The alternative to Slater & Gordon’s (S&G) proposed recapitalisation is insolvency, the company has told creditors and shareholders as it seeks approval of the plan, which would see the debt of the newly separate UK arm slashed.
However, shareholders would see their ownership of the company almost wiped out under the plan, with its 12 senior lenders being issued with 95% of the equity following implementation.
In a letter to shareholders yesterday, S&G chairman John Skippen said it was still better than the alternative, with their shares effectively worthless as the firm’s debt was far greater than the value of the business.
“The recapitalisation is required for S&G to avoid insolvency. It is intended to S&G with a sustainable level of senior secured debt and a stable platform for future operations.”
The view was shared by KPMG, which was commissioned to prepare an independent expert’s report and predicted that, otherwise, S&G would likely be placed into administration by next May, when debts it could not meet became due.
In his introduction to S&G’s annual report, also published yesterday, Mr Skippen said he and the board were “deeply sorry” for the share dilution. He and the board will resign if and when the restructuring occurs.
The shareholders would also no longer have an interest in S&G UK, which would be wholly owned by the senior lenders.
The £380m the UK arm currently owed them would be transformed into £15m plus £250m of convertible notes only repayable from specific proceeds, including S&G UK’s legal action against Watchstone Group (formerly Quindell) for fraudulent misrepresentation in the deal which sent the firm on its downward spiral. Watchstone is fighting the claim.
As partial consideration to shareholders, the Australian business would have recourse to the first £24m of any recovery from the Watchstone action.
There would be a perpetual royalty-free licence for S&G UK to use the brand in the UK, Ireland and the rest of Europe. The UK and Australian businesses “require different strategies and possess different investment opportunities,” the firm said.
Mr Skippen said the firm has “unsustainable” debt levels. As at 30 June 2017, S&G owed £450m to its senior lenders, of which around half was drawn to partially fund the acquisition of Quindell’s professional services division.
“If the recapitalisation is not implemented, the directors consider that S&G will not be in a position to repay any amounts due under the syndicated facility agreement when they become payable.”
In comparison to insolvency, Mr Skippen said, the recapitalisation would provide a “holistic restructuring” of the firm’s balance sheet and it would be solvent.
“Shareholders will retain the opportunity to participate in future value creation and recovery as Slater & Gordon pursues its strategic plan in Australia.”
Under the agreement, the Australian part of S&G would be released from its obligations to pay all amounts drawn by, and secured debt of, S&G UK.
S&G is also proposing a second creditors’ scheme of arrangement for those who have brought shareholder actions against the firm – two have been notified, while at least one more is expected – that would see the benefit of all relevant insurance policies held by S&G shared “rateably” amongst all the claimants.
In the event of the creditors supporting the schemes at meetings being held next month, shareholders will then have to approve them at S&G’s annual general meeting on 6 December. If they pass that, a court hearing for approval is planned for 14 December.