Description

Amigo Holdings PLC ('Amigo') will likely double in next 1 to 2 weeks.

The company has a clear binary catalyst coming up from the 19th of May 2021 onwards, from which the equity could be worth substantially more going forward. This is a short term trade with 4 business days left to trade so apologies for shortcomings in the write up.

Amigo offers unsecured guarantor loans in the UK. The loans are typically longer dated  and the APRs are much lower than typical payday loans because a friend or family is registered as an additional guarantor to the loan (hence ‘Amigo’).

Current relevant events

There is a lot to say about what happened between the IPO in 2017 and 2020 but we shall leave it to go down into the annals of history (or a Netflix series) for the sake of brevity.

Amigo saw a large increase in complaints from borrowers and their guarantors during 2020, after having had complaints steadily rising in 2019. This has partly been driven by incentives of claims management companies (CMCs) who take a cut of typically ~30% of any redress. The number of CMCs registered during COVID went up markedly according to the FCA website, presumably to capitalise on the wave of distress and complaints that would ensue. The complaints incurred reserves based on future redress and handling costs. Once a complaint has been made it can also be referred to the Financial Ombudsman Service (FOS) at some stage for appeal or when a case is deemed marginal. If that happens it creates an automatic cost charge to Amigo by the FOS which increases the reserves further. From 1 June 2020 the FCA also started investigating whether complaints were handled appropriately.

This was all on top of the balance sheet stress caused directly by COVID-19 related payment holidays and the pausing of lending that occurred in March 2020. 

Amigo has a securitisation facility and a secured bond outstanding and given that the above was eroding asset values, at some point the reserves would leave too little behind for the secured bond (the securitisation facility has direct mechanical security over loans). So that meant, technically the reserving would have to stop and if not the company would have to go into administration, rationally forced by the secured bond holders, if not voluntarily by Amigo. On the 26th of November 2020 Amigo stated a material uncertainty related to going concern in their half year report and that it was looking at options, perhaps a scheme of arrangement.

On the 21st of December 2020 Amigo announced a scheme of arrangement to “provide certainty to the total liability arising from customer complaints”. It spelled out that the debt ranking ahead of the redress claims would 1) not allow redress claims currently outstanding and lodged in the future to be paid in full and 2) given that, going forward, all customers would need to be redressed equitably rather than first come first serve for the full amount. The redress would be paid out of a special purpose company and would have a cash contribution of:

1. a minimum of £15m topped up by £20m subject to certain conditions, and

2. “5% of the profits” of Amigo for the next 3 years.

Yes that is right: the equity survives while the senior unsecured claims get a haircut of ~70 to 90%.

On the 25th of January 2021 more details were given out by Amigo: “Amigo, supported by its independent financial and legal advisers, believes that failure of the Scheme will result in Scheme Creditors receiving zero cash payments, given secured creditors who rank ahead of the unsecured creditors Scheme Creditors”. Then, we think, by a self-negotiated show of remorse we see the terms at limb b) above miraculously being improved to “15% of pre-tax profit for the next 4 financial years”.

The “First Court Hearing” was held on the 30th of March where Amigo asked permission to call a meeting of creditors (i.e. Redress Claimants and the FOS) regarding the Scheme. The FCA issued a “letter of concern” ahead of the meeting. But it was generally considered moot as it stated at the start: “on the basis of the information currently available to it, the FCA is not currently proposing to take any additional regulatory action that might otherwise prevent the Scheme from having substantial effect were it to be agreed by the requisite majority of creditors and sanctioned by the Court“.  So rather than discussing any elements of fairness of the proposed scheme a lot of time in front of the judge was spent on logistics and disclosure. The FCA did not appear and made no submissions to the meeting. Ultimately, an order was granted for the vote to go ahead on the 12th of May.

In light of the above, it was quite surprising to see another letter being posted by the FCA on the 10th of May 2021 ahead of the vote: 

“The FCA remains concerned that redress creditors will have their claims significantly reduced whilst other stakeholders, such as shareholders, are not being asked to contribute their fair share to enable the firm to stay solvent. The FCA also notes that the arrangements comprised by the Scheme arise not out of negotiations with Scheme Creditors themselves (who are involuntary creditors of the scheme company) but out of a unilateral proposal by the scheme company which has not been the subject of any negotiation with Scheme Creditors or any body representative of their interests. The FCA considers that a fair compromise could have, but in this case has not been, proposed to Scheme Creditors to vote upon. Therefore, and in view of the particular concerns stated above, the FCA has decided that it intends to appear at the Sanction Hearing through counsel to oppose the sanction of the Scheme, even if approved by the requisite majority of Scheme Creditors, on the basis that the Court cannot be satisfied that the Scheme in its current form is fair.”

In reaction to this not only did Amigo disclose the FCA letter (as required as material information) but also the result of vote based on the votes cast already online, which were 95%+ in favour based on number votes and the value of claims registered. Unsurprisingly, the voting meeting concluded in favour of the scheme, the next day on the 12th of May 2021.

So the only contingency left is the sanction hearing of the scheme where the FCA will make an appearance to argue against the sanctioning on the 19th of May 2021.

Why the FCA’s arguments will likely fail to stop the Sanction of the Scheme

First let’s summarise the arguments of the FCA as to why the scheme should not be sanctioned:

1. [the] scheme creditors' claims [are]being significantly reduced whilst other stakeholders such as shareholders are not being asked to contribute; and

2. the terms of the Scheme arrangements do not arise out of negotiations with Scheme creditors or any body representative of their interests.

Both arguments of the FCA touch upon the same “fairness” principle which is the fundamental question before the judge to sanction the scheme. We have had discussions with legal subject matter experts yesterday and today (11 and 12th of May 2021) and based upon that have made the following observations / conclusions around the success of the FCA being able to challenge the sanctioning of the scheme:

• On a historical basis there are virtually zero cases known whereby the creditors have voted in favour of the scheme and where the scheme then subsequently was not sanctioned.

• The fact that 95% has voted in favour counts quite strongly towards the scheme being sanctioned ultimately . It is based on on an old principle (quoting: Lindley LJ in Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 at 409):

‘If the creditors are acting on sufficient information and with time to consider what they are about and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the Court can be. I do not say it is conclusive, because there might be some blot in a scheme which had passed that had been unobserved and which was pointed out later. While, therefore, I protest that we are not to register their decisions, but to see that they have been properly convened and have been properly consulted and have considered the matter from a proper point of view, that is with a view to the interests of the class to which they belong and are empowered to bind, the Court ought to be slow to differ from them. It should do so without hesitation if there is anything wrong; but it ought not to do so, in my judgment, unless there is something brought to the attention of the court to show that there has been some material oversight or miscarriage.’

• The “fairness test” to be applied at the sanction hearing is commonly worded as follows: “the Court must be satisfied that the arrangement is such as an intelligent and honest man, a member of the class concerned, acting in respect of his interest as such, might reasonably approve.” Given that the class is very homogeneous here it’s unlikely that honesty (e.g. coercive behaviour or conflicted interests) is an issue here between class members. 

• However, the court could consider whether the outcome of the meeting could be relied upon and could look at several factors, the most relevant one of which would be whether information was presented timely and fairly. 

• Amigo established a website to inform about the scheme, which contained all relevant documents including an “explanatory statement” and an “estimated outcome statement”. It seems plenty of time and explanation was provided for people to digest the information, taking into account as well that the creditors were not hedge funds but consumers.

• The crux will be whether Amigo filing for insolvency as the only “likely” option if the scheme would not be approved has been fairly presented as such. I.e. should the possibility of a better cash contribution or an equity contribution have been included or discussed? 

• In order to prove the forme, the FCA would have to submit concluding evidence that the documentation was misleading on this point, which will be a high hurdle, because the potential of insolvency is not at all unreasonable as argued and presented in the “estimated outcome statement”.

• “A better deal could have been possible” is generally not an argument for sanction not to happen as was illustrated with Inmarsat PLC:

“As a basis for challenge, he said that the ability to object, at the sanction hearing, to a scheme approved at the court meeting is not conferred to see whether some better deal might be negotiated. While, commercially, that was the objective of the Objectors, it was not the question with which the court was ultimately concerned at the sanction hearing. The only question with which the court is concerned is whether the scheme actually presented to it is such as might reasonably be approved by an honest and intelligent shareholder.”

Concluding, we arrived at a 75-80% probability of the scheme being sanctioned based on current availability information (12 May 2021). With the upper limit reached if the same judge that was presiding over the convening hearing - The Honourable Mr. Justice Norris - would also preside over the sanction hearing, given his recent track record of sanctioning of contested schemes (most notably Inmarsat PLC and William Hill PLC).

Value of “Amigo 2.0” post Sanction

A cursory look at how Amigo has performed historically shows what the potential upside could be if the the equity survives post 19 May 2021:

Source: S&P Capital IQ

If we take the lowest EBIT number before the troubles say at £61.4m and multiply that with a modest 4x we get a share price of 51.6p.If the scheme does not go through we think the price should fall back to the lowest point we have seen so far: 5.16p. This assumes the current assets on the balance sheet cover all liabilities. 

Assuming the above we get an expected value of: 40p based on the 75% probability of sanction as per above, providing a 1.6x multiple on an expected basis.

Given the ongoing investigations by the FCA there is a longer term risk (say from 6 months from now) that the FCA might reach a conclusion that Amigo’s authorisations would need to be revoked at which point you could deem the business worthless. The likelihood of that happening between now and the potential sanction of the scheme is extremely low. But it does focus this idea as a short term trade only.

Catalyst

Sanction of the scheme at the court hearing on the 19th of May 2021 or shortly thereafter