Amigo - Still waiting.
All,
Please find our unchanged analysis here.
Clarity is emerging in the Amigo situation post the release of their H1 numbers this morning. Press headlines will focus on the 20%+ decline in shares, but the potential significant dilution should not be a surprise.
Potential Scheme of Arrangement:
- Firstly, there will be two Schemes presented to the Courts when Amigo have agreement from the Independent Customer Committee (ICC) and FCA have completed their review. This Scheme will be the last proposal from the Board and they will pursue an orderly wind up of the business if a proposed Scheme is not approved.
- Timings of a scheme remain uncertain as further dialogue continues with the ICC and FCA in order to finalise financial details of redress scheme. A draft Practice Statement Letter (PSL) has been submitted to the FCA and the FCA have appointed an independent financial adviser to review the proposed Scheme. Additionally, a revised Scheme has been submitted to ICC. Agreement is required from the ICC and subsequently, the FCA needs to complete their review. Timing is imminent but may slip into January 2022. Once approval is received from ICC and FCA completes their review, PSL will be issued to relevant creditors and a High Court hearing will be convened.
- If approved, a process that could take at least four months, with subsequently an equity raise, which will be required to partially fund the Scheme and mainly to fund future business. Any redress is likely to be in cash and not in the form of future participation in the business.
Bonds
- Amigo finished the half-year with positive net borrowings due to the ‘run-off’ of the Loan Book, customers charging off and the pause in new lending. The Group had net liabilities of £118m on Sept 30th due to £344m complaints provision, which is junior to the bondholders.
- Given the above timeframe of 4 months + (more likely 6 months) before new lending can commence, subject to the new Scheme being approved, we strongly believe that the Company will partially redeem the Bonds in January once the bonds are callable at nil premium. This will save the Company bond interest while they wait for a Scheme of Arrangement to be approved.
Amigo 2.0
- If the Scheme is approved, the Business is likely to need a combination of debt and equity capital of up to £300m to fund Amigo 2.0. Management didn’t give any guidance on the split of debt: equity, but it should be noted that any equity raise needs to be greater to fund the redress scheme, amount unknown.
Next Steps
- Management are adamant that there is an “imminent risk of insolvency” and repeated that numerous times during the call. This was one of the primary issues that led the judge to reject the original Scheme in May. Therefore, we suspect that if an agreement with the ICC and FCA is achieved, the Scheme will receive Court approval. The alternative, a wind-down, destroys value for all stakeholders.
- Management were unable to give an update on timing to achieve ICC approval, but with the stark warnings of insolvency, it is likely to be achieved imminently. However, the FCA review timing is more uncertain and may slip into the new year.
Positioning
- We maintain our 7% bond position and fully expect the Company to partially redeem the bonds in January. In base case, we expect a repayment of the bonds, but there is a potential upside to bondholders in converting their debt holdings into new equity post Scheme approval. At this stage, there is no proposal.
Happy to discuss.
Tomás
T: +44 20 3744 7009
M:+44 7786 705 806