Barclays offloads Slater & Gordon debt to BAML: sources, page-80

If this report on the latest sale of sale of SGH's debt at 22c in the $ is correct, it's a massive indictment on both SGH board and management - and also the banks.

The 2017 1st half report was a horror story. All main performance indicators headed down compared with previous 6 months to June 2016.

The only positive metric they could point to was normalised EBITDAW. But even this was less than $8m, a decline of about 85% from the June six months, and normalised EBITDA was negative by about $7m, and actual EBITDA about negative $25m (all before impairments).

So it's a company with more than $700m in debt, negative EBITDA of about $25m for the most recent 6 months, and all main indicators heading down. On top of that it's reasonably clear that they also need a cash injection to carry on trading.

So overall as bad as you can get, and you would assume it's been terminal for a while now to anyone receiving monthly management accounting data with basic business and accounting skills.

Where have management and the board been on this ?

It almost seems something worse than incompetence that no realistic remedial action was taken when the problems first became apparent - which was in 2015 immediately after the purchase of the Quindell business and its associated negative cash flow and absence of profitability became apparent, and then their apparent lack of comprehension of how the position was deteriorating after that.

While all this was going on, board and management acted like they were the Kremlin in the 1950s, refusing to give shareholders any updates outside of minimum statutory requirements.

Note - this is still apparently going on - with (reportedly) SGH proposing a scheme of arrangement to the banks (equivalent to a takeover) without bothering to inform the market.

The AGM was 4 November last year, and even at that stage there was either no acknowledgement or no knowledge of how badly the businesses were performing in 2017 1H.

Skippen's remark at the AGM that things were broadly on track against budget seemed suspicious at the time, given there was zero information as to what budget was.

But some relied on that statement as evidence the PIP was working, and shareholders would be justified in feeling misled on that (another CA ? - if there was anything to fight over).

The only organisations who will be happy at the moment with recent decisions will be Citi and Macquarie, both of whom reportedly sold their debt for 38c or more in the $.

The organisations who bought that debt will be going through a serious case of buyer's remorse now - especially after they read of the sale at 22c in the $ for a larger parcel of debt.
The chances of recovering 38c in the $ on the debt are likely slipping away as each day passes.

The banks do not come out of this looking good either.

I'm a shareholder in both NAB and WBC, and (leaving aside the decision to lend in the first place) can't say I'm happy with the way they've handled this. I'm assuming WBC and NAB have maybe up to a $400m exposure to SGH - it's a material hit for their profitability, even though some of this has already been provisioned.

The banks apparently had the option of putting SGH into receivership last year, and imo they should have done that - as it would probably have given a better outcome for the lenders to do that, and then trade on under competent management until the group was ready to break up.

If they did want to have a receivership last year, it looks like the banks were out-manoeuvred or out negotiated by AG and JS at the meetings. An outside observer could come to the conclusion that SGH management had decided that if they were going down, they were going to take the banks down as far as possible with them. Mutual self destruction.

Personally I can't see why any of the lenders would want to keep this going as a listed entity. It wouldn't be worth the extra cost involved.

Also can't see how a formal scheme of arrangement will work - given the diversified shareholding and requirement for SH approval.

Receivership still looks like the most likely eventual outcome to me, though the parties involved may take some time to get to that realisation.