Slater & Gordon looks to be winning over its bankers

Loss-making global law firm Slater & Gordon looks like it will survive as a going concern after winning the confidence of its banking syndicate which is owed more than $740 million.

Chanticleer understands the major lenders to the firm are inclined to support a restructuring proposal and debt reduction plan that must be completed within the next 10 days.

It is believed that the forensic accountants working inside Slater & Gordon on behalf of the banks, McGrathNicol and FTI Consulting, on Tuesday delivered a lengthy report to the banking syndicate.

The debt restructuring plan and "performance improvement program" being negotiated by Slater & Gordon chief executive Andrew Grech is predicated on boosting profitability at the core Australian business.

The Australian arm of Slater & Gordon was the only part of the business which made a profit in the six months to December, prior to impairments. Its earnings before interest, tax, depreciation, amortisation and movement in work in progress and prior to goodwill impairment was $16 million.

Its UK arm lost $34 million before impairments.

The firm's overall half-year loss after impairments was $958 million. The most worrying aspect of the half-year results was the level of negative cash flow in the UK.

Slater & Gordon has been in the equivalent of a death spiral since November last year when it reaffirmed its 2016 financial guidance. However, around the same time it said proposed changes to road accident whiplash cases in the UK would negatively impact upon its business.


That was the nail in the coffin for most professional investors in Slater & Gordon. Since then the stock has lost about $1 billion in value and is now trading around 25c a share. It is a plaything of day traders and less sophisticated retail investors punting on a miracle turnaround.

The firm's total equity is now worth $90 million. But it is likely that will be burned up as part of the restructure.
The debt time bomb at Slater & Gordon can be sheeted back to the company's $1 billion acquisition of a division of UK firm Quindell. This disastrous deal was funded with debt and through a rights issue priced at $6.37 a share.

The business purchased from Quindell has since been written off.

Unfortunately, many staff of Slater & Gordon borrowed money to buy shares in the firm. At the last full-year accounts in June their full recourse loans were $8 million.

When the banks, in effect, took control of Slater & Gordon in January this year they were faced with the difficult task of extracting value from a company with significant assets held in work in progress (WIP).

WIP refers to thousands of legal files which will one day deliver cash when they are settled or won on behalf of clients.

Also, the other main assets of the firm are the partners and lawyers who attend work each day.

The banks realise that without a debt restructure the company would fall into either administration or receivership.

If a debt restructuring is not negotiated by the end of this month, the lenders to the company have the right to ask the company to repay all of its debts by the end of March 2017.

Investors in Slater & Gordon were reminded of the potential death knell this would ring with the lodgement of its UK accounts.

The UK accounts signed by auditors Ernst & Young on March 31 and filed on April 8 said: "The directors, having given consideration to the current financial forecasts for the group and the company, the engagement with the banking syndicate and its financial advisers, the comprehensive review and the performance improvement programs being implemented by management, consider the going-concern basis of preparations is appropriate for a period to 31 March 2017."

Insolvency would be a scorched earth policy that would destroy the business and leave the banks with virtually no opportunity to recover anything. It would be very expensive to wind the business up because of leasing commitments and other costs. The partners of the firm and other lawyers would be smart enough not to have assets in their own names.

Insolvency experts have told Chanticleer that in the event of insolvency the largest single asset could well be the company's directors and officers insurance policy.

That helps explain why lenders are supportive of the company and its plans which were outlined at its results in February.

However, Grech will be under tremendous pressure to cut costs and extract cash from WIP as quickly as possible.

However, throughout its short history as a publicly listed company Slater & Gordon has had considerable difficulty showing that it can convert WIP into cash flow.

Nevertheless, the lenders have been willing to accept that the Australian arm of Slater & Gordon has a strong brand value. They have accepted the company's view that there has not been deterioration in client engagement.

Competitors say Slater & Gordon is losing clients in Australia. Its major competitor is Maurice Blackburn. Both firms specialise in class actions and no win no-fee court cases.

Slater & Gordon's class actions business has hit a rough patch in recent times. Many of its fishing expeditions to generate new business have fallen flat.

The firm relies on a range of different parties including hedge funds to pay for its class action activity. These litigation funding companies only get involved after there has been a minimum amount of shareholder losses, usually about $30 million.

The class actions launched by Slater & Gordon and Maurice Blackburn have become critical to the enforcement of the Corporations Act because the Australian Securities and Investments Commission had ing laws??????????  

A bank rescue of Slater & Gordon would mark a welcome change from the recent spate of bad debt explosions at Australian companies including Arrium which owed the big four banks about $1 billion.

That is not to say that the banks have not already been active in dealing with the Slater & Gordon debt problem.

In its latest presentation to the market, Westpac Banking Corp, which is the leader of the Slater & Gordon syndicate said its "stressed exposure" in property and business services increased by about $300 million.

It is generally accepted among banking analysts that this refers to the Westpac exposure to Slater & Gordon.

The notes to the table which disclosed this amount said it related to one client facility downgrade. That means
Westpac has impaired the loan.

Any optimism about Slater & Gordon's future should be tempered by the fact that banking syndicates can be similar to herding cats. While the leading banks may support a debt restructure it is possible a recalcitrant bank will stop a deal going ahead.

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