Why the Slater & Gordon Limited share price is getting slammed today

Could the Slater & Gordon Limited (ASX:SGH) share price be heading for zero?

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The Slater & Gordon Limited (ASX: SGH) share price is likely to come under more pressure today after the business provided a bleak operating update.

Ominously the law firm warned that it is expecting another operating cash outflow for the six-month period ending December 31 2016, with "bank debt now exceeding enterprise value".

Consequently it's now totally dependent on the largesse of its creditors and lenders in agreeing to write off a large part of its debt in exchange for equity in the business. As I warned back in April 2016 the two most likely escape routes for Slater & Gordon are a debt-for-equity swap or the issue of convertible notes to become shares for the creditors at a future date.

As I suggested 9 months ago: "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."

This would be extremely dilutory to existing shareholders, but would allow the firm to effectively pay down some debt, close its loss-making UK businesses, and perhaps generate enough future cash flow to pay off the principal and interest on the remaining debt.

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.

Again this would be extremely dilutory for existing shareholders, but would allow the company to survive thanks to enough debt headroom and the time to restructure its loss-making businesses mainly in its Slater & Gordon Solutions UK division."

Today's Update

The problem is that Slater & Gordon today reported that its UK businesses are continuing to perform poorly with more write downs likely ahead, while the "Australian operations have started to show signs of being affected by negative sentiment about the business and increased competition in key segments".

As a result of the problems the group forecast that it would post a net operating cash outflow for the period of up to negative $20.9 million, which means its lenders are likely to be running out of patience.

Given that Slater & Gordon now either faces its creditors forcing into administration or the prospect of a recapitalisation deal that is likely to be highly dilutory to existing shareholders it seems the share price will remain under pressure indefinitely.

Forget Slater & Gordon!

Motley Fool contributor Tom Richardson has no position in any stocks mentioned. You can find Tom on Twitter @tommyr345 The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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