In January 2008 Howrey went looking for a loan. Like most of the biggest firms, Howrey relies on short-term credit lines in the initial months of the year when collections are low in order to pay associates, staffers, and other expenses until clients pay their bills.

Howrey felt intimations of the coming recession, so the firm asked Citigroup Inc. for a beefed-up credit facility with rates locked in for not one but two years. Citigroup agreed to a 25 percent larger credit facility, but with a catch: For the next two years the bank wanted significantly more financial information about the firm. Instead of quarterly reports, Howrey now reports its finances to Citi every month. Partner comings and goings used to be reported annually; now it’s monthly. Citi bankers also started calling more often, especially to scope out the firm’s exposure to the fall’s bank failures and mergers.

Howrey is not alone. Law firms, typically considered good credit risks, are now experiencing the toughest and most expensive lending conditions in years. “Even good borrowers, prime borrowers, are having more restrictions and more difficulties than they used to,” says Altman Weil consultant James Cotterman.

The bankers have good reason to be cautious. The legal industry is suffering along with the rest of the economy. Firms are going deeper into their credit lines, and taking longer to pay them down. Plus, the dissolutions of Heller Ehrman and Thelen are still fresh in bankers’s minds. Both dissolved not just because partners fled but because of heavy debt commitments, lawyers and bankers say. Heller alone had $54 million in debt, dissolution papers show.

The new year could bring devastating news. Dan DiPietro, client head of Citi’s law firm group, says he “would not be shocked to see another one or two dissolutions among The Am Law 200 next year.” Gibson, Dunn & Crutcher restructuring partner Jonathan Landers, Citi’s lawyer on law firm dissolutions, says he’s busy on a few workouts–basically loan restructurings–that haven’t yet become public.

Early in 2008, banks say, firms raced to secure either new or bigger credit facilities and bit into them as business slowed. In those initial months, Citigroup, a lender to 60 of The Am Law 100, saw firms dig 25 percent deeper on average into their credit lines than a year earlier. Firms that never tapped credit lines now wanted written authorization that they could use them in case things went bad. It’s not uncommon for those lines to exceed $50 million at big firms, lawyers and bankers say.

Paying those credit lines down normally isn’t a problem. Collections begin coming into firms in significant amounts by the middle of the year, and usually by the end of the summer, firms have paid down their lines. But this year, firms billed less and clients were slower to pay, especially after the financial crisis in September.

And that meant firms had a tougher time paying down what’s supposed to be short-term debt. Telling statistics: As of the end of September, Citi had 30 percent more loans, or $6 billion, outstanding. Wachovia Corporation’s normal paydown levels were down by 30 percent.

Credit line agreements with most banks, such as Citigroup and Wachovia, require the lines to be clear for 30 straight calendar days within a 12-month period, often no later than December 1. Several firms, bankers say, didn’t pay until the last minute.

Meanwhile, firms that didn’t secure a credit line early last year, and who went looking for it in recent months, discovered that credit wasn’t cheap anymore. “We just took out some lines from several different banks,” says the head of one firm, who asked for anonymity to speak frankly. The firm let its credit lines expire in 2003 and relied instead on capital contributions from partners. The banks used to give the firm credit for free. “Now we had to pay for the lines,” he says.

Rates have doubled, from below 1 percent in 2007 to 2-3 percent today for the top 50 firms, says Andrew Johnman, head of professional services at Barclays plc. “If they need additional money or if they need an amendment to their credit facility, then we reprice it to current market pricing,” he says.

In addition, banks are demanding more than interest. Wachovia, for example, was willing to have a credit-only relationship with the firms. “Going forward, we’ll be looking to make it be a more complete banking relationship,” says Peter Haugh, managing director of legal services at Wachovia. The banks, in other words, want deposits.

Landers of Gibson, Dunn is effectively acting as Citigroup’s undertaker for Heller and Thelen, as he has done in the past dissolutions of Brobeck, Phleger & Harrison; Coudert Brothers; and Jenkens & Gilchrist. “The situation in all of them is remarkably similar,” Landers says. Usually a firm takes on loads of debt for rapid expansion. Something happens to affect the firm’s revenue. Less money exists to pay down the debt, and firms cut distributions. That, in turn, encourages partners to flee for more money. Repeat cycle.

“Banks get very nervous when there’s a crisis of confidence,” says Latham & Watkins partner Peter Gilhuly, who is advising Thelen on its dissolution. DiPietro, not naming Heller and Thelen, says Citi had firms that have dissolved recently on an internal watch list of potentially troubled firms as early as a year ago. “If we see a large number of people leaving and going to higher-quality firms, then we say we’d better take a look,” he says.

Workouts, where Landers would show up, come next. Heller and Thelen eventually breached loan covenants that restricted how many partners could depart in a year. The restrictions vary from firm to firm, from 10 to 25 percent, Landers says.

Yet it’s not just troubled firms getting more scrutiny. Citi actually has been requiring more frequent financial information from any firm this year that came in asking for new or bigger credit lines, DiPietro says. Howrey, for example, is getting the information requests despite adding 37 partners and losing only three last year.

The alternative to all this borrowing is to demand more capital from partners. DLA Piper in November said that it would ask its 275 income partners in the United States to contribute capital to the firm and reduce equity partner compensation to shrink its reliance on credit lines from its banks.

Whether that’s better is debatable. On the one hand, now individual partners at DLA may need to take out loans for the capital payments, one banker says, “so the firm will not quite be ‘independent of the banks.’ ” Yet with the banks in trouble, who could blame DLA for seeking some breathing room?

Going into 2009, firms like Howrey are trying to figure out how to milk the credit lines they have without causing trouble. “In a perfect world, what we’d like to do is stay out of it for the 30 days at the beginning of January,” Howrey chief financial officer Patrick Hennessy says. The firm could, if needed, run on its credit lines the rest of the year and pay them off right before they expire. And Citigroup, ready to negotiate, will be there waiting.