Loading up the truck, page-572

There will not be a capital raising. Ask oneself the question:

What has changed since the banking syndicate happily agreed to a new facility in June? Yes I did write June.

The company has informed us that UK lawyers and NIHL is slower than expected in the first half. SGS and Aus lawyers is performing as expected. We know cash flow will be negative this half - it was known in June that cash flow is geared to the second half. We now know that due to slow first half full year guidance might not be met. Nothing to suggest work is lost, just might carry over to next year. There is a fresh look at goodwill, as they are required to do every year. Currently SGS goodwill is valued at $125m greater than on the book so theoretically it could revalue by reducing to the tune of $125m and have no impact on the books. Wording suggests there is likely to be some statutory profit impact but given there is already room to discount it $125m it is probably minimal impact to the book.

There will be closing of some parts, realignment of resources in others. There will be belt tightening where it is warranted. All part of everyday life in a sophisticated business with many moving parts, particularly during integration of a major acquistion.

The company has changed its auditor, that was flagged. It has changed its CFO, that was not unexpected. The ASIC review had started in June at the time of agreeing the facility.

The only thing of note - and its is a big thing - is the share price has plummeted. Of course the lender wants to have a look at the inner workings, it would be strange if they did not under the circumstances. A falling share price and an announcement that regulatory change is on the agenda is ample trigger for a fireside chat. McgrathNicol provide a range of business consulting functions, it is unfortunate their name should be mentioned in the same week as Dick Smith. Why not ask an independent consultant to verify whatever it is that Salter and PwC come up with. It is obvious lenders will want reassurance of the figures discussed just seven months ago to underpin servicing debt for the next five years. Obvious because of the high profile noise around the company coupled with a share price suggested something terminal.

I'm not convinced that a hard line will be taken on what might be termed 'normal covenants'. Yes company strength will be taken seriously and priority but in the slightly unique case of Slater at this time, I suggest if there is some covenants sailing close to the wind they will be waived - provided satisfied clear line of sight how cash will be generated. Again, nothing fundamental has changed since June.

Interesting to note that PwC, the company reporting far end of aggressive accounting at Quindell, were rumoured to have been in discussion with Slater around the time of acquisition decision. I think PwC will have a good handle on the potential within SGS. Aggressive accounting has nothing to do with underlying value just timing of reporting. So PwC walking McgrathNicol through the model and providing calculated probability of cash generation will do the trick. McgrathNicol file their report with lenders, covenants build in extra clauses that allow for greater flexibility and Slater get on with business.

A capital raising cannot be an option. It would not make sense. It is not acquiring new businesses so it doesn't need cash for that purpose. It is at its peak of requiring working capital and has ample headroom - as flagged for the first half of a major acquisition. If Slater cannot demonstrate a runway for the next five years generating a minimum of $1000m (service debt and other) then how will tapping more cash make a difference? The model either works or it doesn't. Who in their right mind would inject fresh capital into a model that doesn't work? It is not like a resources company where is can be seen extra cash to get it through a cycle will reap rewards later when commodity prices bounce. Slater is a law firm with revenues that are predictable, it does not work in cycles. Therefore fresh capital to keep it afloat where there is no confidence in generating future revenues would not make sense.

I understand banks are not a charity but I also understand they want the return expected when agreeing to the facility only eight months ago. After they have reassurance that the roadblock is temporary, by fully understanding the cause in UK, then converting current recievables and WIP will be seen as a source of cash injection. As a few have said on here, a professional services firm value is in letting it get on with billing fees, less trigger happy where there is not ready inventory to flog off. I doubt very much there would be a ready market to purchase partial completed legal cases. I know that is what Slaters do and did but not under fire sale conditions. Lenders will want to support the company because it will generate the return they are after, it provides a high profile consumer interest service and may have other far reaching consequences that would want to avoid.