Continental Breakfast is back, now with added breakfast. In a new series of columns, American Lawyer chief European correspondent Chris Johnson will meet with senior figures in the legal world at their favorite breakfast joints to chew over the industry’s tastiest talking points. The first installment sees him talk law firm finances with Royal Bank of Scotland head of legal services James Tsolakis at his morning restaurant of choice, Claridge’s.
All weeks should start like this. After a month of seemingly incessant rain, wind, and snow, the dark clouds enveloping London have rolled back to reveal a canopy of glorious blue and a strange orange orb—what I believe people in other, less gray climes call the "sun." Despite lingering economic woe and fresh talk of a triple-dip recession, the city’s spirits seem to have lifted along with the weather. I think I even saw someone smile on the tube. (It could just have been a stifled yawn—I can’t be sure.)
To make things even better, I’m on my way to meet one of London’s top law firm bankers, Royal Bank of Scotland head of legal services James Tsolakis, 54, for breakfast. At Claridge’s. The Claridge’s. There are tough Monday mornings—the sort that immediately make the weekend feel like a distant memory. This isn’t one of them.
One of London’s historic grand hotels, founded in 1856, Claridge’s sits in the heart of ultra-exclusive Mayfair. I get a polite nod from the top-hatted doorman as I make my way through the Art Deco revolving doors and pass into the vast lobby, with its marble pillars and gleaming checkerboard floor that reflects the crystal chandelier hanging almost 20 feet above.
An immaculately dressed waiter ushers me to my table, where a sterling silver trolley is laden with a selection of jams and preserves. Black-and-white photographs of famous former guests adorn the walls, including several members of the royal family. (The hotel’s connection with royalty is so strong, the joke goes, that when the reception fields calls from people asking to speak to “the king,” the operator often has to reply, “Which one?”)
Tsolakis arrives bang on time, and removes his jacket as he settles into his chair. He’s tall and slim, with wiry black hair shot through with grey. His initials are monogrammed on his shirt pocket.
“I love it here,” he says with a smile. “Lots of very fond memories.”
Tsolakis says he first came to Claridge’s for breakfast more than 40 years ago, accompanying his father as a special treat on his 10th birthday.
“I was absolutely terrified,” he recalls. “My father had stressed that it was a very formal place and that I would have to be on my best behavior, but I ended up being so obsessed about sitting up perfectly straight and making sure I used the correct cutlery that I didn’t relax the whole time we were here.”
I can’t help but notice across the table that his posture is almost militarily good, but decide not to ask whether he sits with such a straight back when outside the hotel. The waiter returns to take our drink orders. Tsolakis chooses fresh grapefruit juice and black coffee. I ask for orange juice and Earl Grey tea.
Tsolakis has been providing banking services to law firms and partners for more than a decade. A corporate banker by trade, he relocated from New York to launch Citibank’s London law firm group in 2002, before moving in 2008 to RBS, which banks around a third of the entire U.K. legal market—including 80 percent of the top 100. [Full disclosure: RBS owns a minority stake in ALM Media, publisher of The Am Law Daily.]
Tsolakis says that law firm finances have been placed under considerable pressure during the recession, and that debt levels have steadily risen as a result.
“It’s been a really challenging period [for law firms],” he says, putting on a pair of wire-rimmed, half-moon-shaped glasses and flicking through some loose pages of handwritten notes. “Firms are struggling to grow their [revenues], while their clients are also under pressure, so it’s often taking longer to convert fees into cash. Ongoing costs such as salaries and rent still have to be financed, so if a firm’s cash is stuck sitting in [receivables], then it has little choice but to turn to the bank and either draw down on its overdraft or open a new line of credit.”
Shortly before our meeting, the U.K. legal market was rocked by news that Manchester-based Cobbetts, the country’s 62nd-largest law firm by revenue, had called in administrators after succumbing to a fatal combination of falling revenue and rising debt. Cobbetts’s most recent LLP accounts, publicly available from Companies House, reveal that its total borrowings rose slightly to £10.7 million ($16.5 million) in the fiscal year ended April 30, 2012. The firm’s revenue that year was £45.2 million ($70 million). (Cobbetts has since been acquired by local rival DWF in a prepack deal.)
Cobbetts is the first major U.K. law firm to have gone under since 700-lawyer Halliwells went bust in spectacular fashion in 2010. Indeed, most would argue that the legal sector has proved itself to be extremely resilient during the recession. Although there have been some other high-profile casualties, most notably Dewey & LeBoeuf, the number of bankruptcies is far less than has been seen in almost any other industry. But Tsolakis argues that law firm partnerships are plagued by an inherent structural fragility.
“[The recent law firm bankruptcies] are illustrative of how quickly a law firm can unwind and implode,” he says. And Tsolakis should know: RBS held the main account of Halliwells at the time of its collapse.
“It’s true that the level of law firm failures is far superior to those of corporates, but the difference is that a partnership structure does not provide much insulation from business or financial risk,” he adds. “The key capital of a law firm is intellectual capital, and . . . if lots of partners leave in a short period of time, you’re hit with sharp decline in [revenue] but still have significant overheads that need to be paid. That can’t happen as dramatically if you’re a retailer or a manufacturer.”
We’ve been talking for 45 minutes now and my stomach is rumbling, so I suggest we look at the menu. Tsolakis instead looks at his watch. My heart sinks as I wait for him to explain that he doesn’t have time to eat, but thankfully he still has an hour until his next meeting.
Like all the best-trained waiters, ours suddenly appears without being summoned to take our orders. Speaking in an accent that I can’t quite place—Hungarian, perhaps—he explains that the chefs can essentially cook whatever we want. Going off menu is a bit Hollywood for my liking, however, so I stick with the standard continental breakfast (what else?), comprising a fruit plate, brown toast and pastries.
Tsolakis starts off with good intentions and asks for simple poached eggs, but after some encouragement from the waiter—who really should sign up for the next season of The Apprentice, such is his salesmanship—upgrades to a full English breakfast, complete with sausages, sweet cured bacon, eggs, grilled tomato, field mushroom and rye toast. Tsolakis asks if he can switch the bacon for avocado. “Of course, sir.” Our cups are recharged with tea and coffee.
Tsolakis says that banks have reacted to the changing market conditions by tightening their lending policies for law firms. The market conditions are tough for banks too, and the lending policies he was referring to were specific to law firms. They are now looking to lend on a shorter-term basis—typically over three years, rather than five—and are even starting to secure their interests by taking debentures over the borrower firm’s assets, although Tsolakis says this practice remains relatively rare. (U.K. bank Lloyds TSB took a debenture in return for refinancing Cobbetts’s outstanding £10 million debt with previous lender RBS in 2012.)
“The recession was a rude awakening [for law firms],” he says, as I tuck in to some of the freshest, sweetest mango I’ve ever tasted. (The accompanying papaya is disappointingly bland.) “Credit was available so freely and on such favorable terms that it wasn’t something firms ever had to worry about. That isn’t the case anymore.”
Tsolakis says that most firms have subsequently taken a more conservative approach to their funding by increasing their capitalization and trying to avoid short-term debt—a move Tsolakis says he encourages.
“People seem to think that banks actively try to catch people out and that we have some sinister intentions, but that doesn’t make any sense,” he says. “Our group has a direct interest in the financial stability and long-term success of the legal profession—it’s the source of our business. If we have a banking relationship with a client, then it’s in our interests to do everything we can to make sure that continues. Anything else would be counterproductive.”
That’s not to say that the bank doesn’t keep a close eye on its investments. Like all lenders, RBS has a "watch list" of clients that have either breached covenants—due to a decline in profitability, an increase in lockup (the amount of money tied up in work-in-progress or debtors), or a certain volume of partners leaving, perhaps—or are generally giving cause for concern. Tsolakis is understandably reluctant to divulge which firms might currently be on such a list, but says it represents less than 5 percent of the United Kingdom’s top 100.
Overall, the finances of the U.K.’s top firms are generally “pretty solid,” he says, although he admits the picture is “less robust” as you go further down the legal pecking order. Will we see further firms going under? “Quite possibly.”
Tsolakis looks at his watch. Time to go. He thanks me for breakfast, and as we shake hands, I jokingly ask whether he gets much of a chance to eat at Claridge’s since moving to RBS, which having been bailed out by the government in 2008 is now majority-owned by the British taxpayer.
“It does tend to be more modest,” he says. “I do a lot of morning coffees.”
Breakfast for two came to £65.25 ($100), with service.
Chris Johnson is The American Lawyer’s chief European correspondent. Reach him at firstname.lastname@example.org. Follow him on Twitter at @chris_t_johnson.