Shares in Slater & Gordon (S&G) soared overnight – albeit from an historically low base – after it told investors that its new lenders “fully intend to implement a solvent restructure of the company”.
Its share price rose 46% to 13c, having dipped to an all-time low of 7c a fortnight ago – two years ago, before the deal to buy Quindell’s professional services division, it was riding high at nearly A$8.
Issuing dismal half-year results last month, S&G said its debts were more than the business was worth and it would not be able to pay off the bank debt as they fall due.
It would need the continuing support of its lenders “to continue as a going concern”, the firm admitted.
The Sydney Morning Herald newspaper reported earlier this week that the firm’s previous senior lenders – Westpac, National Australia Bank, Barclays and Royal Bank of Scotland – had sold on its debt to distressed debt buyers, possibly for as little as 25c in the dollar.
It said S&G had risked being placed into receivership over the weekend if a deal was not worked out with its bankers, adding that a key stumbling block to the restructure had been the reluctance of Westpac and NAB to take major stakes in the group.
“It is expected the new debt holders will participate in a debt-for-equity swap, where they would exchange their debt for shares in a restructured Slater & Gordon. The final details are being thrashed out, but it is believed existing shareholders will be severely diluted in the process.”
In an update to the Australian stock exchange, S&G confirmed that more than 94% of its $737m debt facility has been traded from its original syndicate of lenders to secondary debt buyers.
“The company has been informed by the new senior lenders that they fully intend to implement a solvent restructure of the company and to work co-operatively with the company to enter into binding agreements to reset its debt structure to ensure that the company has a sustainable level of debt and a stable platform for its future operations both in Australia and the UK.
“The company and new senior lenders believe a restructure on a debt-for-equity lender scheme of arrangement is in the best interests of all stakeholders.”
A writer on investment website Motley Fool Australia said that despite the share price surge, “I would suggest steering well clear of this stock and I would sell any equity I had in the business”.
He explained: “This is because I expect Slater & Gordon’s impossible negotiating position and current debt to equity ratio means shareholders are going to be diluted into the ground by the terms of any restructure agreement.”