Price action?, page-75

Interesting article..

Dan McCrum
Dear SRA, a problem solved?

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APRIL 23, 2015
By: Dan McCrum
Last year we wondered if the Solicitors Regulation Authority had contingency plans in place for the failure of a high volume personal injury legal business. Our question was prompted by the bombed out stock price for listed UK law group Quindell, share sales by the founder, and the failure of the company to generate cash.

However the Australian law group Slater & Gordon will now buy almost all of Quindell, assuming the SRA and Financial Conduct Authority approve. The personal injury giant created will be twice the size of its nearest UK competitor.

We took a close look at Slater & Gordon’s business here, but one further thing to note: for a company of its size it operates with very little cash on hand.

At the end of 2014 Slater & Gordon reported just A$16m (£8m) of cash and equivalents on the balance sheet, equivalent to less than a month’s worth of rent and salaries for the existing business. (Payments to employees and suppliers run at about A$38m per month, judging from the most recent cash flow statement, while cash received from clients came in at a rate of almost A$44m per month.)

According to the presentation which accompanied Slater & Gordon’s A$0.9bn rights issue to fund the purchase of Quindell Professional Services, along with A$375m of new bank debt, the combined group will still have just A$16m of cash on hand once the deal closes, along with A$543m of bank debt.
While some might consider the level of cash balances to be low, Slater & Gordon does have access to overdraft facilities, and has a history of running with minimal levels of cash: A$25m at the end of June, and A$9m at the end of December 2013.

Andrew Grech, managing director of Slater & Gordon, said the company has “cash facilities and the finance facility which is more than ample to cover all of our requirements with considerable headroom in all of our covenants.”

He told us, “I don’t know of a single investor that is concerned about our utilisation of our balance sheet. In fact our gearing ratio, even at the self imposed 40 per cent limit, is considered by all of our investors, certainly all of them which have spoken to me, as conservative and prudent. ”

He said, “the way to look at the cash is as part of the leverage, I don’t think it’s ever been suggested that this is a company which is over geared.”

No one is suggesting Slater & Gordon is in financial trouble. Questions for the company instead may focus on the quality of disclosure and the group’s ability to grow and generate cash from the more than 50 businesses already acquired, and the much large on it is on the verge of acquiring.

The point, from a regulatory perspective, is to consider the consequences were a large law firm to fail, as they sometimes do. In 2012, for instance, Dewey & LeBoeuf filed for bankruptcy in the US, marking the end for a group which employed more than 1,100 lawyers in 15 countries and had borrowed more than $300m.

Created by a 2007 merger between two venerable New York firms, Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, here’s how Forbes described what went wrong:
While other “Big Law” firms with more than 1,000 lawyers and global reach are suffering from the twin troubles of lingering recession and overpaying for lawyers to expand into new practice areas, few borrowed nearly as much money as Dewey & LeBoeuf did — its credit line included a private bond placement of $125 million in 2010. In the face of diminished business in 2008 and 2009, Dewey’s management team essentially ‘doubled down” by accelerating the hiring of high-priced partners from outside in an effort to expand the firm out of trouble.
In the UK, the SRA steps in at a failing law firm to protect clients if there is no prospect of the orderly continuance of business. The aim is to find other solicitors to take on the work.

While the regime has worked well enough for decades, the legal business has changed. Personal injury claims in particular have become an efficient, high volume business: the enlarged UK business of Slater & Gordon will manage well in excess of 100,000 cases per year.

Indeed, Slater & Gordon expects to have 12 per cent of the UK personal injury market, almost as much as the next three largest competitors combined — Irwin Mitchell, Parabis and Minster Law.

So there is perhaps only a handful of large specialised law firms able to take on some of the work should one of them fail. Whether they would want to, given the time and cost of assessing such low margin business, is another question. Tens of thousands of clients left without representation would be problematic.

The SRA does monitor firms to ensure they comply with Principle 8: You must run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles. The regulator can also ask to see relevant business information, such as bank balances, at its discretion. “We have the remit and we will do it in a regulated business if we think there is reason for concern”, a spokesman said.
So, danger averted.