Amigo - Holding the phoenix’ candle

All,

Please refer to our unchanged analysis here.

It’s been a long time coming and we still haven’t got that next practice letter, but progress has been made under the surface. As the balance sheet moves ever closer to a net cash position, bondholders have begun asking the question who they are holding the candle for. Provided the FCA can give its blessing and redress creditors can support the Phoenix 2.0, what lever can bondholders pull to maximise their stake in the new company?

Timing:

- Latest estimates envisage a new practice letter before the end of the month (was supposed to come at the beginning of the month, but we are counting weeks now, no longer months​).

- It has taken longer than hoped because of: 1) an unsteady course steered by the FCA, who is openly concerned about approving a plan that will allow one of its worst offenders to restructure £200m of harm it has caused, only to continue trading happily ever after. 2) The customer committee needed to get up to speed. 3) Iterative approval of parts of the plan from either side.

- The aim for Amigo with the FCA will be to avoid the regulator opposing the new Scheme of Arrangement and simultaneously get approval for the new company to return to the lending market. Two separate but entwined decisions.

The Downside:

- Par ought to be the base - perhaps only receiving half the coupon.

- Bonds are redeemable at par from Jan 15th, but until then there is only a 3-month interest penalty. So, in case the FCA withholds its blessing and the phoenix fails to rise from the ashes, the bonds will likely be repaid early, with a three-month penalty.

- Absent FCA approval, an approaching net cash position gives the company the ability to redeem the bonds at par, which may well be the best option then. This could allow a new and freshly capitalised company to return to the market at a later day, although bondholders would be out of the picture.

- Management is very aware that as things stand it cannot use bondholder cash for any other purpose, apart from repaying the bonds. Any meaningful lending or cash payment to redress creditors will have to be made either:

- 1) with the consent from bondholders

- 2) with cash from elsewhere.

Default and bondholder leverage:

- Because the bonds have no obvious trigger, there is nothing to prevent the company / PJT from approaching other funding parties if their requests are more reasonable.

- Amigo is not in default on its bonds, nor is it planning to be. With KPMG finally, on board (after escalating the case to its Risk Committee several times), there is little on the horizon that would cause the company to default involuntarily between now and the time it has the cash to redeem all of the bonds.

- Given - like ourselves - several large bondholders seem to be seeing value in Amigo 2.0, the company may be able to reach a deal with bonds that a) avoids a default and b) can be reached immediately.

Big Deal vs Small Deal:

- Even though the end result may be a medium deal, there are two distinct scenarios that have different implications:

- 1) Small deal: Bonds chose to amend and extend and offer to put in a “little bit" of fresh cash - we think £50m should do it. A large portion of that cash would be paid out to redress claims with the remainder of those claims + fresh cash providers + some of the existing equity owning the company going forward.

- Note however the large size of the redress claims vs the £50m of cash and the difficulties that could bring in balancing a politically reasonable recovery to redress claimants with the share bondholders would like to own in the company going forward.

- 2) Big deal: Bonds chose not to amend and extend and instead offer to put in some £200m equity via cash and in particular a D/E swap, then refinance the stub into a new, smaller bond.

- This should give bonds a larger portion of the equity, but it may not be popular with all creditors and - while holding more upside - in the short term recoveries may be calculated lower than under scenario 1.

- This scenario could force the FCA’s hand a tad more (creditors share redress pain) and increase the overall likelihood of success.

- For the reasons above and because the company really needs no extra cash at all, it looks likely that the approach may resemble a Chinese menu and that we end up in a medium deal of perhaps £100m with limited fresh cash and behind a larger amend and extend. Again, Amigo would likely not require a net cash position for such a deal.

Fresh Cash Funding:

- PJT will in all likelihood reach out to bondholders in a first approach. While Amigo is small enough to befit a single fund’s balance sheet with no need for a larger group, we expect Wilcox and co to prefer the benefits of a group going forward and to seek a solution that does not upset an unnecessary number of players.

- Bondholders are certainly front and centre in the minds of management when it comes to addressing future balance sheet requirements, but not only is it management's duty to seek the best deal they can (can’t go too far with this in such a situation), bonds will have to understand that the deal has already taken a very long time to negotiate - between two difficult parties - and we are concerned about how much holders can push the offered terms before management are forced to look for alternatives.

Positioning:

- We remain long the bonds for 7% of NAV and will start playing with a recap model to gauge our potential returns going forward. We may have to reduce our position to accommodate a larger than expected fresh cash component.

Keen to exchange ideas,

Aengus and Wolfgang

E: team@sarria.co.uk

T: +44 203 744 7003

www.sarria.co.uk