iron clad guarantee, AG will get the bank to refinance, page-47

That's exactly the point.

An insolvency appointment would completely destroy business value. The business is reliant on professional staff working files and generating revenue. A law firm cannot prevent a client from taking their work elsewhere if they want to. An appointment would see all the files disappear with staff to other law practices. I have liquidated a law firm previously - this is what eventuated, it would likely happen in the case of SGH in this case too.

Therefore the only way the banks can maximise the recoverability of their principal (because there is unlikely to be any meaningful reduction in costs available to SGH management to materially improve earnings in the next 12 months) is to:

• preserve their principal as debt (to the extent SGH can service it from maintainable earnings and cash flow going forward)

• converting the remainder (which is unserviceable and therefore theoretically has nil value) into equity where it might be recovered at a later date (through future dividends, sale to others following debt/equity swap if the SP discount is big enough etc.).

The banks might also achieve this through selling their debt to a distressed debt fund (who would undertake the steps above) due to possible 'reputational risk' (read 'bank bashing') for the bank undertaking such actions in their own name. I can't see the banks keeping their loan capital locked up in SGH earning a sub-optimal return long term hoping for debt reduction from gradual uplifts in cash flow when they could take a loss now and set the remaining loan principal to work earning a return in other businesses.

This means the biggest losers from such a scenario are existing shareholders whose equity value would effectively be wiped out through significant dilution. I think the SP decline since the earnings announcement reflects a number of shareholders thoughts that a debt/equity swap and equity dilution is a real possibility in the next 12-18 months.