Insolvency firm McGrathNicol has released its report on the financial state of troubled law firm Slater & Gordon concluding that a restructure may be required subject to further forecasts about its financial performance.
The report comes as original lenders to the company have offloaded their loans to distressed debt funds and investment banks, amid a growing perception that a debt-for-equity swap will be needed to recapitalise the operation.
The report, titled Group Forecast Review and Recapitalisation Discussion Paper, was drafted by the insolvency firm that was appointed by Slater & Gordon's two major lenders National Australia Bank and Westpac in January.
The report says that the fundamental business is in fair shape but the capital structure needs to be reset, according to sources.
A Slater & Gordon spokeswoman said it would not be "appropriate or prudent" to comment on the report or speculation of a recapitalisation "other than to say we continue to work co-operatively with our lenders to ensure that the company has the time needed to restore earnings and reduce debt levels".
In recent weeks lenders have been offloading their debt positions at discounts as low as 38¢ in the dollar. Debt stack
Macquarie was the other major lender in the syndicate, along with Barclays and Royal Bank of Scotland, according to reports at the time of the debt raising. Citi and Macquarie led the $890 million capital raising in April 2015 to finance the Quindell acquisition.
Limited value
Jonathan Rochford of debt fund Narrow Road Capital said the debt trading suggested there was limited value in the equity of the company.
"The price of the debt is so low, investors are buying it on the expectation there will be a debt-for-equity swap. Shareholders should expect massive dilution," said Mr Rochford, who previously worked at Commonwealth Bank managing and trading distressed assets.
"If the business can generate at least $50 million of ongoing annual profit the debt buyers would be happy, but at this stage it's tough to know what the business can produce.
"There's substantial risk in executing a turnaround on this business. If they lose key staff it could turn out very badly."
Slater & Gordon shares traded 5 per cent lower on Thursday at 29¢, 64 per cent down over the year and 96 per cent below its peak of its $7.85 peak in late March 2015.
The law-firm was once a market darling. Its share price more than tripled from the start of 2012 to its March 2015 peak as it acquired practices in Australia and the UK.
But it has since joined a list of "roll-up" casualties whose share prices have collapsed as the sharemarket turned dark on their growth by acquisition strategies.
Signs of weakness
The writedown earlier this year of $876 million of goodwill relating to its UK acquisition placed it in severe financial stress.
Goldman Sachs equity strategist Matthew Ross sounded a cautious note about other companies that had achieved earnings growth through acquisitions. The broker said it was monitoring companies in which goodwill had increased sharply over two years to represent a larger percentage of total assets as stocks that could fall rapidly out of favour.
While sharemarket investors often over-estimated the revenue and cost synergies of acquisitions, it stood to punish them on first signs of weakness, he said.
Slater & Gordon, and more recently Vocus and Estia Health, were stocks that "have moved in a very short space of time from being the most expensive to among the cheapest," Mr Ross explained.
These roll-ups had benefited from a search for growth at all costs, but in a period of rising interest rates Mr Ross expected the market to be more discerning and revert towards rewarding companies that could deliver "organic" earnings growth rather than acquisition-led growth.
