Tuesday, 20 April 2010
Anthony E. Davis of Hinshaw and Culbertson LLP in New York sent me details of the $125 million bond issue by Dewey and LeBoeuf, which is over-subscribed. Now in the US there is nothing like the Legal Services Act 2007 that enables external investment in law firms. In fact the professional rules expressly prohibit non-lawyers having an interest in a law firm.
Anthony then asked: "Can somebody explain to me why this is different (or should be differently regulated) from raising equity capital?" (ie. as envisaged in the Legal Services Act.)
Well, I suppose the obvious answer is there's no equity. But that's not satisfactory. Imagine if the firm defaulted and had to be restructured. Who would own what, then? Would there be a debt-for-equity swap? Hardly.
The bondholders must be very confident. But then only a handful of firms have gone bankrupt...recently.
I think Anthony is right, Dewey and LeBoef has put itself in hock to outsiders. But as one colleague has said, "Debt be debt and equity be equity. Would it be any different if a firm defaulted on a loan?"