Delay when he said his team is, “seeing an uplift in term debt for things like infrastructure investment, IT and offices”. Simon Adcock at HSBC also confirmed this trend.

“We’ve seen a significant number of firms take advantage of very favourable debt market pricing‎ in the last 12 months, particularly for committed five-year RCF’s and term loans,” said Adcock. “These have either been to finance growth via investment in IT and premises or refinance lightly used uncommitted overdrafts to ensure certainty of availability. We expect this trend to continue in 2016 whilst pricing remains attractive.”

The full UK 200 Financial Management report includes more than 20 case studies of individual firms and their approach to borrowing.

They include Olswang, which recently reduced its debt levels partly by using its Elite practice management system to help it take a tougher line on working capital management and linking financial management to partner remuneration.

CEO Paul Stevens said that what was of more concern than the actual level of debt at Olswang, which last year had total borrowings in excess of £20m, was what he called the “direction of travel”.

“It was clear that if we’d continued to go on as we were going it would carry on increasing,” admitted Stevens. “Some of this was around our investment in offices and also purely our being a bit lax around lockup. A couple of days worth reduction of lockup has a very material impact on debt. We saw a trend, didn’t like that trend particularly and took steps to put it into reverse.”