Amigo Loans Ltd – Options, angles and positioning
All,
Please find our initiation on Amigo Loans Limited (Amigo) here.
- videos with investment discussion available on the website -In the last 12-months, Amigo has been buffered by ballooning claims from borrowers accusing it of unaffordable lending. The company had a scheme of arrangement rejected in the High Court. After looking at the options and potential returns, we conclude that a slightly enhanced scheme, accepted by the courts would leave the company able to raise additional capital and return to modest growth. We believe that a new scheme, capital raise is the likely outcome and even if the company is forced down an insolvency route the downside for bondholders is only 5-7 points. Results for the FYE March 2021 are due on 29 July and we will be taking a 7% NAV position in Amigo with a view to earning 7% in the remainder of the year.
Redress Claims:
- Amigo is seeking to cap and end the redress claims around unaffordable lending that have engulfed the company.
- The claims have arisen due to the regulator clarifying its guidance around affordable lending. This led to a significant increase in the uphold rate for claims (30% to 80%) and (as claims management firms got involved) a rapid rise in the number of claims.
- They did have a proposed scheme of arrangement rejected in the High Court in May. The judge was critical of the low recovery for claimants whilst the equity remained unimpaired. The judge did recognize that the redress claims issue needed to be resolved.
Going Concern:
- The sub-prime market is still crucial in the UK. We accept that the regulators are going to be more focused on affordability and relending practices, however they are not going to wish to see a significant slice of the population locked out of consumer lending.
- We see a new Scheme of Arrangement being proposed with a little more cash and some form of equity participation for the Scheme.
- Our model supports the ability of a smaller Amigo to survive and begin growing again with around £50m of cash from a Rights Issue.
- If management opted for an insolvency process, we see it as unlikely to hurt bondholders, but we could see volatility in the bond price with a lower bound in the 60’s.
Positioning:
- We are buying 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
E: amcmahon@sarria.co.uk
T: +44 203 744 7055