City law firms have escaped the worst effects of the credit squeeze hitting corporate Britain, despite borrowing costs rising and a much tougher climate for smaller practices. Emma Sadowski reports

Ailing banks may be squeezing swathes of corporate Britain, but leading commercial law firms seem to be escaping the worst of the credit crunch, according to new research.

The latest Legal Week Big Question survey underlines the extent to which banks are continuing to cultivate links with large law firms, despite the ongoing credit squeeze. Sixty-two percent of partners said their firm's commercial banks had been 'supportive', including 16% who said the banks had been 'extremely supportive'.

A further 29% of respondents said their bank's stance had been 'OK', though 8% said their lender was 'not very supportive'. Only 1% viewed their banks as 'not at all supportive' in light of the current downturn. Likewise, only 13% of partners said banks had put pressure on their firm to improve performance.

Barlow Lyde & Gilbert chief executive Clint Evans said: "The banks have been very understanding that our business is counter-cyclical. They have been entirely transparent in their dealings with us."

Corporate law firms also remain broadly happy with the service they get from banks, which 49% characterised as 'good' or 'excellent' and a further 29% saw as 'OK'. Twenty-one percent thought service was either 'very poor' or 'could be better'.

The upbeat view on the profession's relationship with lenders is in sharp contrast to many companies in the UK, at a time when business representatives are widely complaining of threatening letters, withdrawn credit and spiralling interest rate charges as battered banks draw in their horns.

This view underlines the extent to which large law firms, which typically maintain low debt, are seen as attractive clients to banks, both for their own low-risk business and the chance to win client-account business.

However, there are clear indications that even large law firms are having to pay more for their borrowings despite recent drastic falls in UK interest rates. While 35% of respondents said their firm has no debt, the remaining 59% said borrowing had become 'a little more expensive', while a further 6% said debt has become 'a lot more expensive'.

The Big Question poll found that government attempts to stabilise the banking system have had some effect, with 68% of lawyers feeling their firm's money is secure in the bank. Only 6% of respondents confessed to feeling nervous about leaving money in the bank.

This finding is a contrast to the weeks after the shock collapse of Lehman Brothers, during which serious questions were asked about the safety of client money within major UK banks.

"Looking back, when uncertainty and speculation affected a range of leading banks, we did have concerns," said Slaughter and May practice partner Paul Olney (pictured above left).

He added: "We reviewed our position and are more comfortable now with the increased capital backing at UK banks and the measures taken by the Government."

Herbert Smith managing partner David Willis (pictured right) said: "Given what the Government has done in terms of recapitalising UK banks, I would hope everyone would feel quite secure. The one issue we would consider is whether to use two or three banks for client account money rather than just one. It is something we are thinking about. Currently we typically only use one bank, unless a client has asked for it specifically."

However, as recently revealed by Legal Week, Addleshaw Goddard has decided to take no chances after bringing forward £12m in profit distributions to partners to avoid leaving the money in the bank.

But, despite the generally positive response from large firms regarding lenders, it is believed that small and medium-sized law firms are facing far more pressure. In response, the Law Society is preparing to launch a series of meetings with the British Bankers Association and major lenders to explore credit-crunch-related issues.

Law Society chief executive Des Hudson commented: "We hope to develop a common understanding of our members' various business models and the factors affecting judgement of risk of lending so that we can encourage the banks to take a supportive approach to solicitors through the downturn."

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