Shares in Slater & Gordon Limited (ASX: SGH) more than doubled in value this morning to hit 65 cents after the law firm revealed it had agreed a debt restructure deal with its banking creditors that include Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
The deal struck means Slater & Gordon does not face the prospect of having debt called in until May 2018 and will pay an amendment fee in cash or issue warrants in the law firm to its creditors in exchange for the debt restructure.
Where a creditor accepts warrants (shares that will vest at a future date) the maximum they can obtain is up to 15% of any uplift in the market value of Slater & Gordon for 30 days from the effective date of the amendment April 30 2016.
Therefore if Slater & Gordon were to lift $100 million in value by the end of May 2016 the maximum amount of equity lenders could receive in return is $15 million.
Slater & Gordon said it expects more than 55% of the lending group to take any amendment fees in cash and the maximum dilutive impact via the issue of warrants would be 6%-7%. However, if the market value of the company rockets over the next 30 days the creditors have bought themselves some insurance in the form of the option to take warrants over cash with the limit capped at 15% of the issued shares in the company where the uplift is "very substantial'.
The company stated that the first tranche of debt is not due until May 2018 "mitigating the refinancing risk and enabling the full expected benefits from the performance improvement program to be realised ahead of future refinancing".
However, all this will count for nothing if the law firm cannot reverse its disastrous first half of FY16 that delivered $83 million in operating cash outflows.
Management has at least been consistent in its message that cash flows would be heavily weighted to the second half of the year as it worked through multiple problems across its UK legal services businesses and implemented cost cutting initiatives.
The firm then remains in a race against time to deliver substantial positive cash flows in the second half of the financial year and the financial results for the six month period to June 30 2016 remain critical to the firm's future.
The business remains in deep trouble therefore and management can only save it by delivering on its talk of a vastly improved second half to the year as May 2018 is not too far away, with shares remaining a risky bet given the disastrous operating performance so far in FY2016.
