The Slater & Gordon Limited (ASX: SGH) share price is teetering on the precipice this morning with it down another 25% to just 7.4 cents as panic sets in among investors who are sprinting for the exits.
At 7.4 cents the firm's market capitalisation or the net worth of its equity is just $35 million, compared to bank debt of $737.6 million and cash on hand of $57 million. In total net debt is $680.4 million as at December 31 2016 and given the group just posted $11.4 million of operating cash outflows it seems the writing is on the wall if its lending syndicate decide to pull the plug.
Based on current exchange rates the group is due to repay $20 million in August 2017, $10 million in February 2018 and $421.4 million by May 2018.
Last week the group updated the market that it has until 26 May 2017 to agree a recapitalisation plan with its lenders, although given its operating performance it seems unlikely that its lenders would want to take equity in the business in return for writing off some debt.
If the lenders were to agree to some sort of debt for equity swap it could potentially stabilise the business as it would be less burdened by the debt, but there's little doubt that the terms demanded by the lenders could effectively wipe out current equity holders in the business.
I doubt that a debt for equity swap is that likely then and Slater & Gordon's best hope is probably to negotiate an extension to its debt maturity dates in return for greater interest payments as it works to turn around its business.
However, if agreement cannot be reached on a recapitalisation plan by May 26 the group warned that "the borrowings under the SFA (syndicated finance agreement) may become due and payable within a further 14 days of this date (May 26)".
Evidently the group is in a battle to survive with its auditors also warning that there's "material uncertainty" as to whether it can continue trading as a going concern. Needless to say this is a stock to avoid and it's not hard to see why investors are running for the exits.
