Far from the story of a prepackaged bankruptcy cum buyout is the fact that the contract with the syndicate of banks from which Dewey has loaned close to $75 million from a $100 million revolving loan is required to be renewed by the end of April. The syndicate including J.P. Morgan Chase, Citi Private Bank, Bank of America Corp. and HSBC Holdings PLC, may not agree with each other when it comes to renewing Dewey’s contract.
As reported by the New York Times earlier, the heavy exodus of partners are threatening to violate the loan agreements of the firm. Usually, such loan agreements require law firms to maintain a certain percentage of its partnerships, and typically the market requires a firm to maintain something between 75 to 85 percent. Considering the huge loan of Dewey, this percentage might have been higher, though the numbers applicable to Dewey are still confidential. But Dewey has already lost more than 20 percent of its partners since the time of signing the loan agreements and may be treading dangerously close to violation of loan agreements.
Considering the situation, the ability of Dewey to toe the debt-deadline and successfully renew loan agreements seems a herculean task. The banks would be within their rights to consider the law firm in default and demand repayment if Dewey is unable to maintain the percentage of partners required according to the loan agreements.
While Dewey is vigorously discussing alternatives and trying to restructure its credit line, the $125 million bond issue that starts maturing next year, coupled with $75 million direct loans from bankers creates a grim situation. As Bruce MacEwen mentioned on his website Adam Smith Esq., “The firm’s leadership now bears the burden of proof to convince lenders, clients and lawyers that it can survive.”
As it is for other law firms, Dewey’s main source of collateral is outstanding receivables for work done and in progress. However, with the exodus of partners, it becomes increasingly difficult to collect unpaid bills and the collateral loses its strength.
The problems are multiplied by the dozens of additional guarantees Dewey extended to partners of the firm during the merger in 2007 that formed Dewey & LeBoeuf.