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Credit Squeeze Has Orrick Borrowing Against Future Partner Profits
The Recorder
May 11, 2009
Orrick, Herrington & Sutcliffe is borrowing against next year's partner profit distributions, according to a February public filing with the California Secretary of State's office, the latest indication that the firm is shoring up its available credit.
On May 4, Orrick acknowledged that to secure a loan, its banks required that it defer capital payouts to ex-partners for six months longer than usual.
The February loan to Orrick was financed by JP Morgan Chase rather than by Citibank, Orrick's traditional lender.
Orrick's move is another example of the new ways firms are coming up with cash in the tight credit environment. Last fall, to reduce its reliance on debt, and perhaps in response to increased requirements by Wachovia, DLA Piper asked all its income partners to contribute equity.
JP Morgan Chase filed a Uniform Commercial Code financing statement (.pdf) in late February that shows Orrick promised it a portion of next year's partner capital as collateral on a loan.
"Citibank has historically been our lead lender, but this year we decided to give a piece of our credit needs to JP Morgan," said Alan Benjamin, a global finance partner in charge of Orrick's credit arrangements. "This is to finance the normal cash flow needs of the firm."
Multiple banks competed for the loan, according to Benjamin. He declined to say how much the loan was for, just that it was "significant."
"We go to banks every year and we get financing. One thing that's changed a little bit is that banks are a little tougher in lending to any business, and we are no exception," he said. "But we have very favorable rates."
There has been no additional capital call this year, nor will there be one next year, Benjamin said. Orrick's capital contribution from partners has remained the same percentage for at least five years and is expected to be the same percentage this year, he said.
Benjamin declined to discuss why the firm didn't expand its line of credit with Citibank. Orrick's Citibank loan is secured by the typical collateral of a lead lender: "all books, all accounts, and all products and proceeds," according to an April 2007 UCC filing (.pdf).
The February JP Morgan Chase loan is secured only by what the UCC statement calls the "2009 Capital Enhancement Contribution Receivables," which it defines as "the right of the debtor to receive capital from partners in respect of a capital call on the partners up to a certain percentage of the aggregate cash distributions made to such partner in respect of the debtor's 2009 fiscal year."
Orrick hired 80 lateral partners in 2008, including many from collapsed firms Heller Ehrman and Thelen. Because it takes several months for laterals to begin bringing in revenue, these laterals likely diluted profits and were a factor in Orrick's 20 percent decline in profits per partner in 2008.
The lateral partners were likely hired under agreements that guaranteed a minimum income for as long as two years, according to sources familiar with hiring practices.
Orrick also was highly exposed to capital markets work, which tanked as the economic crisis worsened last year. Orrick was one of the first firms to announce job cuts. It laid off 40 associates and 35 staff in November, primarily in real estate and structured finance. In March, it laid off 100 lawyers and 200 staff. The firm, like others, has deferred start dates for incoming associates and frozen salaries. In December, it froze associate salaries. Like many large firms , Orrick deferred start dates for its incoming associate class. Half of its incoming associates will start January 2010, while the other half will start in March, about seven months later than normal.
Orrick is generally considered to be a well-managed firm, with a centralized management structure that appears transparent with regard to finances. Partners participate in a monthly conference call with Chairman Ralph Baxter Jr., in which he reviews the health of the firm, and the partners receive a monthly report covering the status of accounts receivables, inventory and revenue.
"Everything that I've heard and read about Orrick in the last six months or so suggests to me that they are confronting the issues that they face in an intelligent, businesslike way," said consultant Richard Gary. "They are doing what I counsel my clients to do."
Bruce MacEwen, a consultant who pens the blog Adam Smith, Esq., said law firms have not been immune to the credit squeeze and that's been challenging, given their yearly cash flow timeline. Firms typically see large amounts of money go out the door at the beginning of the year in the form of partner profits and associate bonuses.
"Any bank that is sophisticated enough to lend to law firms understands that the cash flow of firms is extraordinarily seasonal; there is a mad dash to collect money in the fourth quarter," MacEwen said. "Sometimes there are just seasonal variations in things that would technically trigger covenant violations for a month." In the past, banks would put up with those infractions, he said, "but not now."
