As time goes on, the nature of bankruptcy news becomes more and more unusual. Dominating the bankruptcy news cycle lately has been the meltdown of the uber-law firm, Dewey LeBoeuf. Over the past twenty four hours, it’s been reported that a liquidating chapter 11 is imminent, triggered by bondholders.
To most restructuring types, the most interesting aspect of this story is the fact the law firm obtained bond financing. According to public sources, Dewey issued $125 million in bonds in 2010 in a private placement. According to reports, the bonds were purchased primarily by insurance companies.
Dewey is not the only firm to have obtained financing by a debt securities offering, but it is one of the very few. The traditional financing of a law firm is a combination of partner-infused capital and asset based loans from banks. A major source of capital available to virtually every other type of business – sale of equity in private or public capital markets – is not an option for law firms. Under state law, non lawyers may not own an interest in a law firm.
It’s rare, if not unheard of, for a law firm to be the subject of an operating chapter 11, as opposed to a liquidating one. Despite some earlier rumors to the contrary, Dewey is no exception. A complicating factor will likely be Dewey’s bondholders. According to recent reports, there was active trading in Dewey’s bonds last week. The ultimate composition of this part of Dewey’s capital structure will likely have a significant effect on its workout, whether in chapter 11 or not.