Accounts reveal debts as Cobbetts turns firms' focus to finances

Half of the UK's 20 largest law firms are carrying some degree of bank borrowing, limited liability partnership (LLP) accounts have revealed, as law firm debt comes increasingly into focus in the wake of the recent collapse of Cobbetts.

Accounts filed with Companies House for the 2011-12 financial year show that 10 of the UK top 20 are carrying debts, with seven seeing their debt increase since the 2010-11 financial year: DLA Piper, Herbert Smith Freehills, Clyde & Co, Simmons & Simmons, Berwin Leighton Paisner, Irwin Mitchell and SJ Berwin.

Herbert Smith's accounts show that it had net debt of £50m at the close of the 2011-12 financial year, up 22% on the previous year's figure of £41m. The figure equates to around 10% of the firm's annual turnover of £485m, and 40% of its £135m operating profit.

Clydes' LLP filing shows the firm had net debt of £38m at the end of 2011-12, equating to 13% of revenues and 55% of its operating profits of £69m.

Herbert Smith commented: "Our debt levels are in line with the operations of the firm, and structured to meet our specific requirements over a number of years. Clearly, we have been in a period of some expansion and the overall level of our debt is consistent with what we would expect at this point in our trading and investment cycle."

Clydes said its net debt had been increased marginally by the fact the accounts included just six-month's revenue contribution from legacy Barlow Lyde & Gilbert, but covered the full year's combined debt for both firms, which merged in November 2011.

Simmons reported net debt of £52m, a figure which equates to 98% of the firm's operating profit. However, the bulk of this (£48m) is revolving capital loans taken out by the firm instead of by individual partners to capitalise the business. If loans were reclassified as members' capital, net debt would stand at just £4m.

Firms improving their borrowing position during 2011-12 included Norton Rose, Bird & Bird, CMS Cameron McKenna, Addleshaw Goddard and Eversheds.

Cobbetts, which was last week taken over by DWF in a pre-pack deal, had loan and overdraft facilities of £10m with major creditor Lloyds TSB ahead of its demise, while Halliwells, which went into administration in 2010, had debts of around £22m in the months leading up to its collapse.

However, experts said debt is not necessarily indicative of financial problems. RBS head of legal services James Tsolakis (pictured) commented: "Measuring debt levels against revenue or operating profit in this way is relevant and interesting to a degree but not crucial in assessing a firm's financial position.

"Firms that excessively rely on overdrafts may encounter more difficulty than those firms utilising committed term facilities, as improving the firm's capital structure in this way allows debt to be more appropriately structured."

Outside the UK top 20, DAC Beachcroft saw net debt triple during 2011-12 to £34m, up from £10m the previous year, while Kennedys' borrowings almost doubled from £9.5m to £18.4m. Elsewhere, LG saw debts rise to £7.5m from £4.2m against revenues of £56m.

BDO head of professional services Nick Carter-Pegg added: "Banks have been tightening their lending to the legal sector generally over the past few years, going to back to Halliwells' collapse.

"Overall, firms are now better managed, having increased their focus on finances and having better management teams, including professional managers."