Slater & Gordon (SGH) shares dropped more than 30% at one stage yesterday in the wake of a statement which all but confirmed the company was broke and tottering on the edge of collapse.
The shares ended down just on 26% at 20 cents.
In the statement Slater & Gordon confirmed it is in talks with its lenders to recapitalise the group as the terrible $1.225 billion move into the UK legal services sector pushes the company closer to the edge.
It said that it will “continue to work with its lenders to agree on a recapitalisation plan" which it expects to conclude in the "coming months".
The statement to the ASX followed a meeting between Slater & Gordon and its lenders to discuss a recapitalisation plan.
The meeting was held late on Wednesday evening to accommodate UK banks.
The meeting had to be held this week under new terms agreed to with lenders that are owed around $700 million.
Slater and Gordon also said yesterday that group cash flow remained a challenge, and while net operating cash flow would be better than the $20.9 million outflow over the second half of 2016, it would remain negative, meaning it will have a great deal of trouble repaying interest and other debts. Hence the talks with the banks
Usually these involve debt to equity swamps, meaning existing shareholders are destroyed because the swaps usually involve millions of new shares.
Those investors who topped up their holding in the 2 for three $890 million equity issue a year ago will be especially unhappy as it’s the poor UK deal (which the issue helped finance0 that has brought Slater and Gordon to the edge of collapse.
Those shares were priced at $6.37 each, and are now worthless so the destruction of value by the deal has been mind boggling.
The company’s market value at just over $70 million is exceeds the value of the business, a 10th of the reported $700 million Slater and Gordon owes its banks.
The group flagged a further losses in the UK ahead when it reveals interim results for the 2017 financial year, due February 28.
It said yesterday there could further potential write-downs of the $327.2 million of goodwill relating to its UK assets as recent trading experience and a slower than expected recovery hit earnings.
"It is clear that based on performance expectations and liquidity, the continued support of the company’s lenders is fundamental, as current levels of bank debt exceed total enterprise value," the company said.
The company said its troubled UK operations were showing signs of improvement, but the recovery was slower than expected. Revenues were lower than expected, but earnings and cash were forecast to show an improvement as it cut costs.
And the injury law firm also pointed out that the Australian business was starting to show signs of being affected by negative sentiment about the business and increased competition in key segments.
That loss of standing means potential clients, worried about Slater and Gordon’s financial health, are taking their cases to other firms. It’s a loss that has to be staunched before it turns into a flood.
