Amigo Loans - Right to participate.
All,
Please find our slightly modified analysis here.
Although participating would be profitable we will not take part in the upcoming equity raise from Amigo. We will hold on to our bonds and without any equity kicker, our expected 12-month return for our bondholding is 14%. We expect the bonds will be called soon after the rights issue with Amigo intending to take on bank debt. Management is seeking to raise £40m in equity (we had expected £90m) and we understand they do not intend to approach bondholders to exchange debt for equity. This could change if the book-building exercise falls short. Bondholders are still free to participate in the issue but the compliance challenge created by the signing of an NDA, may well make it easier to exit the bonds and recycle some of the cash into the equity separately.
Less equity, what happens now?
- With the UK economy weaker, demand for non-traditional lending will rise, but the cost of equity has also risen.
- A £40m raise => a discount to today’s price of 89% (we had assumed 76%). The price cannot fall much further putting an effective ceiling on the amount of cash that can be raised.
- This will dampen growth prospects however; we had assumed that it would be 2026/27 before 100% of the capital was deployed.
- The departure of Gary Jennison as CEO just before the AGM may have been linked to the difficulty in obtaining fresh capital, but we have been told that he had intended to go back into retirement.
Expected return hurt by lack of equity participation:
- With no boost from equity our 12-month return is expected at 14%, we expect the bonds to be called next year when the equity/bank debt raise has been completed.
- An exchange of £5m of bonds for equity would increase that return to 23% and would leave bondholders with 12% of the company.
- Our DCF valuation is now £78m (net of £50m in debt). Previously our valuation for the company was £128m.
Who is doing the bookbuild?
- Ashcombe Advisors is doing the bookbuild.
- Deal leader is Andreas Wesemann
- Email: Andreas.Wesemann@ashcombeadvisers.com
- Telephone 020 7529 5804 / 07931 754 511
Process:
- The selection of an underwriting investor starts on 4th November
- The underwriter will be selected by the end of the year
- The Scheme of Arrangement requires the raising to be completed by February.
How can bondholders participate?
- Ashcombe will require an NDA to be signed, however, they have said they are not sharing any material non-public information now so a wall crossing is not required immediately.
- It may be easier for bondholders to avoid the compliance faff by sell the bonds and then separately participating in the equity raise.
Positioning:
- After Amigo partially called its bonds we have a 1% NAV outstanding position. We expect to be taken out at par when the equity and debt raise close (or soon after) and this will give us a 14% return over 12 months. The banks are likely to prefer the removal of a rival secured facility and facilitate the calling of the bond stub.
- We see value in the equity of Amigo, unburdened with the mistakes of the past but the game’s not worth the candle. Whilst participation would be profitable, for the size it’s not worth the faff.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055
www.sarria.co.uk