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updated Mar 04, 2011
By Maria Laus, Author - LawCrossing
01/06/09
Firms are going further into their credit lines and taking longer to pay them off. The dissolution of Heller Ehrman and Thelen also make bankers cautious, particularly because the firms went down not because partners fled but because of heavy debt commitments. The situation is similar in all debt dissolution cases. Usually a firm takes on loads of debt for rapid expansion, then something happens to affect the firm's revenue. Then there is less money to pay down the debt and firms cut distributions. That encourages partners to flee to banks for more money, and the cycle is repeated. When banks see crises in confidence—as in many partners fleeing a firm—they become more and more hesitant.
While paying down debts normally isn't a problem for firms (collections begin coming significantly by the middle of the year), firms billed less this year and clients were slower to pay. As a result, firms had a tougher time paying down short-term debt. According to Law.com, Citi had 30% more loans at the end of the financial crisis in September. Firms that didn't lock down a line of credit early in the year found interest rates to be much more expensive. For the top 50 firms, rates have doubled from below 1% in 2007 to 2 to 3% today.
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