Amigo Loans – inching towards the start
All,
Please find our unchanged analysis here.
The consumer credit market needs subprime lenders, and despite its past, a reconstituted Amigo is a better outcome for consumers than the company folding. The FCA has now come as close as it can to agreeing by saying it doesn’t intend to object to Amigo’s Scheme of Arrangement at the High Court and also by providing a road map for Amigo 2.0 to return as a lender. We continue to hold a small, position in the expectation that bondholders will be able to participate in the equity raise that is central to the relaunch of the company. Our DCF calculation leads models a 40%+ return on the €90m of equity Amigo will raise.
FCA provides a pathway for Amigo 2.0:
- The FCA’s position is in line with what we had anticipated and is as good a result as Amigo could have hoped for.
- IF Amigo can get its scheme approved and meet the criteria set out by the FCA it will be allowed to return to lending.
- The equity raise is a key part of Amigo being allowed to grow, and bondholders will almost certainly be offered the chance to participate in that raise that will happen within 9 months of the scheme being approved.
- Whilst the FCA does not currently intend to oppose the scheme in the high court. It reserves its right to change its mind, but this would be unlikely unless there were some issues in obtaining stakeholder support for the scheme.
- The scheme still requires the approval of stakeholders and the High Court. The new scheme has addressed the previous criticism and shareholders and management are also sharing the pain. The decision by the FCA not to oppose will play well with the judge around whether this is the best possible deal that the company can offer.
The FCA requirements are unambiguous:
- Amigo must meet the threshold conditions, including the following:
Adequate financial resources: Amigo could return to lending before the capital raise, the FCA wants the initial volumes to be limited and would expect Amigo to demonstrate compliance with the FCA’s standards. Expanding Amigo 2.0 to a size where it can be profitable will require the equity raise to be completed (likely along with some form of securitization facility)
Adequate non-financial resources: in addition to the systems, this refers to the human resources available. The replacement of Mike Corcoran as CFO (albeit temporarily) was part of this process, getting Danny Malone to sign on permanently will also be part of the process.
The new lending process and systems must be to the FCA’s satisfaction with any issues dealt with.
- Any FCA fine over lending practices will ensure that the amounts paid to creditors are not impacted, but it does not mean that Amigo will not face having to pay a fine to the regulator. This would crimp the return to lending and would push up the equity raise timetable.
Positioning:
- Our rationale for retaining a small position in the bonds was the option to invest in Amigo 2.0. We continue to expect that bond investors will have the opportunity to participate in the equity raise and that the downside is covered by cash on the balance sheet. Today’s news is as strong a steer as the FCA could give that Amigo 2.0 is going to be allowed to happen. The FCA is still going to be keeping a close eye on Amigo and the nature of its lending, but there is light at the end of the tunnel. Amigo 2.0 is slowly inching to the start line. In our model and DCF calculation, we have an EV of €246m (we assume €100m of securitised debt to support growth), the equity raise will leave new shareholders with 95% of the business. This gives a return of over 60%, discounting at 25% to reflect the distressed nature of the investment, we are still over 40%.
I look forward to discussing this with you all
Aengus
Amigo - Update on Scheme of Arrangement. FCA position
E: amcmahon@sarria.co.uk
T: +44 203 744 7055