Ausbert, from our earlier discussion, I can see your point but not the argument. According to Tram09's post
17552287, what the MF article stated was:
"A debt for equity swap would involve something like Slater & Gordon issuing $100 million new equity in the firm to the banks for every $50 million of outstanding debt."
Now, if there has been a typo and the reference to "$100 million new equity" is actually a reference to "100 million new shares", then your 50c ISP makes sense. But otherwise, the article is suggesting issuing equity on a $2:$1 basis in a debt /equity swap.
Now, regardless of anything else, if your 100 million new shares is actually the correct MF statement, then to remove the $740M debt overhang would require 1.48 billion new shares, if all done @50c. But I can't see why the banking syndicate would do this because presently they are in a secured, priority position, which would be reversed with them going to the bottom of the heap if they converted their debt to equity.
Presently, with shares trading at 27c such a DfQ swap would revalue their post converted holding at $400M assuming that 100% of the net debt was converted. Why then, in converting would they take a >$300M upfront loss in circumstances where they could not readily liquidate their converted shares?
By retaining their position intact, even if they forced a liquidation, they would likely realise this amount or more?
For a DfQ swap to be compelling therefore, the banking syndicate needs to see that they are receiving value in return for both the debt, the position and the security that they are giving up. In all likelihood, this will only be achieved through the syndicate (if a DfQ swap is done) doing so at a sizeable discount to the prevailing /actual share price (not at a premium to it).
As for the reference to billions of shares, a bit further on in the MF article, the following was stated:
"Alternatively Slater & Gordon could issue say $500 million of convertible notes to the banks that would become scrip at a future date at say 5 cents each."
Now, how many shares does this convert to if $500M in convertible notes is later converted at a 5c share issue price? The resulting number is very large indeed.
So, no matter which way the MF article reads, if as it suggests, some form of DfQ swap is done, or convertible notes issued, then:
1. this will be done at a discount (not at a premium) to the current share price;
2. the dilution factor will be very significant indeed; and
3. it will not take too much of the debt to be swapped in order for there to be at least another 1.0 billion in new shares on issue.
Even if you assume a 27c SP, then to eliminate $740M in net debt on a nil discounted basis, would require 2.74 Billion new shares to be issued.
The numbers involved in any possible DfQ swap are indeed really of this sort of potential size or even larger, depending on the circumstances presented.
More likely, the banking syndicate will move to unwind the UK acquisitions and bring SGH back to a slimmer, fitter AU specific business. So, there will be a mixture now of OPEX cuts (a must have), marginal value exits (dropping the weak or marginal cases no matter where located - a near on definite requirement going forward), serious headcount reductions (although if the UK is exited, this takes care of itself), asset sales (brought about by the UK exit, etc), some measure of debt shaving including some measure of debt for equity swap, and at this time, the possibility of some form of future dated capital raising, even if by or through the issue of future dated options at this time rather than anything else (ie: debt for equity swap with matching options exercisable at a certain price in the future, etc).
As for maintaining the loan facilities in place (ie: as an alternative to any of the above, etc), I had earlier suggested that the pricing of this would be risk adjusted by up to 400bp or more. Lakota6 however has suggested that the likely range could be lower at 250bp. Whilst I'm not entirely inclined to agree with him on this, I am however agreed that the likely repricing range (if done) will be in the range of 250bp - 400bp.
With Dec15 interest expense at $15.476M on $793M in gross debt, already it seems that rates have moved up from the Jun15 position of 2.2 - 2.5% to upwards of 4% (marginally higher). Going forward (assuming the status quo with adjustments made is accepted), I still see the rates moving towards 6.5% (so at least +250bp from Dec15 position, or +400bp from Jun15 position). If so, the annualised interest expense will quickly top $50M. However, even if retained at 4%, the future interest expense will annualise out at $32M+. Still, very significant, indeed.
