29 February, page-37

The banking syndicate will not accept the status quo, not without there being serious changes made. If these changes are not made then anything is possible including a highly dilutive capital raising and /or a highly dilutive (not accretionary) debt for equity swap.

Quite simply, serious OPEX cuts are required, not just to restore margin but also to provide the necessary breathing room to permit the Company to trade out of its current circumstances.

I've already said that I believe the banking syndicate will support SGH in the future but only if significant efficiencies are secured in the process. In these circumstances, the banking syndicate will likely extend the existing terms (1/2 repayment presently is required by Jun18 which on present drawdowns is likely upwards of $400m, not counting the interest).

The other price of support will be a Te-rating of risk by with WAV interest likely in the 4-5% range or higher going forward.

As for OPEX reductions, these are necessary as presently SGH keeps on growing with no semblance of efficiency, management or effective control in place.

Many of the acquisitions have retained their own identities, their own management, their own duplicated support functions (HR, marketing, media, etc), even their own pre-existing "partnerships" in place without any changes being made. No wonder getting effective financial and management information has proved so difficult.

One of the reasons why acquisitions are made is to aggregate the acquired results in terms of building a bigger, better whole. There is simply no reason why each of STOB, Nowicki, Bannister, even Cox West should be maintaining their own separate identities, including duplicated /parallel management, partnerships etc all in place. Otherwise what is the real strength of the Slater & Gordon brand?

Some have suggested that cutting for the sake of survival is not warranted. Cutting and driving cost efficiencies however should be part of a continuous improvement exercise (ever vigilant, always practised). To not do so risks potentially a future train wreck happening with no-one even holding on to the dead man's switch.

Equally, there is simply no real excuse for a company with 5350 employees at Jun30, to have grown to 5500 by early December when the Bright* press release was issued. This is the sort of example that causes banking syndicates to think twice about things.

Employment costs are rising rapidly and are now averaging in the high $90s - at least $93,000pa in direct costs (ex-super, provisions, payroll tax, etc), so by simply moving to make staffing levels more efficient / effective could secure significant OPEX reductions on a future recurring basis. Some may not like this being done but there are a number of ways to recovering future profitability.

One of these is in making OPEX about as efficient and effective as it can be particularly given that SGH' margins (PIL, GEL, in AU and in the UK) have all been falling in the last 5 years (circa halved in this time).

So, if SGH was fair dinkum about driving both shareholder and stakeholder returns (including for its clients) why then wouldn't it also be tackling constructive business efficiencies. Now, if management don't do this, then the banking syndicate surely will drive this, both in going forward and as a price of their continuing support.

But as for a capital raising - no. And especially no if management fully co-operates with what the banking syndicate needs to see going forward.