Amigo Loans – Jockeying for the backstop
All,
Please find our analysis here, including a small model for Amigo 2.0.
The announcement from Amigo yesterday has little direct impact on bondholders, but it puts existing shareholders on notice that Amigo will go into administration if they fail to approve the issuance of heavily dilutive shares and that at most they are going to be left with a mere 5% of the business. Implicitly it also sets the scene for the first hearing on the SOA, which is expected in mid-February, where the company are planning to haircut redress claimants at 40p/£. Still, substantially larger under the first scheme proposal. The court will feel vindicated.
Approval Process:
- The Practice statement is likely to be out in the next week or so.
- The first court hearing is scheduled for Mid-February and a second hearing in March/April.
- The FCA will have to approve of the new plan.
- Being a public entity, Amigo also requires the approval of shareholders to issue further shares
- Following approval, Amigo will carry out a Rights Issue that will dilute existing shareholders. As there are no large institutional shareholders who are looking likely to defend their rights in a case as contentious as this one, most of the issue is likely to be unsubscribed and will go to whoever backstops it, including selected bondholders.
How much will Amigo need to raise?
- We estimate that Amigo will look to raise up to £100m in equity, although that may include some of the remaining bond balance.
-Using the details on Amigo 2.0 per the half-year statement, we are struggling to generate significant cashflow for future equity, but in light of forthcoming hurdles requiring the dilution of existing equity and haircut on claimants, we think that’s part of the plan.
- The rights issue will be launched as soon as possible after the SoA, notwithstanding the 12-month grace period.
Who will provide the equity?
- Bondholders are likely to be offered the chance to provide the backstop, probably in conjunction with a wider debt/equity swap of their remaining exposure. For practical reasons however, we think Amigo is likely to reach out to the major holders rather than all bondholders.
- The equity should therefore largely end up with the institutions backstopping the rights issue, as we do not expect much to come from existing shareholders.
- PJT could in theory also approach a third party to backstop the rights issue and may have done so already. But in light of bondholders’ familiarity with the business, the information asymmetry should work in their favour.
What can we do?
- Bondholders can stay passive and await an approach from Amigo for fresh equity, but it might just be a cheque instead. If Amigo doesn’t approach you or us in March, the likelihood is that someone else is lined up to provide the equity.
- We would certainly pre-empt PJT/Amigo and actively signal our willingness to backstop. If after backstopping for the shareholders we would be required to give up shares to other bondholders too, then the fees should be very attractive. This route offers the best way to capture the maximum option value in Amigo 2.0.
- To acquire all of Amigo should be difficult. Making an open bid for Amigo (current market capitalisation of £17m) would seem as risky as it would be expensive. We would run into time constraints around the Scheme of Arrangement and considering where shares have been coming from, a successful bid would require a big premium. In much the same direction however, we understand that one of the parties has been approaching Amigo with the idea of providing a loan to take out the remaining bonds. But we think this would put management and PJT into a technically difficult spot and that’s probably why it didn’t work.
Departure of Mike Corcoran:
– The decision by Amigo CFO Mike Corcoran to depart the company is inconvenient but not necessarily a disaster. Corcoran has been instrumental in creating both the initial Scheme of Arrangement (opposed by the FCA and rejected by the High Court) and the latest iteration.
- We can only speculate as to the reason and timing of his departure. As CFO, he will have been at the centre of the forecasts presented in the first scheme attempt and that may give him a difficult standing in the second, which is looking much improved from the court’s and the FCA’s perspective.
- Another reason could be that shareholders, in order to approve the new issue and their own dilution, will require a visible sacrifice.
- Corcoran joined Amigo in November 2020 at a chaotic time for Amigo. In addition to the growing claims from customers alleging mis selling, company founder James Benamor sought and failed to remove the board (including the CFO) in September2020. He may have failed but the CFO quit and Corcoran came in.
Investment Rationale:
We retain a small position in the bonds, which has been substantially reduced (78%) by the redemption earlier this month. Trading just off par, the position is fully backed by cash and book, but carries an option to invest in Amigo 2.0. We will stay close to Amigo and its advisors over the next three months as we would be very keen to partake in the backstop and rights issue.
We look forward to exchanging ideas with you.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055