SGH (ASX) Slater &amp; Gordon looks to be winning over its bankers

Originally posted by Dr.Who ↑

From memory I first mentioned debt for equity swap on HC in January this year.

My thinking at the time was the level of debt is too high and well outside the comfort zone of banks risk and compliance overseer (clear and obvious). However, remove some of the debt from the books in the form of equity and problem solved as the banks investment arm works under different risk controls. Of course that would only make sense if the banks believed in the company's future prospects to get a return from its equity. With that in mind I then hypothesised that the banks might be prepared to pay a premium for equity; reason? Reducing debt, reduce risk, and prepared to pay a premium would likley attract institutional investors to get back on board thus supporting a higher SP than the premium paid, sustainable into the future. Their equity earns its return and more.

All the above, I accepted is unlikely but nevertheless not out of the question.

Back to today. If the banks support then it must mean a belief in the business model. The capital structure is irrelevant in a sense. Keeping it simple, whether debt or equity the banks need a return. That return will not be forthcoming unless the company performs, if believe the company performs then why change the structure? If don't believe in the company's prospects then no sophisticated financial arrangement is going to produce cashflow and therefore no reason to support it.

My thoughts are now back to what I was thinking in January. Three months inside analysis have conformed there is a valid business going through a temporary cashflow problem. Now the syndicate need to convince their risk and compliance to accept a temporary greater than normal risk. That will be granted provided it is priced correctly. The debt facility continues as is with an increase above libor to compensate.

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Never in my wildest dreams did I think I would be communing with Dr Who - there you go!

On an equity style issue -I can only think of preference shares, convertible notes or perhaps (very unlikely at this stage) corporate bonds. Of these perhaps preference shares (ranking ahead of ordinary equity) would be most likely.

The difficulty with the financiers taking ordinary equity is the prospect of them ending up with over 20% of the company and being forced to make a takeover offer - too ironic to happen.

Agree with you that SGH has a potentially viable (perhaps even lucrative) business in the UK and desperately need time and ability to make it happen.

Not done with yet!