Amigo Loans - The unlikely letter of non-objection

All,

Please find our unchanged analysis here.

The FCA’s public consultation document on its proposed guidelines largely reiterates the position the regulator has taken throughout the Amigo process. But it contains one key element: The last example demonstrating the FCA’s approach to compromises - Firm C. From our perspective, the regulator’s publication today effectively includes the closest thing to what it said it would never issue: a letter of non-objection. It is setting out actionable guidelines that seem within reach for Amigo today. We are therefore evaluating the guidelines very positively and supportive for the upcoming hearings.

"How the FCA would consider" the compromise:

- The FCA and the court had previously opposed the first scheme proposal by Amigo on grounds including that insolvency was not imminent and that a better deal could be achieved. So the big question has been if the new proposal would cut it. Apparently, it does - at least for the FCA.

- On page 16 (of 17), the FCA effectively describes Amigo precisely (probably not for lack of imagination) and affirms its reservation about the haircut to redress claimants. But it then concedes:

"However, we are conscious that the only likely alternative to the Scheme is the insolvency of Firm C and that the Scheme is proposed as part of a wind-down whereby all stakeholders of the firm will be affected. We would take these factors into account …"

- Firm B is also a relevant warning to Amigo and comes close to describing the firm’s initial proposal. While we do not yet have the practice letter for the second proposal, we consider there to be sufficient room for agreement in round 2.

Phoenixing:

- The FCA specifically makes the point that it does not approve of the practice (creating an Amigo 2.0). This is the one difference between Firm C and amigo, where Firm C is looking for the compromise only in order to wind down solvently.

- Firm B by contrast intends to continue trading, a factor the FCA takes issue with as its shareholders and other stakeholders remain unaffected. In such circumstances the FCA outlines that a) it is a legal process it cannot stop per se, but b) that it will go after management. It is in that context that we are seeing the departure of the CFO the other day.

- As regards Amigo, yes, the aim is to phoenix an Amigo 2.0, but shareholders are being diluted down to 5% and are themselves subject to a letter by Amigo the other day that threatens them with insolvency if they don’t approve it.

- So while Amigo is still attempting the Phoenix 2.0 resurrection, the new deal satisfies the underlying demand that all stakeholders share the burden.

Positioning:

- We retain a small position in the bonds, which has been substantially reduced (78%) by the redemption earlier this month. The rationale for holding on remains the option to invest in Amigo 2.0, with little downside as the remaining bonds are backed by cash and book. The process of getting FCA approval for lending will not be easy or certain, however, we believe that the consumer credit market needs subprime lenders and a reconstituted Amigo is a better outcome for consumers than the loss of access to credit.

GC22/1: FCA’s approach to compromises for regulated firms

Aengus and Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003

E: amcmahon@sarria.co.uk
T: +44 203 744 7055