It has been reported Slater and Gordon’s negotiations with its lenders could be finalised as early as 17 March. In light of this, Mark Humphery-Jenner, an associate professor of finance at UNSW Business School, spoke exclusively to Lawyers Weekly about the likely outcome.
The academic said that although it will not be certain until the recapitalisation plan is announced, he believes the lenders are likely to agree to swap their debt for equity in Slater and Gordon.
“There’s a possibility that that would be either: a) effectively acquiring the whole firm, or b) potentially, more likely, acquiring so many shares that every other shareholder is diluted,” he said.
“That’s more likely because there are reports that the lenders want the firm to remain listed.”
Slater and Gordon was removed from the ASX 300 last Friday, effective 20 March, which Mr Humphery-Jenner said was not surprising. Given its debt of more than $750 million, compared with its market capitalisation of around $30 million, he said a debt for equity swap was the most plausible way forward.
“It’s unlikely that if [the lenders] were to liquidate the firm they would be able to obtain back all the capital that they have lent, and we can see that because some of these lenders are already willing to take haircuts on the debt that they have,” he said.
Mr Humphery-Jenner’s prediction comes despite the typical reluctance of banks to swap debt for equity. He said that Slater and Gordon’s dire circumstances will likely prompt its lenders, which include Westpac and NAB, to run the risk of holding equity in the firm.
“[The big banks] typically don’t want a debt for equity swap because typically it creates prudential issues, in that equity is more risky than debt, and they typically don’t want to have equity on their balance sheet that’s understandable, from bank regulatory perspectives,” he said.
“The issue for banks of course is whether they believe they would get very much, if anything, back in a liquidation.”
In the event of a debt for equity swap, the value of current shares would probably be highly diluted, Mr Humphery-Jenner said. However, he said the long-term impact of this on Slaters’ share price is not immediately obvious.
“The reduction in share price, on the one hand, could come from that dilution,” he said.
“On the other hand, if this is the only plausible way to save the company, there could potentially be some benefit at least in the long term for those shareholders, in that saving the company, for a person who holds the shares at the moment, is more valuable than letting the firm go bankrupt.
“The shareholders who had already potentially sold their shares, or have access to the class action, those shareholders may still be able to recover depending on the extent to which Slater and Gordon can rely on liability insurance.”
However, Mr Humphery-Jenner said the ongoing ASIC investigation into Slater and Gordon’s operations could limit its capacity to access liability insurance.
“If liability insurance is not available, then [current] shareholders are unlikely to be able to recover as much. And secondly, Slater and Gordon lacks assets to be able to pay out on all of those claims, so therefore their avenues for recovery are more limited if the ASIC investigation finds there’s relevant wrongdoing,” he said.
Mr Humphery-Jenner took a pragmatic view on the probability of Slater and Gordon’s eventual recovery, listing three key hurdles facing the firm.
“There are a few underlying issues with it recovering: in the short term, Slater and Gordon has actually stated that it’s suffering a lack of confidence in its product and services. That lack of market confidence in actually hiring them is clearly going to deter their recovery in the short term.
“A second short-term deterrent is that employees could easily leave the company in fear of Slater and Gordon going bankrupt. The lack of human capital could then reduce its chances of recovery.
“Then, thirdly, there are several other large players in this similar space. So Maurice Blackburn, for example, is a large player in this class actions space. This could seriously impact its ability to recover because it is now going to need to compete against a much larger incumbent competitor.”
Add to these factors the towering class action brought against Slater and Gordon by Maurice Blackburn, on behalf of Slaters’ former shareholders, and the outlook is bleak.
“The lenders, assuming they do this debt for equity swap, clearly believe Slater and Gordon has the potential to continue as a going concern,” Mr Humphery-Jenner said.
“So in the long term it could potentially recover, although it would certainly take a very long time for it to do so. And it certainly is contingent upon it not falling over in the short term.”
Disclosure statement: Mark Humphery-Jenner was a shareholder in Slater and Gordon and lost money on these shares. He elected not to participate in the class action.