Changing of the Guard

News out of San Francisco this week that the bankrupt estate has only been able to collect $8 of $77 million of Heller Ehrman receivables in the ninety days since their filing is likely to have a major impact on the competitive landscape of Restructuring practices at law firms across the country.

Let me connect the dots as to how see this event is likely to impact the competive landscape in the next ninety to one hundred twenty days.

My surmise is based on the lender blood I have in my veins from having been, early in my career, head of work-outs for a major bank (back before the upgrade to "special assets"...as if the borrower doesn't know where he is at with that nicer label). And, my surmise is reinforced by input I have gotten from the market.

There is a long history in lending of a bad result by a borrower or two in an industry quickly leading to changes in lending practices for the entire industry. With financial markets as skittish as they currently are, I fully expect that long pattern of quick adjustments to continue.

The collection rate on the Heller Ehrman receivables is dismal. (I am not commenting on the job being done by the Estate, I am commenting on the bottom line result.) Now, the rate is not necessarily out of line with what I expect from a law firm meltdown, especially in this type of economy. But, when compared to advance rates, implicit or explicit, that lenders have been using for law firm receivables, the result does not bode well for how lenders are likely to look at receivables risk with lines of credit of law firms, large or small. And, many of those lines of credit are coming up for review in the next sixty days.

So what is the lender to do who finds himself with a large line exposure, backed primarily…in essence…by receivables? The lender has to be careful less they trigger a meltdown, ala what is playing out in Philadelphia at Wolf Block. But, on the other hand, the lender can’t just ignore the problem in view of the current regulatory environment.

You can expect lenders to increasingly demand that partners back up the lines where the law firm is (relatively) heavily leveraged. Lenders have already begun asking for guaranties or sureties in cases where the firm is leveraged or a poor earner.

But, here is the real rub. The variance in the financial health of partners is immense. Some law firms might be surprised as to how many of their partners are insolvent on a balance sheet basis, especially in some of the states most deeply impacted by the downturn. While other partners have managed their personal affairs more conservatively and still have significant net worth’s.

So what happens when the lenders request updated financial statements of all those being asked to guarantee? How soon before lenders are routinely demanding joint and several sureties?

Woe be to the 45 year old Restructuring star who is at a financially leveraged firm and has managed his, or her, financial affairs conservatively.

No one wants to desert one’s partners in tough times…but no one but a fool wants to become the party to whom the lender is looking for a disproportionate share of the lender's risk mitigation.

I have already seen movement of Restructuring aces where these scenarios have been at work. You can expect to see much more movement. Like in the corporate world, those firms with pristine credit will have incredible opportunities (to attract top talent). Those firms with weak credit will quickly see their superstars bolting for the doors, before being asked to sign guaranties. And, they will bolt before the guaranties are requested, because -- once asked for -- the meltdown will be on. And, any Restructuring lawyer worth his salt knows full well that insiders are frequently at the mercy of aggressive trustees.

As this scenario plays out in the coming months, you can expect to see the changing of the guard.

New Restructuring market leaders will be emerging!

One year from now, you can expect to see Chambers listings of top Restructuring legal practices looking much different.

And, let us not forget that this phenomenon is not likely to be limited to law firms. All manner of professional service firms playing in the Restructuring arena will be impacted.

Change presents such great opportunities for the focused, the agile, and the speedy!

Want to understand more about the changing face of law firms, read the recently completed five part series, Law Firm Alert, which begins here. Do you have a friend that is at risk due to this scenario, share this post with him or her. They will be eternally grateful.