Why Westpac Banking Corp is abandoning Slater & Gordon Limited

The Australian Financial Review is reporting that banks including Westpac Banking Corp (ASX: WBC) are selling their debt in Slater & Gordon Limited (ASX: SGH) at huge discounts to its face value.

The buyers of the debt are asset managers and distressed debt specialists such as Anchorage Capital who are likely to have a plan up their sleeves as to how they can turn a profit on the debt they are reportedly buying for as little as 22 cents in the dollar.

The bankers including National Australia Bank Ltd (ASX: NAB) have probably decided to take a sharp haircut after concluding that the loss-making law firm has no chance of paying back the total interest and debt owed to them under the terms of their syndicated finance agreement.

The AFR reported that Westpac bankers this week sold $250 million of the debt owed to it for just $65 million to a distressed debt specialist that is likely to push for a restructure of Slater & Gordon in an attempt to turn a profit on the debt it bought.

I doubt whether distressed debt specialists such as Anchorage Capital would want to accept new equity in Slater & Gordon in return for writing off debt, as their modus operandi is to push for quick solutions that can produce large profits.

The distressed debt buyers may be prepared to restructure the terms of the debt or even extend Slater & Gordon credit under onerous terms that would likely involve asset sales and a significant restructure in an attempt to get the business back on its feet. If the hedge funds were successful in supporting a turnaround they could turn some huge profits.

This morning Slater & Gordon shares trade for just 8.9 cents and I expect its management teams is locked in talks with its new hedge fund creditors in an attempt to negotiate a restructure attempt, rather than a debt for equity swap, or move to push it into administration.

A debt restructure is potentially good news for long-suffering shareholders, but I still think this is a stock to avoid as there’s a substantial risk that current shareholders get all but wiped out in any number of ways.

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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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