Amigo – A chance for Bondholders?
All,
Please find our unchanged analysis here.
Management so far may have done their best to keep the bonds out of the mix, but a potential waiver request, even if subject to the underwhelming threshold of 50%, coupled with a potential requirement for more “resources” ought to represent an opportunity for the elephant in the room - bondholders.
Unless the FCA can be satisfied within the next 30 days, the then necessary waiver might hand bondholders the tool to impose themselves they have been missing. A default can be called by the Trustee or bondholders representing 25% of outstanding principal. Waiving the breach would, however, only require a simple majority.
An underwritten rights issue might go a long way to convincing the FCA and the High Court that the existing shareholders are sharing the pain of the redress claimants. Importantly, the previous judgment acknowledged the unsustainability of the Redress Claims whilst rejecting Amigo’s solution as not spreading the pain equitably.
Status Quo:
- Amigo has now officially acknowledged that it is working on a fresh Scheme of Arrangement (Scheme) and is working with the FCA on crafting it. Due to communication from the FCA, regarding the Scheme and terms for a subsequent return to lending, Amigo has now postponed publication of its annual results beyond the 29th of July, which was a covenant requirement under the SSNs.
Why Postpone the Results?
- Correspondence from the FCA regarding a new Scheme seems to have prevented the auditor from giving a however qualified going concern opinion that wouldn’t put the directors under pressure. Reading between the lines of the statement, the reasons could include:
- a later than anticipated return to lending, which the FCA has now expressly postponed until after the forthcoming scheme is sanctioned, and/or
- a requirement to demonstrate its financial viability and that it meets the appropriate resources threshold. According to the FCA handbook, these include financial measures, including provisioning and being able to meet debts as they fall due. The regulation also mandates non-financial resources based around management capability.
COND.pdf (fca.org.uk)
What changes?
- Probably only the order of events, even if that may have a bearing on who is eventually involved.
- Even without this delay, the Scheme would not have been ready before November. Moving to late November or December isn’t going to change the financial dynamics of any deal.
- Our thesis remains that a Scheme will be agreed and that Amigo returns to lending. We are not surprised that the FCA would not authorize a return to lending until a new Scheme is sanctioned by the High Court, but perhaps the FCA has been hardening its position. It is possible that the FCA now effectively requires certainty on, or the underwriting of the rights issue simultaneously with, or as a condition to its support of the Scheme.
- That Amigo had previously postponed the publication of the results by as little as a week indicates to us that management clearly had held out hopes, which have not - or not yet - materialised. But in essence, very little has changed, except that it should be harder to raise the anticipated equity away before the company resumes lending, instead of afterwards.
- Finding investors pre restructuring would certainly narrow the search. Maybe it will offer a chance to re-engage with James Benamour as a shareholder or - crucially - for bondholders to step in and take a larger stake of the equity.
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 soon with a rights issue either simultaneously or soon thereafter, following which the bonds should trade up.
- As of today, there is also a chance that bondholders will get invited to participate in the rights issue. 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.
Regards,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055
www.sarria.co.uk