Amigo – Redemption song.
All,
Please find our unchanged analysis here.
The decision by Amigo to redeem most of its 2024 SSNs on 15 January 22 was something that was always highly likely so it does not change our analysis. We had expected a call once the redemption price fell to par (which happened in January). We still see an opportunity for the remaining bonds to be part converted to equity allowing bondholders to participate in the upside at the new company. Amigo will buy back £184m of the bonds and leave £50m outstanding. The redemption will be funded by the £280m the company currently has on its balance sheet. We are long the bonds for 7% NAV (at 92.5p/£) the instrument is currently trading at 99p/£. If the FCA is willing to allow Amigo to return to lending, the company will need to issue a new bond of £200m-£230m in addition to the £70m of equity that management has promised. Amigo has been very successful in collecting its outstanding loans, this has reduced the need for the company to make concessions to bondholders up until now.
FCA support is still pivotal:
Amigo’s Scheme of Arrangement still requires approval from the FCA. If this is not forthcoming or if the potential fines from the FCA regarding lending practices are likely to be unmanageable, then a winding down of Amigo is still a possibility. The FCA will take its time in deciding whether or not to oppose the scheme and may not make a public declaration until shortly before the court case.
Redemption:
- Amigo currently has £280m in cash on hand. It is calling £184.1m of the £234.1m 7.625% senior secured notes due in 2024 at par. The call will leave a stub of £50m outstanding which we expect to have an opportunity to participate in the equity raise if Amigo can return to lending.
-Amigo will save £28m in interest cost over the remaining life of the notes and this will form part of the increased cash contribution to fund customer complaint claims.
- We expect the remaining £50m will either be refinanced ahead of a post Scheme new bond issue or will be offered the opportunity to participate in the new equity.
- A redemption was always likely to be part of the refinancing, completing an equity raise with most external funding falling due with 2 years was never going to fly.
Positioning:
- Our 7% bond position anticipated redemption of the bonds at par in January. We still see upside potential for the remaining £50m of bonds to convert partially or fully into new equity post scheme approval. Assuming the FCA approves a return to lending, Amigo will need to issue a new bond and will want to remove the stub of the 2024 bonds. The FCA could still sink the plan by pushing the company into insolvency. However, as we noted back in December that would mainly hurt the retail complainants as bondholders would be covered from cash at Amigo.
- With £280m of cash on the balance sheet at present and £183m being paid out to redeem bonds the remaining £50m outstanding will be 1.9x by cash on balance sheet.
As always we look forward to exchanging ideas on this name with you all.
Regards,
Aengus