Amigo Loans Limited – Having another go
All,
Please find our unchanged analysis here.
When it publishes its delayed FYE March 21 results on 29 July 21, Amigo Loans Limited needs to lay out a viable route to re-launching itself as a lender. Amigo will look to reduce the headline cost of its products to address market opportunity and affordability, but we do not see the lending pause being reversed until there is a new Scheme of Arrangement addressing the unaffordable lending claims that have hit the company in the last 18-months. We expect a new scheme to be launched soon with a court hearing and decision likely in November. The revised Scheme should look similar to the one rejected in May, but with some equity, participation to address the court’s concerns. We remain long the SSNs for 7% NAV.
New Scheme of Arrangement:
In yesterday’s Sunday Times, Gary Jennison (CEO) confirmed our view that there is not going to be a significant change in the cash offered to redress claimants. The offer of up to £35m will not change however Amigo may tinker with its phasing. In rejecting the previous scheme, the High Court pointed out that keeping shareholders whole whilst imposing large haircuts on redress claimants was a flaw. Given Jennison will be paid £1.9m (in 5-years) if the share price reaches 30p, he is incentivised to try and minimise dilution for existing shareholders. But if there is no Scheme, then shareholders will hold 100% of nothing. We expect some form of equity-related instrument to be part of any package alongside the cash, and 15% of operating profit over the next 4-years. The Sunday Times article says a revised Scheme may not reach the courts until November. Given the original scheme gave 107 days between announcement and the creditors’ meeting, if we assume that a court is likely to want the same, that suggests around 14 November with a potential judgment before the end of that month.
Future Lending:
Jennison also intends to move away from the 49.9% headline rate for lending. Amigo will target a rate of 34.9%, with customers who pay on time for the first 6-months getting cuts. This is in line with our view - a less profitable (per customer) Amigo - but with a larger addressable market.
Results:
The FYE March 21 results will be published on 29 July. We expect cash on hand at £141m with a net loan book of around £361m. Given the pause in lending since December 2020 and the payment pause for certain customers due to COVID, we model revenue to fall to £171m (down 42%). Beyond this, the other key-value driver will be any guidance the company can give on the revised Scheme of Arrangement (likely none). The informal moratorium on paying redress claims will need to remain in place. If Amigo’s hand were forced by the FCA, an insolvency filing would be inevitable. We do not see the pause on lending being lifted before the company is paying out redress claims.
Positioning:
We are long a 7% NAV position in Amigo bonds at 92.5c/€ with a view to earning 7% in the remainder of the year, split into 4 points upside and carry. Our analysis of different downside scenarios has made us comfortable with the value protection in the bonds of 85c/€ in case a new scheme would seek to compromise the bonds and a similar recovery in case of liquidation, although bonds would likely fall into the 60's for a period if this unlikely event should occur. A 7% position therefore should not present more than a 1% risk to the book.
- We expect a successful new Scheme of Arrangement in the near future and rights issue soon thereafter, following which the bonds should trade up.
We look forward to exchanging ideas with you on this name.
Aengus McMahon
E: amcmahon@sarria.co.uk
T: +44 203 744 7055