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Traditionally, the first few months of each year are the lean season for law firms. But this spring is proving to be a lot worse than years past. On average, firms are digging 25 percent deeper into their lines of credit than they did last year, says Dan DiPietro, head of the law firm group at Citi Private Bank, which has relationships with about 150 firms. And at least a half-dozen top-tier law firms that have never tapped into lines of credit are suddenly making sure funds are in place if business temporarily stalls out, says Jeffrey Grossman, head of credit and advisory services at Wachovia Wealth Management. “Before, lines of credit were given on a handshake. Now firms want to formalize the commitment,” Grossman says. In a replay of the boom-bust cycle of 2000-01, three factors appear to be at work in the current cash flow squeeze. “Last year was a big year for ‘people’ costs,” says David Gaulin, cohead of PricewaterhouseCoopers’s law firm services group, referring to the overheated salary growth in the ranks of associates, nonequity partners, and nonlegal talent. Of course, there’s not as much work in the pipeline. Deals are down nearly 30 percent in the U.S., according to Dealogic. Structured finance and private equity work is in the tank. Even litigation, oft-trumpeted as being countercyclical, declined in 2007, as measured by the number of federal cases filed. To make matters worse, many corporations, experiencing their own financial stress, are “hoarding cash,” as one managing partner puts it, rather than paying outside counsel. Although Citi, HSBC USA Inc. and Wachovia Corporation’s bankers all say they consider law firm loans to be investment-grade, other commercial banks have grown queasy about extending large loans. Beyond the short-term stress, there is some good long-term news. First, the typical Am Law 200 firm is in a stronger position to ride out a slowdown than it was in 2000. Firms are carrying 20 percent less debt overall, and the prospect of a Coudert-style debt-stoked implosion is less likely today, DiPietro says. Second, some of this debt was taken on to finance growth. More firms are underwriting Asian and Middle East expansion with long-term debt, which is carrying historically low rates, says HSBC’s legal team senior vice president Christian Covello. Smart move, says Stanley Kolodziejczak, cohead of PricewaterhouseCoopers’s law firm services group. Firms that delay investment could end up weakening their competitiveness in the longer term. “In a down market like this, you might have a chance to pick off some truly great lateral partners,” he says. “Do you want to give up the chance because you’re afraid to borrow some money?”

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