Amigo Loans Ltd (Amigo) – The future is coming soon
All,
Please find our unchanged analysis here.
By getting its accounts out yesterday, ahead of the 2nd September deadline, Amigo cured its covenant breach and will not have to negotiate with bondholders as part of the upcoming Scheme of Arrangement (SoA). The terms of the SoA is currently being discussed with the customer committee their recommendation is expected by early September. Management is also engaging with the FCA in structuring a scheme that will allow them to return to lending and which the FCA will not oppose in court. Management hopes not to need to raise cash prior to the scheme, however, given around £70m of balance adjustments required regardless of an SoA, our view remains that the FCA will insist on an equity raise. We believe that will need to be in the region of £50m - £75m. It is still possible that the SoA may actively seek to involve bondholders, giving them an opportunity to participate in any equity raise, however, management is seeking to avoid this.
Loan Book shrinking faster
- The rapid fall underlines the difference between the headline term of loans and the much quicker repayments. A year of suspended lending has seen the book fall by 44%, indicating that actual loan periods are much shorter than the headline terms. Collections were ahead of our expectations meaning the company finished with £185m of cash on hand (£41m more than we modeled). The loan book finished the year at £419m, we had expected £502m.
Impairment charge balloons
- Eye-catching, but much will be stripped away in the SoA. The company needs to impress on the High Court and customers how deep its liabilities are. The customer complaints provision rose from £194m to £345m between December 20 and March 21. £240m is “cash” for redress payments that would be covered by the SoA. Most of the other c£104m would be Balance Adjustments, set against the book. We are modelling around £17m a quarter from Sep-21. The level of balance adjustment is higher than we thought and will likely increase the level of additional cash needed from £50m to £75m. However, our model still shows a viable business.
Covid impact benign
- All the customers who took Covid payment relief are now back on normal repayment schedules. The impact of Covid on Amigo is covered in a £35m provision, £28m relates to lost revenue through reduced interest with the remaining £7m down to impairment. This reflects an expectation of higher defaults in those who needed to take payment relief, but the sums don’t change our outlook for the company.
Arrears rising as furlough winds down
- We do not see improvement in this in the next 2 quarters as the government completes the withdrawal of furlough payments. The arrears position is worsening but manageable. In the year arrears >60 days rose from 6% to 12% of the netbook (£50m). The impairment level also rose from 14% - 19%.
New Scheme of Arrangement not ready yet, but soon
- We still expect a scheme of arrangement, with management offering some more cash to the claimants. These could include additional profit share, cash-raising and partial debt/equity swap. The committee is expected to report back to management by early September with a Practice Statement from Amigo soon after. This would fit in with a timetable of getting the SoA in place by year-end and being able to resume lending in Q122. Bondholders will certainly have a seat if the SoA proposes a debt/equity swap, which we see as the best way to offer above-par returns. Amongst the options is a winding up of Amigo and a new company being formed. Post the call management confirmed to us that such a NewCo would be within the bondholder restricted group. As regards legal certainty going forward, this would be the cleaner option.
FCA being courted.
- The FCA wants to ensure that Amigo has sufficient capital and management capability before allowing it to return to lending. Amigo's SoA will need to address this to avoid the FCA opposing the settlement in court. The size of the balance adjustments needed will not have softened the regulator’s stance on when additional resources are needed. The company needs £50m - £75m in additional capital, persuading the FCA to allow this to be postponed will be challenging.
- The separate investigation by the FC A over lending practices in 2016-2018 could lead to a fine or other sanctions. Ultimately the UK needs regulated non-prime lenders to provide credit to consumers locked out of traditional bank lending and a properly capitalised and well-regulated non-prime market is preferable to the closure of the non-prime market.
Amigo v2.0, a new beginning
- The company confirmed that it is looking at a lower-cost, non-guarantor lending product. With rate reductions for good payers. This is core to our thesis of a smaller, less risky but profitable Amigo in the future.
Positioning
- We remain 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.
- As of today, there is a reduced chance that bondholders will get invited to participate in the rights issue. However, even if bonds are trading in the 90s, we would be prepared to equitise a limited portion to boost equity ownership besides fresh cash if that were on offer.
Happy to discuss as always
Regards
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055