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Amigo Luxembourg S.A. -- Moody's places Amigo's B3 backed senior secured debt ratings on review for downgrade

·16 min read

Rating Action: Moody's places Amigo's B3 backed senior secured debt ratings on review for downgradeGlobal Credit Research - 05 Feb 2021London, 05 February 2021 -- Moody's Investors Service ("Moody's") has today downgraded to Caa1 from B3 the Corporate Family Rating (CFR) of Amigo Loans Group Ltd (Amigo) and placed it on review for further downgrade. At the same time, the rating agency placed on review for downgrade the B3 backed senior secured rating of the notes issued by Amigo Luxembourg S.A.Today's rating action reflects Moody's view that Amigo is facing heightened solvency risks following a surge in customer complaints[1]. Furthermore, it captures the uncertainties regarding the balance sheet composition, and the magnitude of the economic value loss in the coming months, as well as the senior secured bonds' priority ranking security interest.The outlook on all issuers has been changed to ratings under review from negative.A full list of affected ratings can be found at the end of this press release. RATINGS RATIONALE DOWNGRADE OF CFR The downgrade of the CFR to Caa1 from B3 follows elevated risk to the solvency of Amigo, following the surge of customer complaints. The company indicated that it might not be able to redress these complaints fully and could become insolvent, unless its proposed Scheme of Arrangement (the Scheme) is approved.Amigo Holdings PLC has recently incorporated a new wholly owned subsidiary, ALL Scheme Ltd, for the purpose of paying redress to all current and former customers (both borrowers and guarantors with a valid claim) in relation to historic loans made by Amigo before 21 December 2020 ("Redress Creditors") and certain related liabilities owed to the Financial Ombudsman Service (FOS). These redress claims are primarily related to affordability but also include all claims arising out of, or in relation to, those historic loans. Under the terms of the Scheme, Amigo is proposing a compensation pool of GBP15 million to GBP35 million, plus a cash contribution based on 15% of pre-tax profit for the next four financial years ending 31 March 2025. The court hearing for the Scheme is on 30 March 2021. If the court approves the setting up of the Scheme, then the Redress Creditors will be called upon to vote on it in April followed by the final court hearing to approve the Scheme later in May. The uncertainties in relation to whether the court will approve the Scheme and whether sufficient claimants will subsequently vote in favour of it heighten the risk of Amigo's insolvency and are reflected by Moody's downgrade of the CFR to Caa1.The Caa1 CFR reflects Amigo's good cash reserves replenished by collections from outstanding loans that enables it to meet its operational and funding expenses; and its solid Tangible Common Equity relative to Tangible Managed Assets at 22% as of September 2020 that provides a good loss absorbing cushion. Furthermore, if there is a favorable outcome in regard to the Scheme in April followed by a final approval of the court in May, Amigo will have no refinancing need until 2022 for its securitization facilities and 2024 for its senior secured notes. Therefore, the company could gradually resume lending once the regulatory investigations are completed. The CFR also reflects Moody's expectation that Amigo will continue to report losses in the next 12-18 months unless there is significant new lending. Amigo's loan book contracted 30% year-on-year up to September 2020 and continues to do so given new lending has ceased.Moody's believes Amigo's exposure to social risk is very high under its Environmental Social and Governance (ESG) framework, given potential implications for vulnerable borrowers and persistent debtors. This is due to risks arising from the rise in customer complaints and the FOS' claims in relation to customers' affordability of additional debt, potential regulatory fines and related reputational damage, all of which are having a significant credit impact on the entity and are therefore key drivers of today's rating action.- REVIEW FOR DOWNGRADE OF THE CFR AND THE B3 BACKED SENIOR BOND RATINGMoody's review for downgrade of the Caa1 CFR reflects the possibility that the company could become insolvent were the proposed scheme to not be approved by the court in March or ultimately by a sufficient number of participating claimants in April.The review for downgrade of the B3 rating on the senior secured notes reflects their position in the company's funding structure, the notes' terms and the uncertainties regarding the balance sheet composition and the magnitude of the economic value loss in the coming months. In Moody's opinion, the notes' priority ranking security interest provides protection and reduces their expected loss, thereby underpinning the B3 rating of the notes, one notch higher than Amigo's CFR.Moody's said the review will primarily focus on the outcome and the related financial implications of the upcoming court ruling and the subsequent Redress Creditors vote on Amigo's proposed Scheme and if supported at both stages in the process, the strategic steps Amigo will take soon afterwards, its forecast balance sheet evolution in the first half of 2021 and any relevant updates from the Financial Conduct Authority's ongoing investigation of the company's affordability assessment processes.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAmigo's CFR could be confirmed at current levels if Moody's concludes that the company will be able to maintain its standalone financial profile after a favorable court ruling and the Redress Creditors vote on the Scheme, without any adverse development in its solvency and liquidity profile and franchise positioning. Amigo Luxembourg S.A.'s backed senior secured debt ratings could be confirmed at the current level upon confirmation of Amigo's CFR and if Moody's believes that there continues to be sufficient unencumbered assets to continue to meet the claims of the senior note holders.Amigo's CFR could be downgraded because of Amigo filing for insolvency or further weakening in its solvency or liquidity profile, and/or franchise positioning, governance and risk management. The senior secured notes may be downgraded if the CFR is downgraded or there is a material increase in the liabilities that will rank super senior to or pari-passu with the senior secured notes that would increase their expected loss. Redemption of the senior notes at a material discount, were this to occur, could be viewed as a distressed exchange and result in a multi notch downgrade.LIST OF AFFECTED RATINGSIssuer: Amigo Loans Group Ltd..Downgraded and placed on Review for further Downgrade:....Long-term Corporate Family Rating, downgraded to Caa1 from B3..Outlook Action:....Outlook changed to Rating under Review from NegativeIssuer: Amigo Luxembourg S.A...Placed on Review for Downgrade:....Backed Senior Secured Regular Bond/Debenture, currently B3..Outlook Action:....Outlook changed to Rating under Review from NegativePRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Amigo Holdings PLC Announcement: RNS Number : 6832M, 25-Jan-2021Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Arif Bekiroglu Vice President - Senior Analyst Financial Institutions Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Carola Schuler MD - Banking Financial Institutions Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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