Amigo Loans: Keeping everyone happy.

All,

Please find our unchanged analysis here.

After all, last week’s results release did have a couple of updates on Amigo’s future: 1. the timing of a return to lending and; 2. how Amigo intends to fund itself. We look at the details as known and assess the potential impact on our position in Amigo as the company puts a new capital structure in place.


Lending will resume soon:

- Management described a small-scale return to lending as imminent. Amigo is working closely with the FCA to ensure that its systems meet consumer lending requirements. The FCA has also confirmed to Amigo that any fine under its two ongoing investigations of Amigo’s past lending will take consider the impact on all stakeholders. An FCA-compliant Amigo is a better outcome than a winding up which would leave everyone (including redress claimants) worse off.


The equity and debt issuance will follow quickly:

- Once Amigo’s small-scale return to lending has shown that its systems work the 19:1 rights issue mandated in the Scheme of Arrangement will be launched. No dates have been given yet but the appointment of a broker indicates that Amigo is very keen to get back into active lending. The structure of the rights issue is currently under discussion with the brokers in conjunction with the FCA.

- Amigo also intends to raise debt at the time of the Rights Issue which we see as being via some form of securitisation (there is a carve-out in the bonds).


The SSNs are likely to be called:

- We expect Amigo will offer SSN holders the chance to participate in the upcoming rights issue, further reducing the remaining £50m of bonds outstanding. Removing the SSNs from the equation will simplify the capital structure. Swapping debt for equity is one way of achieving this aim. We have no comment from management that they will involve us.

- Our expectation on this trade based on our DCF calculation for the new Amigo is a return of 21% over the next 12 months assuming £10m (of the £50m) SSNs are equitised in a rights issue at £0.01. The equity leg will return 48% with 14% coming from the bonds. Our downside is par with the bonds covered by cash on hand. This would equate to a 14% return (8.25% coupon and 6 points of upside as the bonds pull to par.


Positioning:

- We originally had a long position for 7% of NAV at 92.5c/€, our long position was reduced by 78% when the company partially redeemed the bonds, but we retained the rest. Even discounting for distress, our DCF calculation leaves us expecting a return of 21% on this investment or 14% if there is no participation in the rights issue.

- Amigo is very close to its test lending period (limited to £35m); as soon as it can convince the FCA that its systems are adequate, Amigo will seek to raise equity and debt to fund growth. Lending banks will be happier once the SSNs are gone and the capital raise is an ideal point for bondholders to be offered the chance to participate in the equity.


As always, I look forward to discussing this with you.

Aengus

E: amcmahon@sarria.co.uk

T: +44 203 744 7055
www.sarria.co.uk

Aengus McMahonAMIGO