Dewey’s Undisclosed PPM

Monday, April 19, 2010

As has been widely reported on law.com and Bloomberg, Dewey raised $125-million in a private placement of bonds, reportedly sold to institutional investors (mostly insurance companies) with maturities of 3–10 years. Rates paid were not disclosed. The firm was close-mouthed about the transaction:

A source at the firm says Dewey was refinancing existing bank debt. “With [our] bankers we looked at the rates and thought this was a good time to lock in,” says one partner. “Essentially we think the current rates are the lowest we’re going to see.” The partner adds that bonds were investment grade, carried three- to 10-year terms, and, he adds with some pride, oversubscribed. “We suspect that other firms will pursue this route,” he says.

Richard Shutran, a partner involved in the decision-making process, was not immediately available for comment.

While this is, strictly speaking, not the first private placement of debt for a law firm, it is among the fingers-of-one-hand of such transactions. Writers were clearly struggling to make it look less noteworthy than I believe it is:

Dewey is certainly not the only firm to use a bond offering to refinance debt. Dewey Ballantine, one of its predecessor firms, issued a private placement in 1990, and MoFo did the same in 2001 and 2002 to refinance debt incurred when the firm spent money on office renovations and expansion, Bloomberg reports. Clifford Chance issued $150 million in bonds in 2003 to fund its expansion [into new offices in Canary Wharf--Bruce].

That’s about it, folks; and the Clifford Chance deal was the only one I’d deem a real precedent.

What are the trends in law firm lending in general?

“If law firms were rated, they would typically be investment grade,” [Jeffrey Grossman of Wells Fargo's law firm group] 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.

While firms are tapping bank lenders for more capital, they’re also tapping their partners–and at least in the cases of DLA Piper and Reed Smith, non-equity partners–for additional capital contributions. Strengthening your balance sheet in a time of financial stress is, generally speaking, sound practice and I applaud it. But the questions posed by the Dewey deal outnumber the answers. Such as?

I must assume that some form of private placement memorandum was prepared in connection with Dewey’s offering. What a fascinating and juicy document that must be, but here are the areas that would grab my attention first and foremost:

  • Risk Factors: How would Dewey describe the risks to a world-class law firm? Client flight? Partner flight? Upstart competition? Outsourcers such as Axiom Legal or CPA Global? Losing the war for talent? The chances of New York ceasing to be a global financial capital?
  • Representations and warranties: What undertakings has Dewey assumed with respect to revenue, or even revenue growth? Size of the partnership? Client attrition? Secondary financing?
  • Finally and perhaps of greatest fascination, what are the remedies of debt-holders in the event of material breach of covenants? Is there personal recourse liability to the partners? (I have to surmise not.) The ability to accelerate and demand immediate repayment in full? A lien against tangible assets?

Perhaps the larger question, given the imminent effectiveness of the LSA in the UK, is whether the outside investors’ interest in Dewey is debt or equity? Clearly it’s formally characterized as debt, but we all know interests are routinely re-characterized for tax reasons as well as interests of justice. Two indicia that this is more like equity and less like debt are (my surmise that) there’s no recourse liability and the all but certain absence of any meaningful collateral securing the debt–law firms have no meaningful material assets.

But I’m still fascinated, perplexed, and enthralled by what the debtholders’ remedies might be in case of a material breach or default: To seize operational control of the firm? (Elevating the debt, of course, to equity.) This seems implausible in the extreme, but what short of that would constitute a serious remedy?

Or perhaps the remedy is not really defined, on the assumption of improbability. That in and of itself would be interesting to know.

 

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  1. [...] not have seen, or may not recall, a separate piece I did over two years ago in April 2010 called Dewey’s Undisclosed PPM, in which I wrote: I must assume that some form of private placement memorandum was prepared in [...]

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