Should you buy Slater & Gordon Limited shares today?

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Slater & Gordon Limited (ASX: SGH) has lived to fight another day after the embattled law firm managed to strike a deal with its banking syndicate.

Although the company’s share price has fallen more than 10% today to 53 cents, it is still trading almost 80% higher than its 29.5 cent closing price on Friday. Indeed, investors had grown increasingly concerned that an agreement with its lenders would not be reached, which would have left Slater & Gordon potentially liable to repay all of its bank debt by the end of March 2017.

The latest update from the company showed $783 million of drawings from its facility with less than $52 million in cash and equivalents on hand as at 31 December, 2015. Given the company’s historic inability to convert work in progress (WIP) to cash, repaying that debt would have been an impossible task.

However, Slater & Gordon has bought itself some time, and investors are more than pleased. Indeed, the company will need to drastically reduce costs across the business, while it will also need to improve its ability to generate cash, but it now has until at least May 2018 to do so.

The company’s CEO, Andrew Grech, said (my emphasis): “We remain focused as a management team, on executing our performance improvement program across the business to improve profitability and cash flow, and reduce debt. We are confident that the amendments we have entered into today with our lending group provide us with the flexibility and time to execute and continue our performance improvement program.”

One of the requirements of the new deal will see Slater & Gordon report more frequently to both National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC), while it must also refrain from declaring or paying any dividends.

You can read the details of the new agreement, here.

Should you buy?

Investors were justifiably worried that Slater & Gordon would not be able to reach an agreement with its lenders in time, rendering it susceptible to a potential corporate collapse. As such, yesterday’s enormous rebound was also understandable, although it would have been painful to watch for investors observing from the sidelines.

A key risk has now been mitigated, and the shares have been well-rewarded as a result. However, there is still a long way to go before investors can necessarily be comfortable with the business. For starters, it must still prove it is capable of converting WIP into cash, while the group’s management team must also regain the trust once given to it by investors.

Until it can do both of those things, Slater & Gordon remains a very risky bet and one that, in my opinion, investors would be wise to avoid.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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