Debt levels at the top UK firms by revenue have increased to £185m compared to £138m last year.
Data taken from top UK firms’ annual LLP filings at Companies House reveals that Simmons & Simmons, Addleshaw Goddard, Bird & Bird and Herbert Smith are the most indebted of the leading firms.
Herbert Smith saw its debt level rise by £17m to just over £41m worth of net debt in 2010/11. It increased its overdraft facility by £11m to £18.6m with part of the new loan going to fund the fit out of the firm’s new Belfast office. The firm saw its turnover rise by 3% last year to £465.1m.
Addleshaw Goddard was also forced to take out a large loan to fund its property costs when it moved to Milton Gate in 2009. The firm now has around £24m worth of net debt.
‘It is important to have some liquidity, just in case there is some disruption to cash flow.’
James Tsolakis, RBS
Simmons & Simmons had £51.1m worth of net debt on its books in 2010/11, down modestly from the 2009/10 figure of £52.9m. Bird & Bird also saw its debt levels rise by E7m to E25.7m in 2010/11.
The old adage is that it’s turnover for vanity and cash for sanity. But debt is not necessarily good or bad – mortgages or loans to fund property moves can be money well spent, with both Addleshaw Goddard and Herbert Smith using their debt to cover property costs.
However, the maturity of the loans does matter – short-term loans are a risky bet and make bank managers uncomfortable.
‘There isn’t a normal or standard amount of debt for any firm,’ said James Tsolakis, head of legal services at The Royal Bank of Scotland. ‘Magic Circle firms will have lines of credit available to them because it’s financially prudent and good treasury management. They will have money for an Armageddon scenario but they won’t use it because they don’t have to. It is important to have some liquidity, just in case there is some disruption to cash flow. Most of these firms have a huge international infrastructure to support.’
On the flip side, our data shows us that many firms are paying off their debt or choosing to amass cash for a rainy day. For instance, Berwin Leighton Paisner paid back over £18m worth of loans after a bumper year that saw it increase its revenues by 16% to £221m. The firm now has a surplus of £900,000.
Unsurprisingly, Magic Circle firms emerge as the most cash-rich conservatively managed group of firms: Freshfields Bruckhaus Deringer has around £89m worth of cash on its balance sheet. While Allen & Overy had £106.6m worth of cash on its books, up from a figure of £91m in the previous financial year. Ashurst has also amassed a large amount of cash at the bank, with around £34m of cash in hand.
Saving for an Armageddon scenario may be prudent in this economic climate, cash can be used as a buffer to pay for the tax man and to fund fixed costs in difficult economic times, but there is little need for law firms to build up vast cash war chests and most will choose to pay cash out as profit to partners.