Shares in embattled law-firm Slater & Gordon soared yesterday after the company told the ASX that it had escaped collapse by doing a deal with its bankers to avoid bankruptcy.
As a result, the banks have given it more time, but shareholders will pay the cost of not having any dividends until 2019 at the earliest, and almost certainly longer.
In a statement to the exchange, the company said it had agreed to amendments to the terms of its existing facility agreement that ensures loans do not have to be repaid until May 2018.
This was a “clear sign of endorsement” for the company’s "improvement program", the statement claimed.
The shares jumped, more than doubling at one stage (to 68 cents) from Friday’s close of 29.5 cents, before easing to end the day up a still very solid 100% at 59 cents.
But that is still a long away from the all time high of $6.61 hit a year ago.
CEO Andrew Grech told the market that as a result of the agreement, management will remain focused on “improving profitability and cash flow, and to reduce debt". And that focus will have to intensify if Slater & Gordon is to meet an new, aggressive repayment schedule.
The law firm had previously said it had until May to negotiate new terms with its lenders, led by National Australia Bank and Westpac (and including Citigroup and Macquarie) or be forced to repay the debt within 12 months, a move that would have seen it slide into an inevitable default.
Under the new agreement, Slater & Gordon is due to repay $480 million of debt in the 2018 financial year and $360 million in 2019, which are now in the form of "term loans".
As part of the new agreement, Slater & Gordon has agreed to new financial convenants, more-frequent reporting to lenders, and said it had agreed not to declare or pay any dividends.
As part of the agreement Slater & Gordon has agreed to pay an an “amendment fee” to its banks either in the form of cash, or performance warrants (a form of equity).
The warrants are structured to give lenders "upside" in any gain in the market capitalisation of the firm, ahead of a refinancing or maturity, through the placement of shares.
More than 55% of the lending group will take the payment in the form of cash, which S&G said would result in a maximum dilution to existing shareholders by 6% to 7%.
Slater & Gordon said it did not require shareholder approval to issue the warrants, a statement that could upset some aggrieved holders unhappy at the massive loss of value in the past year.
Slater & Gordon has had a tumultuous year after it agreed to pay $1.3 billion to acquire the professional services division of Quindell, a London listed firm. That acquisition was funded with new equity and bank loans. The company’s future has been placed in doubt by that deal because the company is not producing enough cash to repay debt.
So what are the chances of Slater & Gordon surviving? Well this is what The Financial Review’s Chanticleer column wrote yesterday:
"To get an idea of the task facing (CEO) Grech and his management team it is worth noting that since it was listed Slater & Gordon’s net operating cash flow over the past five years has totalled $164 million.
"Even if Slater & Gordon achieves the highest annual cash flow of $54 million achieved in 2014, it will still be $380 million short of repaying its first tranche of debt in May 2018.
"But it has bought much-needed breathing space. The amendment to the debt facility was provided after Slater & Gordon provided the banks with detailed cash flow and earnings forecasts going out several years.”
A big ask.
