It's being reported that law firm Slater & Gordon Limited (ASX: SGH) might be close to agreeing a deal with its banking creditors Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
Slater & Gordon reported a disastrous first half of FY2016 in which it posted a negative cash outflow of $83.3 million, with debt of $783 million and a debt limit of just $850 million.
Consequently the law firm has been in a race against time to negotiate a debt restructure with its creditors to save it from bankruptcy.
It seems unlikely the banks will be prepared to extend Slater & Gordon more credit, although they won't want to see the firm go under either, so if a deal is agreed it will likely involve a debt to equity swap or issue of convertible notes to become shares for the banks at a future date.
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 generate enough future cashflow 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.
Any deal agreed will be dilutory to existing shareholders, although on the bright side Slater & Gordon might finally be in a position where it can return to consistent profitability, with the dead weight of its Quindell business effectively written off .
There is also a small possibility that UK chancellor George Osborne's proposed reforms to personal injury laws in the UK are shot or watered down by the legal lobby who will put up a strong challenge to reforms that are not guaranteed to go through.
Slater & Gordon faces other problems however, with rival law firm Maurice Blackburn likely to be scrubbed off the Christmas card list after it announced a class action against Slaters over its disastrous recent performance.
Expect volatility in the share price.
