The Slater & Gordon Limited (ASX: SGH) share price is up 35% this afternoon or 3.1 cents to 12 cents after the law firm announced it's negotiating with its new creditors over the terms of a restructure plan.
The firm announced this morning that 94% of its outstanding debt facility has been "traded from its original syndicate of par lenders to secondary debt buyers".
Banking lenders from within the original syndicated finance agreement (SFA) included National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) who are reported by the Fairfax media to have sold their date to distressed debt buyers for as little as 22 cents to 25 cents in the dollar.
For example, Westpac is reported by Fairfax to have sold $250 million of debt owed it to for just sold $65 million to the specialist corporate debt collectors.
The law firm is reported to have around $737.6 million in total bank debt, which is now largely in the hands of the secondary lenders who will be sitting down with Slater & Gordon's management team to negotiate the terms of the "restructure".
Given the size of its debt problems and fact that it's still losing money Slater & Gordon is in a weak to non-existent bargaining positioning against the kind of U.S. hedge fund creditors that are known for playing hardball.
It's likely then that the terms of the "restructure" could include a debt-for-equity swap whereby so much new equity was issued in Slater & Gordon (in exchange for writing off up to say $700 million of debt) that current equity holders are all but wiped out. For example the value of the traded equity in Slater & Gordon at the moment is only around $40 million, or around 1/18th of its outstanding bank debt.
A debt-for-equity swap is one option, but I expect the law firm will also be trying to negotiate a restructure of the debt to lengthen repayment obligations and possibly to have credit extended by its new creditors. This would be a good result for the firm and shareholders as it may give it time to get back on its feet without the current equity holders in the business being taken to the cleaners alongside the banks.
This afternoon speculators are bidding the shares up to 40% higher, but I would suggest steering well clear of this stock and I would sell any equity I had in the business. 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.
