King & Wood Mallesons news, updates and analysis | Page 9 of 19

King & Wood Mallesons (KWM) has agreed to tightened security over borrowings from its prime lender Barclays Bank following a period of financial stress for the law firm.

New documents filed on Companies House show that KWM’s European and Middle East arm, which Legal Business revealed in July had extended its loan with Barclays by £5m to £25m, has signed a debenture with the bank with strict provisions attached.

The debenture was made on 27 July by KWM in favour of Barclays ‘as security for your liabilities to us’. The firm has refused to disclose whether the debenture replaces existing borrowings or comes as new debt.

As part of the arrangement, Barclays has been given security over KWM’s revenue stream. Typically, banks will have a covenant in place with law firms that specifies a minimum number of equity partners or that profit must be equal to a multiple of its debt, but not a provision giving it security of its revenue.

The document reads that ‘by executing this debenture you charge to us with full title guarantee with the payment or discharge of all secured sums’. This includes ‘all your securities…all your goodwill and uncalled share capital for the time being…all your intellectual property…all trade debts now or in the future owing to you.’

A mechanism has been put in place whereby the bank can move between a fixed or a floating charge, which means the debenture will apply to all revenue in the region even if performance improves.

It will also remain in force until all sums have been repaid. The document reads: ‘This debenture will remain a continuing security in our favour, regardless of any settlement of account or any other matter whatever, and shall be without prejudice and in addition to every other right, remedy or security which we may have now or in the future in respect of any of the assets for the payment of any secured sums.’

A negative pledge and other restrictions have been imposed, with the firm required to gain Barclays’ ‘prior written consent’ before it can ‘sell, assign, lease, license or sub-license, or grant any interest in, your intellectual property rights’. This means Barclays will have to give sign off should the firm wish to open a new office, alter its existing leases whether to expand or contract, or sub-let space.

Barclays has also included a provision whereby it can appoint an administrator if KWM fails to meet its obligations. The document reads: ‘At any time after we have demanded payment of any of the secured sums, or any step or proceeding has been taken for the appointment of an administrator, liquidator or provisional liquidator, or with a view to seeking a moratorium or a voluntary agreement, in respect of you, or if requested by you, we may appoint…any person or persons to be a receiver and manager of all of or any of the assets or an administrator or administrators; and this debenture shall in any of the such events become immediately enforceable.’

A finance director at a major law firm told Legal Business: ‘This really restricts what KWM can do without reference to the bank. It’s belt and braces stuff. I’ve never seen this at a law firm.’

KWM has already been hit by a stream of partner exits over the last 24 months and undertook a restructuring in March which saw 24 partners being asked to leave.

The debenture was signed on the day that the majority of the legacy SJ Berwin partnership agreed to stump up £14m following a cash call. The move, which doubled each equity partners’ capital contribution, meant that those at the bottom of the firm’s 20-60 points ladder paid in around £80,000 into the business, while those at the top of the equity injected £240,000 into the firm. The firm also asked salaried partners to supply £60,000 each into the business.

KWM is still without a managing partner in the region following the resignation of William Boss at the start of the year and again failed to pay profit distributions, despite moving from a quarterly to a monthly-based system, last month after paying its tax bill.

The agreement was signed by European and Middle East senior partner Stephen Kon and regional co-head of tax Gareth Amdor. KWM said in a statement to Legal Business: ‘The debenture is part of the funding arrangements of the firm.’

tom.moore@legalease.co.uk

For more on King & Wood Mallesons, subscribers can read ‘Branded’ for an in-depth look at the firm.

King & Wood Mallesons‘ (KWM) European and Middle East business is mulling a cash call months after increasing its loan facility with Barclays from £20m to £25m, as the firm strives to recover from a torrid 18 months.

EUME partners at the 2,200-lawyer firm were informed at their monthly partners meeting in June that London-based funds veteran Michael Halford is leading a review of the firm’s capitalisation in the region. One likely option is asking partners to contribute more capital as the firm moves to put its finances on a firmer footing.

Separately, the EUME business, which KWM acquired when the Asia-Pacific giant merged with SJ Berwin in November 2013, has increased its loan facility with Barclays by £5m to £25m. While the terms of the debt are not public, partners were told at a meeting in March that the revolving credit facility, which had been set to expire in July 2016, had been extended and increased.

The review of capitalisation comes after delays last year on profit distributions. The firm has since decided to move from quarterly distributions to monthly payments. Stuart Fuller (pictured), KWM’s global managing partner, told Legal Business: ‘We should run a business where we pay partners regularly. Quarterly payments are a quaint feature of UK firms.’

The move to address finances comes amid a challenging period for KWM in Europe. The firm has been struggled following a series of high-profile partner exits in the last 12 months and carried out a partnership restructuring that saw 24 partners asked to leave in March. EUME was last year the worst performing member of KWM, which operates a Swiss verein model that keeps liability and finances separate, as global revenue fell 1% to $1.02bn (KWM posted revenue growth estimated at 8% but its results are depressed in conversion to the strong dollar). While not directly comparable given the overlap in reporting periods, KWM’s EUME business generated £181.3m in revenue during the 2015 calendar year compared to £191m in 2014/15.

Just weeks after the partner restructuring was announced, a six-partner private equity team in Paris resigned for US law firm Goodwin Procter in a severe blow for KWM. The Paris team, which included Paris managing partner Christophe Digoy and big-biller Maxence Bloch, is understood to have walked out with at least £8m in annual billings. KWM has lost a number of other partners with substantial billings in the last two years.

KWM has confirmed that it has ‘written to Goodwin Procter in connection with legal proceedings by KWM against it’, rather than the Paris partners, but refused to confirm details of any possible action.

KWM has pledged to re-build its practice in France, highlighting that its profitable Paris funds team was unaffected by the Goodwin departures. Nevertheless, KWM has some way to go to demonstrate that it has steadied its course in Europe.

tom.moore@legalease.co.uk

For more on King & Wood Mallesons, subscribers can see ‘Branded’ for an in-depth look at the firm.