U.S. Firms Keeping Debt Levels Low, Citi Says

Photo by Miran Rijavec (Flickr/Creative Commons)

U.K. law firms are borrowing at record levels, the Financial Times reported this week, citing research from a finance provider.

The report raises the question: Are U.S.-based firms also wading into financing after years of cutting back?

According to data from the Citi Private Bank Law Firm Group, while U.S.-based law firms did increase their borrowing slightly in 2014, the debt levels remain well below the record
highs of 2010 and below the averages from 2005 to 2012.

Dan DiPietro, the chairman of the group, said in a telephone interview that U.S. firms remain debt-averse, relying instead on their partners “more than ever to keep their financing levels low.”

The exceptions, he said, arise when a firm has a one-off need, such as the relocation or renovation of a major office.

That type of expenditure sometimes prompts firms to seek term financing or a letter of credit.

“But if you control for these big-ticket, once-in-a-generation events, then we’re not seeing any increases in the level of borrowing,” DiPietro said. For U.K. firms at the “top end of the market, there also isn’t any significant trend of borrowing more,” he said. “It’s business as usual.”

According to the bank’s data, the average debt held by firms from 2005-2014 has dropped to 4.5 percent of total assets from 7.6 percent. The high-water mark occurred in 2010, when the average debt was $20.4 million, a figure tantamount to 8.7 percent of total assets.

While law firm debt is dropping, there’s a countervailing increase in borrowing by individual partners, spurred by firms’ requiring more capital.

Overall, the 200 largest firms as ranked by the American Lawyer magazine required an average of $350,000 a partner in 2014, a 3.7 percent increase from 2013. The 50 largest firms required an average contribution of $492,000, up from $477,000 in 2013.

For those in firms outside of the top 50, the numbers are smaller, although the 2013-14 percentage increases were larger. Firms ranking from 51 to 100 averaged a 6.5 percent increase, with capital contributions rising to $311,000 from $292,000. For those in the top 200, requirements grew to $170,000 from $160,000, reflecting a 6 percent jump.

As a result, new and lateral partners, as well as long- standing partners facing an uptick in the amount they must pay their firms, sometimes need outside funding.

Lawyers who are contemplating financing to pay their share shouldn’t fret.

“Very few are rejected. The number of partners who don’t qualify is de minimis,” DiPietro said.