Shares in Slater & Gordon Limited (ASX: SGH) closed at a record low of 21 cents today as holders continue to dump the stock due to the group's debt mountain and recent admission that it is exploring options to recapitalise or refinance itself.
If a company is seeking to recapitalise itself any new lender or financier is going to require very attractive terms that are likely to be to the detriment of existing shareholders.
Therefore, the share price will probably remain under selling pressure until the company can either demonstrate a strong swing to positive cash flows, or announce some sort of debt restructure involving an extension to its terms to maturity. An extension to the debt maturity profile is probably top of the agenda as it's hard to see a new lender throwing funds at Slater & Gordon which means it's now reliant on the largesse of its creditors as a capital raising doesn't look an option given the current market value.
Events may come to a head by the end of February when the company will be forced to reveal its latest cash flow statements after an operating cash loss of $104.2 million last year. On top of this it had a gross debt pile of $765 million at the end of financial year 2016, which suggests it will be under almighty pressure to deliver positive cash flows over H1 2017.
If it doesn't it's possible to speculate that its creditors (some of whom have bought its debt for just 45 cents in the dollar) may be in a position to move to force a restructure that could spell disaster for ordinary shareholders.
Needless to say buying Slater & Gordon shares looks a dim idea, especially when you consider there are so many other profitable companies paying big dividend yields that you could buy instead….
