It was another bad day yesterday for Slater & Gordon (SGH) shares which plunged by more than 40% in a volatile trading session as investors and analysts continued to question the law firm’s solvency.
The shares ended the day down a massive 44% at 32.5 cents which was the day and year’s low.
Clearly the shares will head lower without anything for investors to get positive about.
On Monday the law firm revealed a $958 million half year loss as a result of $876 million of write-downs, an amount that shocked investors ands triggered an upsurge in doubt about its longevity as a listed stock, especially when the deadlines given by its banks became known.
Investment analysts began to question the survival prospects of the company, which has to firstly prepare and file a survival plan (detailing how to boost cash flow and reduce debt) with its lenders by the end of this month, and then reach agreement with those lenders by the end of April on a new financing deal.
If it doesn’t the maturity dates on the group’s debt are advanced to the end of March next year when they will have to be repaid. Barring a financial miracle, no one can see that happening.
Macquarie analysts described Slater & Gordon’s financial position as ‘precarious‘ after it reported negative cash flows of $80 million, much worse than analysts had feared after the company warned in November that the measure would be negative $30 million to $40 million.
The subsequent write-offs meant Slater & Gordon’s net debt of $741 million was $78 million larger than its ‘work-in-progress’- a measure of case revenues for work that had been completed but not invoiced. That is a shortfall which needs to be covered, somehow.
Debt jumped by $118 million in the six months to the end of December.
Macquarie also said in a note to clients that S&G company was providing weekly cash flow updates to its banks ahead of that restructuring proposal at the end of this month. NAB and Westpac are together owed about $800 million.
S&G’s receipts from customer in the six months to December 31 were $534 million, while payments to suppliers and employees were $594 million. This was the first time employee costs exceeded receipts. That helped boost debt.
“Over the next month, the group will need to prove to advisers that Slater & Gordon Services [the firm’s UK arm] can be operated profitability with sufficient cashflow for the debt facility to be extended past March 2017,” Macquarie analyst Michael Higgins wrote in a note to clients yesterday.
“In Slater & Gordon’s favour is that the only asset with the potential to generate future positive cashflows is work in progress, and work in progress is of most value in the hands of Slater & Gordon,” – hence pressures to settle legal cases quickly, as Fairfax Media points out this morning.
