The share price of embattled legal eagle Slater & Gordon Limited (ASX: SGH) has risen 12% over the last two sessions to trade at 28 cents.
The rebound came after reports from The Australian Financial Review that Slater & Gordon is close to reaching an agreement with Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
Indeed, this would come as a huge relief for shareholders who have watched the shares lose more than 96% of their value in a little over 12 months after they traded as high as $8.07. Following a very controversial decision to acquire Quindell's Professional Services division in the United Kingdom, the company has been left with hundreds of millions of dollar in net debt and questions regarding its ability to continue as a going concern.
However, a new deal with its banks could see it survive for a while yet as it restructures its operations and reduces its debt. The pressure will certainly be on CEO Andrew Grech to cut unnecessary costs from the business, whilst he will also need to find a way to convert its work in progress, or WIP, into cash – something that the company has struggled to do in its time as a public company.
As highlighted here, part of any agreement reached with the bank could well involve the issue of new shares to boost the company's equity. This would likely dilute the equity currently held by shareholders heavily, although it could help to strengthen the company's weak balance sheet.
Slater & Gordon's management team will need to work very quickly to ensure a plan can be put in place. After all, it only has until the end of the month to satisfy its lenders who otherwise reserve the right to ask the company for full repayment on its loans by the end of March 2017.
Although some investors might be inclined to speculate on the future of the business, and bet on a potential turnaround, Slater & Gordon remains in a very precarious position. It is by no means out of the deep end yet, and investors would be wise to remain on the sidelines rather than making a play on its shares at this point.
