Amigo Regulatory News (AMGO)

26 November 2020

Amigo Holdings PLC

Interim results for the six months ended 30 September 2020

Amigo Holdings PLC, (Amigo), the leading provider of guarantor loans in the UK, announces results for the six-month period ended 30 September 2020.

Headlines

· Covid-19 related payment holidays granted to approximately 56,000 customers as at 30 September 2020. As at end of October this was 57,000 with 22,000 plans still active. Monthly collections remain robust at 83% of pre-Covid-19 expectations

· Revenue reduction of 36.5% to £92.3m (H1 2020: £145.4m) primarily due to the temporary pause in all new lending except to key workers and the modification loss arising from Covid-19-related payment holidays

· Net loan book reduction of 33.6% to £485.2m (H1 2020: £730.7m)

· Impairment:revenue ratio at 21.1% (H1 2020: 31.1%) reflecting a significant reduction in originations

· The provision for complaints increased to £159.1m (H1 2020: £7.5m) with an associated cost of £93.7m (H1 2020: £10.4m), following a review of the volume assumptions within our forward-looking provision to reflect ongoing higher levels of complaints

· Reported statutory loss before tax for the period of £62.6m (H1 2020: profit £42.3m)

· The tax charge predominately reflects the write off of a deferred tax asset

· Reported statutory loss after tax for the period of £67.9m (H1 2020: profit £37.0m)

· £134.2m of cash as at 30 September 2020 (H1 2020: £27.9m) after a reduction in net borrowings of £230.8m from the prior year; cash as at 25 November 2020 of c.£160.0m reflects continued strong cash generation and a refund of tax paid

· Net borrowings/equity: 2.7x (H1 2020: 2.0x)

· The Board considers that it has adequate liquidity to continue to fund operations and support its customers. There is, however, a material uncertainty surrounding going concern due to the potential economic impact of Covid-19, uncertainty over future complaint volumes and the possible outcome of the ongoing FCA investigation.

Post period end

· Complaints Voluntary agreement (VReq) deadline reached. As of 30 October 2020, Amigo had reviewed and reached a decision on all 25,571 of the complaints included within the VReq. Final responses were outstanding on 2,517 of those complaints, 2,209 relate to a specific group of complaints where guarantor payment has been a feature and 238 relate to complaints where further information is required from third parties to calculate redress due

· Asset Voluntary agreement (VReq) entered into with the FCA whereby prior approval from the FCA is required to transfer assets outside of the Group. No effect on day to day running of Amigo or ability to pay down debt

· An extension to the waiver period on the Group's securitisation facility has been agreed in principle. We expect to announce confirmation of this shortly. During this waiver period, performance triggers will remain waived and all collections from securitised assets will be used to pay down the outstanding borrowings

· Amigo is working with advisers to review options, that are acceptable to all stakeholders, to address the current level of complaints. While at an early stage, this includes assessing the use of a scheme of arrangement as a potential vehicle for customer redress

· New Board and senior management appointments; well placed to manage the change and transformation required to position Amigo for the long term

*Detailed definitions and calculations of these alternative performance measures (APMs) can be found in the APM section of these condensed financial statements

Gary Jennison, CEO of Amigo, said: "It's undoubtedly been a difficult period for Amigo but as a team we have made significant progress towards quantifying and addressing the challenges we face. As a Board we have a clear responsibility to all our stakeholders: from delivering the right outcomes for our customers as they manage the impact of Covid-19, to managing the wellbeing of our employees, and getting the business back on track for our shareholders.

"We are much better placed operationally to manage complaints and we now understand our position better. We have appointed professional advisors to help us look at all the available options; this work is at a very early stage. Where we've seen evidence of very poor behaviour by some CMCs, we have reported them to their regulator, the FCA. Our focus is on ensuring that Amigo retains its position as a viable unsecured lending platform for the 10-12m adults who are excluded from mainstream bank lending. We want to meet the varied needs of these potential customers, be that through offering guarantor loans or other unsecured loan products.

"We are engaging with our regulator, the FCA, on a regular basis and are actively participating in the Woolard Review. There are millions of people that cannot access mainstream finance today but deserve a chance to be able to access it tomorrow. We want to be part of the solution for increasing financial inclusion in the UK, that is our purpose and what we are working towards delivering in 2021."

Analyst, investor and bondholder conference call and webcast

Amigo will be hosting a live webcast for investors and bondholders today at 09:30 (London time) which will be available at: https://www.amigoplc.com/investors/results-centre. A conference call is also available for those unable to join the webcast (Dial in: + 44 20 3868 4725; Access code: 388329). A replay will be available on Amigo's website after the event. The presentation pack for the webcast shows the reconciliation between the PLC results and Amigo Loans Group Limited (the 'Bond Group').

Investor video

There is an investor video available to view here, where Gary Jennison, CEO of Amigo, discusses his thoughts on the interim results and the key corporate updates since he took the role of CEO.

Notes to summary financial table:

1Number of customers represents the number of accounts with a balance greater than zero, exclusive of charged off accounts.

2Net loan book represents total outstanding loans less provision for impairment excluding deferred broker costs.

3(Loss)/profit after tax otherwise known as (loss)/profit and total comprehensive income to equity shareholders of the Group as per the financial statements.

4 Adjusted (loss)/profit after tax excludes items due to their exceptional nature including: senior secured note, RCF fees, securitisation facility fees write off, tax provision release, tax asset write off and strategic review and formal sale process costs. None are business-as-usual transactions. Hence, removing these items is deemed to give a view of underlying (loss)/profit adjusting for non-business-as-usual items within the financial year.

5 Adjusted basic (loss)/earnings per share is a non-IFRS measure and the calculation is shown in note 8. Adjustments to (loss)/earnings are described in footnote 5 above.

6Net borrowings/equity - net borrowings is defined as borrowings less cash at bank and in hand. This is divided by shareholder equity to give the Group's preferred gearing metric.

Contacts:

Amigo

Mike Corcoran, Chief Financial Officer

Kate Patrick, Head of External Affairs & Investor Relations investors@amigo.me

Hawthorn Advisors amigo@hawthornadvisors.com

Lorna Cobbett Tel: 07771 344 781 

About Amigo Loans

Amigo is a public limited company registered in England and Wales with registered number 10024479. The Amigo Shares are listed on the Official List of the London Stock Exchange. Amigo is a leading provider of guarantor loans in the UK and offers access to mid‐cost credit to those who are unable to borrow from traditional lenders due to their credit histories. The guarantor loan concept introduces a second individual to the lending relationship, typically a family member or friend with a stronger credit profile than the borrower. This individual acts as guarantor, undertaking to make loan payments if the borrower does not. Amigo was founded in 2005 and has grown to become the UK's largest provider of guarantor loans. In the process, Amigo's guarantor loan product has allowed borrowers to rebuild their credit scores and improve their ability to access credit from mainstream financial service providers in the future. Amigo is a mid‐cost provider with a simple and transparent product ‐ a guarantor loan at a representative APR of 49.9 per cent., with no fees, early redemption penalties or any other charges. Amigo Loans Ltd and Amigo Management Services Ltd are authorised and regulated in the UK by the Financial Conduct Authority.

Forward looking statements

This report contains certain forward-looking statements. These include statements regarding Amigo Holdings PLC's intentions, beliefs or current expectations and those of our officers, Directors and employees concerning, amongst other things, our financial condition, results of operations, liquidity, prospects, growth, strategies, and the business we operate. These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will or may occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast. Except as required by law, Amigo Holdings PLC has no obligation to update the forward-looking statements or to correct any inaccuracies therein.

Chief Executive's Statement

Performance

The first half of the financial year, to end September 2020, has been a difficult period, for Amigo and, we recognise, for our shareholders. But it is one in which we have made significant progress towards quantifying and addressing the challenges we face. We have made substantial changes to our Board including the appointment of a new Chair, my role of Chief Executive, and post the period end, Chief Financial Officer and two new Non-Executive Directors. The addition of a new Chief Risk Officer and Chief Transformation Officer complete the turnaround team for Amigo.

We have continued to support our customers through the Covid-19 pandemic, and, with the inclusion of interest holidays for the first three months, have gone beyond FCA guidance in the relief we have offered. Over 30,000 borrowers have transitioned out of payment holidays, as of end October 2020, and we have maintained collections at a healthy level.

The biggest challenge we have faced over this period, is without doubt, the level of complaints we have received. We have continued to increase resource capacity to manage the volumes, especially from the claims management companies (CMCs). We are taking a robust approach to dealing with the CMCs, including reporting our concerns about the behaviour of specific firms to the Financial Conduct Authority (FCA). The team and I are in regular contact and continue to have positive and constructive discussions, at a senior level, with the FCA.

To enable the business to move forward in the best interests of all stakeholders, the Group is working with advisers with experience in the non-standard lending sector to consider how best to address the current situation regarding the level of complaints. The Group and its advisers are considering all possible options, including the use of a scheme of arrangement as a potential vehicle for customer redress. Consideration of these options is at an early stage. Through these discussions, Amigo remains committed to achieving an outcome that is acceptable to all stakeholders, which provides a fair outcome for our customers and which will enable us to progress and provide a greater degree of certainty for the business.

Whilst we are better placed operationally to manage complaints, the overall number of complaints received, despite continued monthly volatility, has been higher than we initially expected. We have therefore adjusted our volume assumptions within our forward-looking provision to reflect this extended period of high volumes. As a result, the balance sheet provision for complaints has increased to £159.1m. The cost of complaints for the half year is £93.7m which has led to a reported loss before tax for the first six months to 30 September 2020 of £62.6m and loss after tax of £67.9m. Adjusting for exceptional items, adjusted loss after tax was £58.1m (see note 4 of the summary financial table for details of the adjustments).

Strategy

I have successfully led three previous turnaround situations in the past and I am convinced that we can fix the issues Amigo is facing and rebuild the business for the long term. This is a great business, with driven and engaged people pursuing a purpose that supports the financially underserved in our society.

We now have over 300 people working solely on complaints. Together we are taking a thorough approach, not only analysing the root cause analysis as is expected, but also pushing back robustly on the egregious behaviour that we are seeing from some CMCs. Addressing in excess of 25,000 complaints over the first half of the financial year has been an enormous task and it is testament to the whole team that this has been achieved. Reaching a resolution and conclusion to this situation, and finding a fair outcome for all our customers, remains our primary focus.

We are also working hard to rebuild confidence and communication with our regulator. It is vital that we listen to the regulator, build knowledge of our product and our purpose, and agree a way forward that enables us to continue to provide financial inclusion to those underserved by mainstream lenders.

We have taken a hard look at how and what we do now as a business and what we might do in the future. Before we lay out our strategic direction, our number one priority must be to resolve the complaints challenge and we are making progress in addressing the issue under a new senior team at Amigo. There is significant opportunity open to us, and our current and future customers, once that is done.

We aim to restart lending, in a prudent way, as soon as possible in 2021. There is strong demand for non-standard loan products, and this is likely to be even more relevant as the economy recovers from the Covid-19 pandemic. Amigo has great people and an established brand and customer base. The non-standard lending market, with 10-12 million people in the UK unable to access mainstream credit, presents huge growth opportunities. We continue to assess the scope of alternative products and pricing strategies to leverage this strong demand for non-standard lending products.

Regulatory Update

With a new Board in place, and a strong commitment to rebuild the relationship with our regulator, we have been in regular and productive communication with the FCA at a senior level. In September 2020, it was announced that the FCA will be undertaking a review of unsecured credit market regulation, the Woolard Review, which will look at how regulation can better support a healthy unsecured lending market. This is an important review which we fully support and are pleased that we were able to contribute to the consultation with participation in a number of review related roundtables.

Vulnerability in customers remains a key focus for us and our regulators and will become even more important as a result of the Covid-19 pandemic. We have a specialist team trained to identify and support our customers where they show signs of vulnerability, to find the right solution for them.

As a result of the second Covid-19 lockdown the FCA issued guidance to extend the time period in which Covid-19-related relief is offered. We have continued to offer an initial three-month interest payment holiday to support our customers during this time, exceeding the guidance from the FCA, and any customer impacted by Covid-19 can get up to six months of payment holiday from us.

Over the first half we have continued to observe poor behaviour from some CMCs, for example issuing complaints from people who have never been customers of ours or submitting complaints multiple times from one customer. We have reported our concerns around the behaviour of certain CMCs to the FCA, who took over the regulation of the sector in April 2019, and to the Solicitors Regulatory Authority where these claims firms are regulated by them. The negative behaviour that we are witnessing has been highlighted in a recent Portfolio letter from the FCA to CMCs in October 2020.

Post the period end, in October 2020, we agreed with the FCA an Asset Voluntary Requirement (VReq), meaning prior approval will be required to permit the transfer of assets outside of the Group in certain circumstances, including discretionary cash payments to the Directors of the Company and dividends to shareholders. The Asset VReq does not impact the day to day running of Amigo or its ability to continue to pay down debt. At the end of October, as detailed in the Financial Review, we also reached the deadline for the Complaints VReq.

We continue to work with the FCA Investigations team to aid the ongoing enquiry into our creditworthiness processes from November 2018 and we will update the market as appropriate.

Our people

We believe that our people make the difference between success and failure. Our teams have worked tirelessly to support our customers through the unprecedented global Covid-19 pandemic and to manage the rapid escalation in complaints volumes. I would like to thank each one of our people for their continued hard work, support and customer care.

Board and senior management change

There has been substantial change to the Board composition since the start of this financial year. On 1 August 2020, Jonathan Roe joined the Board as a Non-Executive Director and received FCA authorisation to assume the role of Chair of Amigo on 13 October 2020. Roger Lovering, who held the position of Acting Chair from June 2020 resigned that position, with immediate effect, on Jonathan's approval and subsequently stepped down as Non-Executive Director from the business on 31 October 2020. I took on the role of Chief Executive in September 2020, under the '12-week rule' pending FCA full authorisation, having joined the Board in August 2020 as a Non-Executive Director.

Post the period end, in October 2020, Maria Darby-Walker joined the Board as a Non-Executive Director and will take over as Chair of the Remuneration Committee following FCA approval. We also announced that Nayan Kisnadwala stepped down from his role as Chief Financial Officer and Director on 11 November 2020, with Mike Corcoran joining the Board as Chief Financial Officer under the 12-week rule, pending full FCA authorisation. On 19 November 2020, we announced that Michael Bartholomeusz joined the Board as a Non-Executive Director with immediate effect. Michael will take over as Chair of the Risk Committee, subject to FCA approval. Furthermore, we announced the immediate appointment of Paul Dyer as Chief Risk Officer, under the 12-week exemption rule, and of Shaminder Rai as Chief Transformation Officer, who is expected to start in January 2021. These appointments reflect the Board's commitment to addressing rapidly the challenges that we face, to creating long-term value for our shareholders and to returning to provide the chance of financial inclusion to the millions of people in the UK unable to access credit from mainstream lenders.

As announced in October 2020, and as part of an orderly and co-ordinated Board transition process, Richard Price confirmed his intention to step down as Non-Executive Director following the publication of these half year results. On behalf of the Board, I would like to thank Nayan, Roger and Richard for their valuable contribution to Amigo over the years.

On 17 June 2020 a General Meeting was held, having been requisitioned by our former majority shareholder Richmond Group Limited (RGL), with resolutions to remove each of the five members of the Board at that time and appoint two alternative named directors in their place. All resolutions were opposed with over 90% of the minority shareholders that voted supporting the Company. In September 2020, a second General Meeting took place, also requisitioned by RGL, to remove certain Directors and appoint founder James Benamor as a Director. The Board notes that while all the resolutions were voted down by the shareholders, a not insignificant minority of shareholders did not support the Board's recommendation that shareholders vote against all the resolutions. We appreciate the support we have received and reconfirm our commitment to delivering long-term value and to engaging with all our shareholders as we move forward with full focus on turning our business around and driving a culture of strong governance and fair treatment of customers to provide financial inclusion.

I am pleased to be taking on the role of Chief Executive and delighted to be doing so with a Board that brings significant financial and regulatory experience; one that is well placed to manage the change and transformation that is required to rebuild Amigo as a sustainable business for the long term.

Summary and Outlook

The first half of the financial year has been a challenging period, but we are confident that we are making progress in quantifying and addressing Amigo's legacy issues. We have a new Board in place which is focused on taking the business through to the next stage of its development.

We are preparing to return to lending, on a prudent basis, as soon as possible in 2021. Until we do so, and until we have more clarity on the financial impact of Covid-19, the Board considers it too early to issue guidance for this financial year. Our cash position remains strong, despite paying customer redress of £35.4m and reducing debt by over £130.0m in the first half. Collections remained at 83% of pre-Covid-19 levels. Despite material uncertainties around the economic impact of Covid-19, future complaint volumes and the outcome of the ongoing FCA investigation, the Board has adopted the going concern basis of accounting for the presentation of these half year results.

The Board considers there to be adequate liquidity to continue to fund operations and support our customers. As at 25 November 2020, we have approximately £160.0m of cash.

Amigo's purpose of providing financial inclusion to the millions of borrowers in the UK unable to access the mainstream credit providers, will become more important as the country recovers from the economic impact of Covid-19. We will look to broaden the way in which we can provide solutions to our customers' needs as we position the business for the long term.

Financial review

In the first six months to 30 September 2020, revenue fell by 36.5% year on year, reflecting both the pause in lending except to key workers and the impact of Covid-19 payment holidays. Amigo's pause in lending following the onset of Covid-19 led to a decline in customer numbers of 21.0% and a reduction in the net loan book of 33.6% compared to the prior year. Total originations year to date are £0.4m, reflecting lending to key workers throughout the period; all lending ceased on 3 November 2020 alongside the second Covid-19 related lockdown in the UK. Complaints related balance adjustments to customer balances have also contributed to the reducing loan book.

Amigo ended the period with a statutory loss before tax of £62.6m (H1 2020: profit before tax of £42.3m) and a statutory loss after tax of £67.9m (H1 2020: profit after tax £37.0m) primarily due to the increase in the provision for complaints and the associated cost of complaints over the period.

Adjusting for non-recurring items defined in note 5 of notes to summary financial table, adjusted loss after tax was £58.1m, (H1 FY2020 adjusted profit of £35.8m).

Complaints Provision

Over the six month period to 30 September 2020, a substantial increase in complaints received has occurred with the source of these complaints predominantly being CMCs. At Q1, the complaints balance sheet provision of £116.4m was broadly unchanged from the year-end on the basis that Q1 volumes were largely in line with expectations. Since Q1, complaint volumes, whilst volatile, have continued to rise and we have seen an increase in the volume of defended complaints being referred to the Financial Ombudsman Service (FOS). On 27 May 2020, we agreed a VReq with the FCA to work through a backlog of complaints, principally arising in 2020, by the end of June 2020. An amended VReq was later agreed on 3 July 2020, covering a higher volume of complaints, to reach a position by 30 October 2020 where all complaints are dealt with appropriately within an eight-week timeframe. As a result, the volume of cases being worked and decisioned significantly increased in the quarter leading to a large increase in provision utilisation since Q1.

£53.2m of the provision was utilised in the six month period to 30 September 2020 (H1 FY2020: £2.9m), with £44.7m occurring within Q2. This represents redress settlements to customers, of which around 60% was settled with cash, and the remaining 40% with balance adjustments. As at 30 September 2020, the balance sheet provision stands at £159.1m (H1 2020: £7.5m), resulting in a £93.7m charge to the consolidated statement of comprehensive income (H1 FY2020: £10.4m), of which £86.9m occurred in Q2. 

The rise in complaint volumes, predominantly from CMCs, has been factored into our half-year provision as management have revisited key assumptions in the provision calculation, hence the material increase in the balance sheet provision to £159.1m in Q2. In accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets, the provision relates to both the estimated costs of customer complaints received up to 30 September 2020 and the projected costs of potential future complaints where it is considered more likely than not that customer redress will be appropriate, based on the available data on the type and volume of complaints received to date. The provision is not intended to cover the eventual cost of all future complaints; such cost remain unknown, but rather it provides for projected future complaints where it is deemed there is a constructive obligation resulting from a past event.

The key change in assumptions since Q1 is an increase in estimated post-Q2 complaint volumes in our forward-looking provision following an upward trend of complaint volumes received over the period. For sensitivity analysis and discussion over significant judgements and estimates used in the complaints provision calculation see note 2.3 to these financial statements.

The complaints VReq agreed in July with the FCA, reached its deadline following the period end, on 30 October 2020. A total of 25,571 complaints were subject to the requirements of the VReq. As of 30 October 2020, Amigo had reviewed and reached a decision on all 25,571 of the complaints included within the VReq but had not issued the final responses to customers on 2,517 of those complaints, primarily for specific, known reasons. Of the outstanding complaints 2,209 related to a specific group of complaints where guarantor payments on a loan have been a feature. The methodology for calculating redress for this specific group of complaints is being discussed with the FCA. Of the remaining outstanding cases under the VReq, 238 related to cases where Amigo was working with a third party to collect the necessary information required to calculate the redress due.

Amigo is committed to managing complaints raised by customers in accordance with regulatory requirements. The Board has changed significantly over the period, with the newly formed Board of Directors prioritising rebuilding relationships with our regulators and the FOS. Amigo continues to work with the FOS to ensure we are aligned on the approach to decisioning complaints and finalising outcomes. Amigo is constantly reviewing the quality of complaints incoming and referred to the FOS by CMCs and as a result of this analysis has submitted formal complaints to the FCA on a number of CMCs.

We have hired external advisors and built up our claim handling infrastructure, with the complaints team at 30 September 2020 being circa 300 heads strong. We continue to investigate the root cause of complaints in line with regulatory expectations.

Covid-19 payment holidays

During the first half of our financial year, Amigo granted Covid-19 related payment holidays to approximately 56,000 customers. As at 30 September 2020, Amigo had approximately 39,000 customers on Covid-19 related payment holidays with over 12,000 customers plans ending and returning to standard payments. As at 31 October 2020, the number of active plans had reduced to 22,000 with 29,000 plans ending and returning to standard payments, a further 6,000 either settled or charged off. Following these customer payment holidays ending, there has been a slight increase in arrears, although still encouragingly below year-end pre-Covid-19 levels.

From 31 March 2020, Covid-19 relief measures were formally introduced; for customers that requested it, depending on their individual circumstances, initial payment holidays with durations up to three months were offered.

Towards the end of Q1, following the FCA's announcement of the extension to customer payment holidays for personal loans for up to six months, Amigo's payment holiday policy was revised. A customer could first extend their payment holiday up to a backstop duration of three months. Customers were then able to request extensions up to a total plan length of six months. Should the customer request a plan extension taking the payment holiday beyond three months, plans were then automatically renewed on a monthly basis, up to an aggregate six-month maximum. Customers had the option to opt out and end the payment holiday at any time. For the first three months of the payment holiday no interest accrued on customer balances; from four to six months interest accruals were applied. As a result of Amigo's interest cap, the reintroduction of interest accrual between months four and six of a payment holiday will not increase the total interest payable by the customer over the life of the loan. Rolling monthly extensions have been predominantly granted from 1 July 2020 onwards.

No capital or interest is forgiven as part of the forbearance despite no interest accruing for plans up to three months in length; the customer is still expected to repay the loan in full.

By deferring contractual repayments without increasing the value of future monthly instalments, the present value of the future cash flows for customers with Covid-19 payment holidays is reduced. In accordance with the asset modification and effective interest rate requirements of IFRS 9, a modification loss has been recognised based on the estimated change in the present value of contractual cash flows that arises from the Covid-19 payment plans granted up to 30 September 2020. An initial modification loss of £16.0m was recognised in Q1 for all payment holidays granted in the quarter, with £12.9m recognised in revenue, and £3.1m recognised in impairment. By the end of Q2, this modification loss had completely unwound with £nil impact on the closing Q2 loan book.

During the second quarter, extensions to Covid-19 payment holidays granted in Q1 and new payment holidays granted in Q2 represented additional modification events. Hence, a further modification loss of £16.0m has been recognised in the second quarter, with £12.0m recognised in revenue and the remainder recognised in impairment. The modification loss relating to Q1 plans that were extended in Q2 will amortise over the remaining life of the loans.

See notes 2 and 5 to these financial statements for more details on key management judgements and estimates surrounding modification loss calculation. The modification losses recognised in the consolidated income statement are purely accounting adjustments; the expected timing of future cash flows has altered, but total interest and principal due from each loan remain unchanged.

Impairment

The impairment charge as a percentage of revenue was 21.1% (H1 FY2020: 31.1%) for the first six months of the financial year reflecting the limited originations in the period. The balance sheet provision has fallen by [£19.4m] since the end of Q1 to £78.7m (14.0% of gross loan book) (H1 FY2020: £86.6m], 10.6% of gross loan book). The overall provision has reduced in line with the amortisation of the loan book in the absence of any meaningful originations.

Cash and liquidity

Collections remain robust at 83% of pre-Covid-19 expectations for the period to 30 September 2020. This includes the early settlement of some customer loans. Amigo has adequate liquidity to continue to fund operations and support its customers, with £134.2m cash held as at 30 September 2020. Post period end, cash rose to c.£160m as at 25 November 2020 due to receipt of a £27.2m tax refund.

Tax

The effective tax rate of the business for the first six months is negative 8.5% (H1 2020: 12.5%), lower than the prevailing UK corporation tax rate of 19%. This is due to the write off of a deferred tax asset and prior year tax provisions.

Following the period end, Amigo received tax refunds totalling £27.2m from HMRC increasing the cash position and reducing net borrowings respectively. £7.1m relates to loss relief for carried back losses, and the remainder relates to quarterly payment instalments made prior to the recognition of a complaints provision as at 31 March 2020 which resulted in an overall loss making position for the financial year.

A deferred tax asset of £6.6m has been written off and charged to the Consolidated Statement of Comprehensive Income; this was initially recognised following transition from IAS39 to IFRS 9. Due to inherent uncertainty surrounding future profitability, this asset has been written off. Other tax assets totalling £1.7m have also been charged to the Consolidated Statement of Comprehensive Income in the period.

Funding

The Group is financed from a combination of cash generated from operations, senior secured notes of £234.1m with a 7.625% coupon and a securitisation facility of £250m. During the first half of the year, due to the potential impact of Covid-19 on asset performance, Amigo negotiated a waiver period on asset performance triggers for the securitisation facility to 18 December 2020, allowing both Amigo and its lenders the opportunity to fully understand the impact of Covid-19 on the business whilst maintaining the facility. In addition, the size of the facility was reduced from £300m to £250m, reflecting Amigo's current lower funding requirements while lending is paused.  All cash generation arising from customer loans held within the securitisation facility is restricted and will continue to be used during the waiver period extension to further reduce the outstanding balance. An extension to the waiver on the securitisation facility has been agreed in principle.

On 27 May 2020, Amigo voluntarily cancelled its undrawn revolving credit facility of £109.5m. Net borrowings (defined as borrowings less unrestricted cash) reduced from £396.3m to £265.5m over the six month period, with securitisation borrowings reducing to £168.0m from £230.0m and senior secured notes remaining at £234.1m.

The Group's average cost of funds, calculated as interest payable as a percentage of average gross loan book, has increased to 4.7% compared to 4.3% at the same time last year due to the reducing gross loan book. Amigo may from time to time make opportunistic open market repurchases of its outstanding high yield senior secured notes. The notes became callable at the beginning of January 2020.

Net borrowings / equity at 2.7x, (H1 FY2020: 2.0x), has increased from 2.4x at the full year.

Going concern

The Directors have identified circumstances that represent a material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern. See note 1.1 of the financial statements for more details.

Principal risks and uncertainties

Amigo's financial performance is subject to a number of risks and uncertainties that could materially impact its financial performance over the remaining six months of the year. The principal risks and uncertainties are consistent with those set out in pages 34 to 39 of the annual report and accounts 2020, which is available on the Company website.

All principal risks and uncertainties are summarized below. 

Credit risk

The macroeconomic environment in the first half of the year was more challenging than expected due to the impact of Brexit-related uncertainty and the emergence of Covid-19. The low interest rates, reduced business productivity and closures, employee furloughing and redundancy during the period has had the effect of increasing demand for credit whilst tightening lending policies across the financial services sector.

Amigo has offered a number of relief measures to customers suffering financial distress, both at the Company's initiative and following regulatory guidance. As customers reach the end of their payment holidays there may be challenges getting customers back to regular payments, even when they are financially able to do so, as well as maintaining normal collections activity. Year to date, cash collections have been at 83% of pre-Covid-19 projections. These factors have been partially offset by the pause in new lending, except to key workers in exceptional circumstances, beginning 24 March 2020. This has resulted in minimal originations, £0.4m, in the first six months of the year.

Customer and conduct risk

Covid-19 has led to an increase in customer and conduct risk, as existing customers have had their finances disrupted. We have mitigated this risk by offering payment holidays where needed in line with external guidance and best practice. We also restricted new lending to just key workers and only in exceptional circumstances from March 2020. From November 2020, we ceased all lending as the UK entered a second lockdown period.

Amigo continues to face a significant volume of complaints and FOS referrals and has made progress during the period in building operational capability to assess and respond to complaints in a consistent and timely manner. The volume of complaints received, particularly from claims management companies, continues to present a risk to the business in investigating and responding within agreed timeframes and agreeing redress where it is due. All complaints are individually assessed and where a complaint is upheld it is due to the particular circumstances of that case. We continue to work with key regulatory stakeholders to ensure that our customer and conduct risk management continues to develop in line with evolving regulation and industry best practice.

Regulatory and political risk

During the period, the FCA began an investigation into whether Amigo's creditworthiness assessment process, and the governance and oversight of this, was compliant with regulatory requirements.

Amigo has entered into two Voluntary Requirements ('VReq's) with the FCA.

· The first relates to customer complaints. On 27 May 2020 Amigo announced it had agreed this VReq to work through a backlog of complaints principally arising in 2020. Subsequently, on 3 July 2020, we announced that an amended version of the VReq, covering a higher volume of complaints, had been agreed. Under the terms of the amended VReq Amigo agreed to reach a position by 30 October 2020 where all complaints are dealt with appropriately within eight weeks. As of 30 October 2020, Amigo had reviewed and reached a decision on all of the complaints included within the VReq but had not issued the final responses to customers on 2,517 of those complaints, primarily for specific, known reasons.

· The second VReq relates to the transfer of assets and was announced after the period end, on 19 October 2020. This Asset Voluntary Requirement ('Asset VReq') means that prior approval by the FCA will be required to permit the transfer of assets outside of the Group in certain circumstances, including discretionary cash payments to the Directors of the Company and dividends to Shareholders. The Asset VReq does not impact the day to day running of Amigo or its ability to continue to pay down debt.

Amigo has a new Board in place and is in regular and productive dialogue with the FCA to restore confidence following the events of recent months. This includes responding to developing standards (including COVID-19 related relief), supporting the regulatory investigation and informing the future direction of regulation through feedback and challenge.

Operational risk

While Amigo has adapted well to the challenges of Covid-19 and remote working, the operational risk environment remains slightly elevated, with reduced in-person interaction and greater reliance on individuals' home internet service. The continuing rapid pace of change in the business, driven both by Covid-19 and business model challenges, also heighten the risk environment, though the business has a long history of rapid adaptation.

People risk

Continuing changes at ExCo and Board level through the first half of the year have kept risk in this area high, and the issues facing the business create significant challenges in hiring and retention throughout the business.

We continue to see very little direct impact on our people from Covid-19, but it remains a significant additional source of risk.

Strategic and competitive risk

The decision to restrict lending this year presented the risk that competitors may have increased market share in our absence. However, economic conditions have presented challenges for all firms in this sector, mitigating the loss of competitive advantage over the period.

Amigo's brand, product share, and operational efficiency remain notable competitive strengths and support our aim to restart lending with a new lending proposition in early 2021.

Treasury risk

On 27 May 2020, the RCF was cancelled, reducing funding diversification.

On 14 August 2020 the securitisation facility was renegotiated and on 17 August 2020 Amigo announced the further extension of the facility performance trigger waiver period to 18 December 2020. The facility was reduced from £300m to £250m reflecting Amigo's current lower funding requirement whilst lending is paused. All collections arising from customer loans held within the facility will be used to further reduce the outstanding note. The facility cannot be drawn down during the waiver period. The extension of the agreement on the securitisation beyond 18 December 2020 is subject to negotiation and hence significant risk remains.

Covid-19 and the requirement for extensive relief measures has tended to increase liquidity risk, though collections have been less impacted than initially expected. The requirement to pay significant amounts of cash redress on complaints has also contributed to liquidity risk. Offsetting this, the pause in lending has allowed Amigo to conserve cash, and the liquidity position is robust under baseline forecasts. But there is a significant risk that increased and sustained stress on collections or complaints could exhaust Amigo's liquidity.

Risk of shareholders with significant influence

During the first half of the year, following the June General Meeting, the former majority shareholder, Richmond Group Limited, sold down its holding in the Company, as it had declared to the market. During the course of that sell-down, the shareholder requisitioned another General Meeting, after the Relationship Agreement had lapsed but while the shareholder still held a sufficient stake to do so. Measures proposed regarding removal of certain Board members and appointment of others were not approved.

As the former majority shareholder has now sold its holding in its entirety and no other shareholder has developed a stake that gives it significant influence, this is no longer considered a material risk.

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

· the interim management report includes a fair review of the information required by:

a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Michael Corcoran

Director

26 November 2020 

Independent Auditor's Report to the members of Amigo Holdings PLC

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2020 which comprises Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Statement of Financial Position, Condensed Consolidated Statement of Changes in Equity and Condensed Consolidated Cash flows and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2020 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Material uncertainty related to going concern

We draw attention to note 1 to the interim report which indicates that the ability of the Group to continue as a going concern is significantly impacted by the severity of the complaints position and the possibility of further Financial Conduct Authority action and the Group is currently considering its options to address the current level of complaints, including the use of a scheme of arrangement. These events and conditions, along with the other matters explained in note 1, constitute a material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 1, the interim financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Nicholas Edmonds

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square London

E14 5GL

26 November 2020

Condensed Consolidated Statement of Comprehensive Income

The (loss)/profit is derived from continuing activities.

The accompanying notes form part of these financial statements.

1 This line item includes reversals of impairment losses or impairment gains, determined in accordance with IFRS 9. In the period £0.7m of previously recognised impairment gains were reversed (H1 2020: £2.1m reversal of impairment losses).

2 There was less than £0.1m of other comprehensive income during any period, and hence no consolidated statement of other comprehensive income is presented.

3 Total cost of dividends paid in the period was £nil (H1 2020: £35.4m). Final dividends are recognised on the earlier of their approval or their payment. Interim dividends are recognised on their payment date.

Condensed Consolidated Statement of Financial Position as at 30 September 2020

The accompanying notes form part of these financial statements.

This interim report of Amigo Holdings PLC was approved by the Board of Directors and authorised for issue.

Condensed Consolidated Statement of Changes in Equity

The accompanying notes form part of these financial statements.

1 The merger reserve was created as a result of a Group reorganisation in 2017 to create an appropriate holding company structure. The restructure was within a wholly owned group, constituting a common control transaction.

2 On 1 April 2019, the Group adopted IFRS 16. A right-of-use asset of £0.6m and a lease liability of £0.9m were recognised as a result on 1 April 2019, with the balancing amount being taken to retained earnings.

Condensed Consolidated Statement of Cash Flows

The accompanying notes form part of these financial statements.

Notes to the condensed consolidated financial statements

1. Accounting Policies

1.1 Basis of preparation of financial statements

Amigo Holdings PLC is a public company limited by shares (following IPO on 4 July 2018), listed on the London Stock Exchange (LSE: AMGO). The Company is incorporated and domiciled in England and Wales and its registered office is Nova Building, 118-128 Commercial Road, Bournemouth, United Kingdom BH2 5LT.

The principal activity of the Company is to act as a holding company for the Amigo Loans Group of companies. The "principal" activity of the Amigo Loans Group is to provide individuals with guarantor loans from £1,000 to £10,000 over one to five years.

The consolidated financial statements have been prepared on a going concern basis and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (EU-IFRS) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The consolidated financial statements have been prepared under the historical cost convention, except for financial instruments measured at amortised cost or fair value.

The presentational currency of the Group is GBP, the functional currency of the Company is GBP and these financial statements are presented in GBP. All values are stated in £ million (£m) except where otherwise stated.

In preparing the financial statements, the Directors are required to use certain critical accounting estimates and are required to exercise judgement in the application of the Group's accounting policies. See note 2 for further details.

These interim financial statements have been prepared fully in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. They do not include all the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of Amigo Holdings PLC (the 'Group') as at and for the year ended 31 March 2020.

The interim financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated annual report for the year ended 31 March 2020. Changes to significant accounting policies are described in notes 1.2 and 2.

The consolidated financial statements of the Group as at and for the year ended 31 March 2020 are available upon request from the Company's registered office at Nova Building, 118-128 Commercial Road, Bournemouth, United Kingdom, BH2 5LT.

The comparative figures for the financial year ended 31 March 2020 are not the Group's statutory accounts for that financial year, but are an extract from those statutory accounts for interim reporting. Those accounts have been reported on by the Company's auditor and delivered to the registrar of companies. The report of the auditor:

i) drew attention to the material uncertainty related to going concern referenced in the financial statements;

ii) did not include a reference to any other matters to which the auditor drew attention by way of emphasis without qualifying their report; and

iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

These interim financial statements were approved by the board of directors on 26 November 2020.

Going concern

The Directors have made an assessment in preparing these condensed financial statements as to whether the Group is a going concern. The financial statements have been prepared on a going concern basis which the Directors consider to be appropriate for the following reasons:

The Group meets its funding requirements through:

• cash generated from operations and the existing loan book is expected to continue to generate cash inflows in the normal course of business. Initially in response to the Covid-19 pandemic, new lending (inclusive of top-ups) except to key workers, was paused in March 2020. Subsequently on 3 November 2020 all new lending was paused, aligning to the date of the second national lockdown.

• a £250m securitisation facility (reduced from £300m on 17 August 2020) which expires in June 2022, after which the drawn balance will amortise in line with the repayment of the underlying securitised agreements. On 17 August 2020, Amigo announced it had agreed with its lenders a further extension of the waiver period end date from 24 July 2020 to 18 December 2020 to permit time for both parties the opportunity to fully understand and assess the impact of Covid-19 on the business, whilst maintaining the facility. The terms of the waiver period amendment remove the obligation of the lender to make any further advances to the Amigo Group, provide Amigo with a waiver from an early amortisation event should an asset performance trigger threshold be breached during the period and requires that all collections of securitised assets are used to repay any outstanding note balance. Any agreements with upheld complaints are repurchased from the facility for cash of equivalent value. The terms of the amendment also require that the facility must be restructured by 18 December 2020 to the satisfaction of the lender or the facility will be placed into early amortisation, after which, the performance covenants no longer apply.

• senior secured notes of £234.1m which expire in January 2024. The notes have no financial maintenance covenants.

The Group has a cash balance of approximately £160.0m as at 25 November 2020. The Directors have prepared a base case cash flow forecast which covers a period of twelve months from the date of approval of these condensed financial statements. This base case assumes:

· lending recommences within the period, albeit at significantly reduced levels compared with pre-Covid-19 originations

• the securitisation facility enters early amortisation on the assumption that Group is unable to restructure the facility to the satisfaction of the lender at the end of the waiver period, being 18 December 2020;

• the settlement of complaints redress continues in line with prudent expectations;

• credit losses, and therefore customer collections, remain within modelled moderately stressed levels;

• no dividend payments during the forecast period.

This base case indicates that the Group will have sufficient funds to enable it to operate within its available facilities and settle its liabilities as they fall due for at least the next twelve months.

The Directors have prepared a severe but plausible downside scenario covering the same forecast period, being at least the next twelve months from date of approval of these financial statements, which includes sensitivities that consider the potential impact of:

• increased credit losses as a result of a deterioration in the macroeconomy due to Covid-19 and the inability of an increased number of Amigo's customers to continue to make payments. This sensitivity is broadly aligned to Amigo's worst case IFRS 9 macroeconomic scenario (see note 2.1.3); and

• a sustained high volume of customer complaints throughout the forecast period on top of the redress assumptions modelled in the base case (note, assumptions used in the downside scenario are more severe than discussed in note 2.3).

This severe but plausible downside scenario indicates that the Group's available liquidity headroom would significantly reduce over the next twelve months, and the Group would need to source additional funding to continue to operate.

In light of the uncertainty regarding the level of future complaint flows, Amigo is working with advisers to review options that are acceptable to all stakeholders to address the current level of complaints. While at an early stage, this includes the use of a scheme of arrangement as a potential vehicle for customer redress. The Group has a reasonable expectation that it will be able to implement one of these options to address these uncertainties, however the directors acknowledge that the successful implementation of this process is not wholly within their control. Even in the base case, if the Group is unable to find a mechanism to contain complaints liabilities, for example by use of a scheme of arrangement, the Group's longer-term viability would be in doubt.

Additionally, in June 2020, the Financial Conduct Authority ("FCA") launched an investigation into the Group's creditworthiness assessment process, and the governance and oversight of this process. This investigation will cover the period from 1 November 2018 to date. Such investigations can take up to two years to finalise but could be concluded on within the next twelve months. There are a number of potential outcomes which may result from this FCA investigation, including the imposition of a significant fine and/or the requirement to perform a mandatory back-book remediation exercise. The Directors consider a mandatory back-book remediation exercise to be a possible outcome, but not the most likely outcome. The Directors consider should they be required to perform a back-book remediation exercise it could reasonably be expected to exhaust the Group's available liquid resources.

Based on these indications the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis. However, these circumstances represent a material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern and, therefore, to continue realising its assets and discharging its liabilities in the normal course of business. The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.

1.2 Amounts receivable from customers

i) Classification

IFRS 9 requires a classification and measurement approach for financial assets which reflects how the assets are managed and their cash flow characteristics. IFRS 9 includes three classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit and loss (FVTPL). Note, the Group does not hold any financial assets that are equity investments; hence the below considerations of classification and measurement only apply to financial assets that are debt instruments. A financial asset is measured at amortised cost if it meets both of the following conditions (and is not designated as at FVTPL):

· it is held within a business model whose objective is to hold assets to collect contractual cash flows; and

· its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Business model assessment

In the assessment of the objective of a business model, the information considered includes:

· the stated policies and objectives for the loan book and the operation of those policies in practice, in particular whether management's strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets;

· how the performance of the loan book is evaluated and reported to the Group's management;

· the risks that affect the performance of the business model (and the financial assets held within that business model) and its strategy for how those risks are managed;

· how managers of the business are compensated (e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected); and

· the frequency, volume and timing of debt sales in prior periods, the reasons for such sales and the Group's expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Group's stated objective for managing the financial assets is achieved and how cash flows are realised.

The Group's business comprises primarily loans to customers that are held for collecting contractual cash flows. Debt sales of charged off assets are not indicative of the overall business model of the Group. The business model's main objective is to hold assets to collect contractual cash flows.

Assessment of whether contractual cash flows are solely payments of principle and interest

For the purposes of this assessment, "principal" is defined as the fair value of the financial asset on initial recognition. "Interest" is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time, as well as profit margin.

In assessing whether the contractual cash flows are solely payments of principal and interest (SPPI), the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. The Group has deemed that the contractual cash flows are SPPI and hence, loans to customers are measured at amortised cost under IFRS 9.

ii) Impairment

IFRS 9 includes a forward-looking "expected credit loss" (ECL) model in regards to impairment. IFRS 9 requires an impairment provision to be recognised on origination of a financial asset. Under IFRS 9, a provision is made against all stage 1 (defined below) financial assets to reflect the expected credit losses from default events within the next twelve months. The application of lifetime expected credit losses to assets which have experienced a significant increase in credit risk results in an uplift to the impairment provision.

iii) Measurement of ECLs

Under IFRS 9 financial assets fall into one of three categories:

Stage 1 - Financial assets which have not experienced a "significant" increase in credit risk since initial recognition;

Stage 2 - Financial assets that are considered to have experienced a "significant" increase in credit risk since initial recognition; and

Stage 3 - Financial assets which are in default or otherwise credit impaired.

Loss allowances for stage 1 financial assets are based on twelve month ECLs, that is the portion of ECLs that result from default events that are estimated within twelve months of the reporting date and are recognised from the date of asset origination. Loss allowances for stage 2 and 3 financial assets are based on lifetime ECLs, which are the ECLs that result from all default events over the expected life of a financial instrument.

In substance the borrower and the guarantor of each financial asset have equivalent responsibilities. Hence for each loan there are two obligors to which the entity has equal recourse. This dual borrower nature of the product is a key consideration in determining the staging and the recoverability of an asset.

The Group performs separate credit and affordability assessments on both the borrower and guarantor. After having passed an initial credit assessment, most borrowers and all guarantors are contacted by phone and each is assessed for their creditworthiness and ability to afford the loan. In addition, the guarantor's roles and responsibilities are clearly explained and recorded. This is to ensure that while the borrower is primarily responsible for making the repayments, both the borrower and the guarantor are clear about their obligations and are also capable of repaying the loan.

When a borrower misses a payment, both parties are kept informed regarding the remediation of the arrears.

If a missed payment is not remediated within a certain timeframe, collection efforts are switched to the guarantor and if arrears are cleared the loan is considered performing.

The Covid-19 pandemic presents significant economic uncertainty. The Group assessed that its key sensitivity was in relation to expected credit losses on customer loans and receivables. Given the significant uncertainty around the duration and severity of the impact of the pandemic on the macroeconomy and in particular unemployment, a matrix of nine scenarios consisting of three durations (three, six and twelve months) and three severities (moderate, high and extremely high) has been modelled. Refer to note 2.1.1 for further detail on the judgements and estimates used in the measurement of the ECL.

iv) Assessment of significant increase in credit risk (SICR)

In determining whether the credit risk (i.e. risk of default) of a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis. The qualitative customer data used in this assessment is payment status flags, which occur in specific circumstances such as a short-term payment plan, breathing space or other indicators of a change in a customer's circumstances. See note 2.1.2 for details of how payment status flags are linked to staging, and judgements on what signifies a significant increase in credit risk.

The Group has offered payment holidays to customers in response to Covid-19. These measures were introduced on 31 March 2020. The granting of a payment holiday, or the extension of a payment holiday at the customers request, does not automatically trigger a significant increase in credit risk. Customers granted payment holidays are assessed for other indicators of SICR and are classified as stage 2 if other indicators of a SICR are present. This is in line with guidance issued by the International Accounting Standards Board (IASB) and Prudential Regulation Authority (PRA) which noted that the extension of government-endorsed payment holidays to all borrowers in particular classes of financial instruments should not automatically result in all those instruments being considered to have suffered a significant increase in credit risk. At the time a customer requests an extension to a payment holiday, Amigo has no additional information available for which to make an alternative assessment over whether there has been a significant increase in credit risk; extensions are granted at request - customers are not required to give more information. See note 2.1.2 for further detail on SICR considerations for Covid-19 payment holidays and note 2.4 for judgements and estimates applied by the Group on the calculation of a modification loss resulting from the granting of these payment holidays.

v) Derecognition

The Group offers, to certain borrowers, the option to top up existing loans subject to internal eligibility criteria and customer affordability. The Group pays out the difference between the customer's remaining outstanding balance and the new loan amount at the date of top-up. The Group considers a top-up to be a derecognition event for the purposes of IFRS 9 on the basis that a new contractual agreement is entered into by the customer replacing the legacy agreement. The borrower and guarantor are both fully underwritten at the point of top-up and the borrower may use a different guarantor from the original agreement when topping up.

vi) Modification

Aside from top-ups and Covid-19 payment holidays, no formal modifications are offered to customers. In some instances, forbearance measures are offered to customers. These are not permanent measures; there are no changes to the customer's contract and the measures do not meet derecognition or modification requirements.

Where modified payment terms are offered to customers, the Group evaluates whether the cash flows of the modified financial assets are substantially different. If the cash flows are deemed substantially different, then the contractual rights to cash flows from the original loan are deemed to have expired and the asset is derecognised (see 1.2.v) and a new asset is recognised at fair value plus eligible transaction costs.

For non-substantial modifications the Group recalculates the gross carrying amount of a financial asset based on the revised cash flows and recognises a modification profit or loss in the Consolidated Statement of Comprehensive Income. The modified gross carrying amount is calculated by discounting the modified cash flows at the original effective interest rate. Where the modification event is deemed to be a trigger for a significant increase in credit risk, the modification loss is presented together with impairment losses. In other cases, it is presented within revenue.

vii) Definition of default

The Group considers an account to be in default if it is more than three contractual payments past due, i.e. greater than 61 days, which is a more prudent approach than the rebuttable presumption in IFRS 9 of 90 days and has been adopted to align with internal operational procedures. The Group reassesses the status of loans at each month end on a collective basis. When the arrears status of an asset improves so that it no longer meets the default criteria for that portfolio, it is cured and transitions back from stage 3.

viii) Forbearance

Where the borrower indicates to the Group that they are unable to bring the account up to date, informal, temporary forbearance measures may be offered. There are no changes to the customer's contract at any stage. Therefore, with the exception of Covid-19 payment holidays, these changes are neither modification nor derecognition events.

Depending on the forbearance measure offered, an operational flag will be added to the customer's account, which may indicate significant increase in credit risk and trigger movement of this balance from stage 1 to stage 2 in impairment calculation. See note 2.1.2 for further details.

2. Critical accounting assumptions and key sources of estimation uncertainty

Preparation of the financial statements requires management to make significant judgements and estimates. The items in the financial statements where these judgements and estimates have been made are:

Judgements

The preparation of the consolidated Group financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of income and expenses during the reporting period. The most significant uses of judgements and estimates are explained in more detail in the following sections:

· IFRS 9 - measurement of ECLs

· Assessing whether the credit risk of an instrument has increased significantly since initial recognition (note 2.1.2).

· Definition of default is considered by the Group to be when an account is three contractual payments past due (note 1.2.vii).

· Multiple economic scenarios - the probability weighting of nine scenarios to the ECL calculation (note 2.1.3).

· Application of a management overlay - due to wide scale take up of Covid-19 payment holidays, the emergence of delinquent assets (stage 2 and 3) has been temporarily delayed. A judgemental overlay has been applied to the impairment provision to approximate the potential short term impact on the ageing of the loan book (note 2.1.4).

· IFRS 9 - modification of financial assets

· Assessment of Covid-19 payment holidays as a non-substantial modification (note 2.4.1).

· Assessment of a modification loss as a significant increase in credit risk (note 2.4.2).

· Provisions (note 2.3)

· Judgement is involved in determining whether a present constructive obligation exists and in estimating the probability, timing and amount of any outflows.

· Going concern

· Judgement is applied in determining if there is a reasonable expectation that the Group adopts the going concern basis in preparing these financial statements (note 1.1).

Estimates

Areas which include a degree of estimation uncertainty are:

· IFRS 9 - measurement of ECLs

· Adopting a collective basis for measurement in calculation of ECLs in IFRS 9 calculations (note 2.1.1).

· Probability of default (PD), exposure at default (EAD) and loss given default (LGD) (note 2.1.1).

· Forward-looking information incorporated into the measurement of ECLs (note 2.1.3).

· Incorporating a probability weighted estimate of external macroeconomic factors into the measurement of ECLs (note 2.1.3).

· A management overlay has been applied to the impairment provision (note 2.1.4).

· IFRS 9 - modification of financial assets

· Estimating the change in net present value of the projected future cashflows arising from Covid-19 payment holidays on a cohort basis (note 2.4.2).

· Estimating expected Covid-19 payment holiday duration (note 2.4.2).

· Estimating the change in net present value of projected future cash flows arising upon payment holiday extensions (note 2.4.2).

· Provisions (note 2.3)

· Calculation of provisions involves management's best estimate of expected future outflows, the calculation of which evaluates current and historical data, and assumptions and expectations of future outcomes.

· Effective interest rate (note 2.2)

· Calculation of the effective interest rate includes estimation of the average behavioural life of the loans and the profile of the loan payments over this period (note 2.2).

2.1 Credit Impairment

2.1.1 Measurement of ECLs

The Group has adopted a collective basis of measurement for calculating ECLs. The loan book is divided into portfolios of assets with shared risk characteristics including whether the loan is new business, repeat lending or part of a lending pilot as well as considering if the customer is a homeowner or not. These portfolios of assets are further divided by contractual term and monthly origination vintages.

The allowance for ECLs is calculated using three components: a probability of default (PD), a loss given default (LGD) and the exposure at default (EAD). The ECL is calculated by multiplying the PD (twelve month or lifetime depending on the staging of the loan), LGD and EAD. The twelve month and lifetime PDs represent the probability of a default occurring over the next twelve months or the lifetime of the financial instruments, respectively, based on historical data and assumptions and expectations of future economic conditions.

EAD represents the expected balance at default, considering the repayment of principal and interest from the balance sheet date to the default date. LGD is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the Group expects to receive.

The Group assesses the impact of forward-looking information on its measurement of ECLs. The Group has analysed the effect of a range of economic factors and identified the most significant macroeconomic factor that is likely to impact credit losses as the rate of unemployment. Given the significant uncertainty around the duration and severity of the Covid-19 pandemic on the macroeconomy and in particular unemployment a matrix of nine scenarios consisting of three durations (three, six and twelve months) and three severities (moderate, high and extremely high) has been modelled and probability weighted to determine the ECL provision (see note 2.1.3).

2.1.2 Assessment of significant increase in credit risk (SICR)

To determine whether there has been a significant increase in credit risk the following two step approach has been taken:

1) The primary indicator of whether a significant increase in credit risk has occurred for an asset is determined by considering the presence of certain payment status flags on a customers' account. This is the Group's primary qualitative criteria considered in the assessment of whether there has been a significant increase in credit risk. If a relevant operational flag is deemed a trigger indicating the remaining lifetime probability of default has increased significantly, the Group considers the credit risk of an asset to have increased significantly since initial recognition. Examples of this include operational flags for specific circumstances such as a short-term payment plans and breathing space granted to customers.

2) As a backstop, the Group considers that a significant increase in credit risk occurs no later than when an asset is two contractual payments past due (equivalent to 30 days), which is aligned to the rebuttable presumption of more than 30 days past due. This is the primary quantitative information considered by the Group in significant increase in credit risk assessments.

The Group reassesses the flag status of all loans at each month end and remeasures the proportion of the book which has demonstrated a significant increase in credit risk based on the latest payment flag data. An account transitions from stage 2 to stage 1 immediately when a payment flag is removed from the account. Each quarter a flag governance meeting is held, to review operational changes which may impact the use of operational flags in the assessment of a significant increase in credit risk.

The Group has offered payment holidays to customers in response to Covid-19. In normal circumstances, a customer request for a payment holiday (i.e. breathing space) would trigger a SICR in line with the Group's payment status flag approach to staging.

The granting of exceptional payment holidays in response to Covid-19 does not automatically trigger a significant increase in credit risk. As such, these customers are not being automatically moved to stage 2 and lifetime ECLs. Customers granted Covid-19 payment holidays are assessed for other potential indicators of SICR, which are incremental to the Group's existing staging flags. This assessment includes a historical review of the customer's payment performance and behaviours. Following this review, those customers that have been granted a Covid-19 payment holiday and are judged to have otherwise experienced a SICR are transitioned to stage 2.

2.1.3 Forward-looking information

The Group assesses the impact of forward-looking information on its measurement of ECLs. The Group has analysed the effect of a range of economic factors and identified the most significant macroeconomic factor that is likely to impact credit losses as the rate of unemployment.

The Group has modelled a range of economic shock scenarios to estimate the impact of a spike in unemployment as a result of the Covid-19 pandemic. In doing so, consideration has also been given to the potential impact of deep fiscal and monetary support measures that have been implemented by the government to support the economy during this time. Given the lack of reliable external information the range of scenarios will include a variety of both severities and durations which can then be probability weighted.

In response to the significant uncertainty around the duration and severity of the pandemic on the macroeconomy a matrix of nine scenarios has been modelled.

The probability weightings allocated to the nine scenarios are included in the table below. These scenarios are weighted according to management's judgement of each scenario's likelihood.

The severity of the economic shock has been estimated with reference to underlying expectations for customer payment behaviour for accounts which are up to date or one contractual payment past due. The moderate, high and extremely high severities represent increases of 25%, 50% and 100% respectively, in the propensity for these accounts to miss payments and fall into arrears for the full duration of the economic shock.

The following table details the absolute impact on the current ECL provision of £78.7m if each of the nine scenarios are given a probability weighting of 100%.

The table above demonstrates that in the first scenario with a moderate severity and an impact of an initial three month spike in the unemployment rate, the ECL provision would decrease by £10.6m. In the worst case scenario with the greatest severity of the increase in unemployment and assuming this deterioration continues for a duration of twelve months the ECL provision would increase by £21.1m. The scenarios above demonstrate a range of ECL provisions from £68.1m to £99.8m.

In the financial statements for the year-ended 31 March 2020 severity weightings were 75%, 20% and 5% respectively for moderate, high and extremely high scenarios. At the year-end, scenario weightings were aligned to the forecast of the Office of Budget Responsibility (OBR) which forecast a three month lockdown scenario where economic activity would gradually return to normal over the subsequent three months.

Following Amigo's year-end scenario weighting assessment, OBR published a Fiscal Sustainability Report consistent with the three-scenario approach already adopted by Amigo, but concluded there was no strong basis for forming a basis for each scenario's relative likelihood. Since Amigo's year-end results announcement, macroeconomic uncertainty has increased. For the periods from 30 June 2020 onwards these weightings have been revised to 33% for each severity.

As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected.

2.1.4 Application of a management overlay to the impairment provision calculation

Covid-19 payment holidays were granted to certain customers from 31 March 2020 onwards; at the date a plan is granted, the arrears status of the loan is paused for the duration of the payment holiday, up to a maximum of six months. The total population of stage 1 assets for which a Covid-19 payment holiday has been granted have been assessed from a staging perspective to determine whether there has been an indication of a significant increase in credit risk (see note 2.1.2). Where it is determined that customers applying for Covid-19 payment holidays have experienced a significant increase in credit risk the assets have been transitioned form stage 1 to stage 2 via a staging overlay.

A significant proportion of customers have taken up Covid-19 payment holidays many of them for the maximum duration of six months. Notwithstanding the staging overlay, the effective pause in payments and arrears status for a material cohort of customers for this duration has a resulted in a short-term reduction in the ageing of the loan book with fewer assets hitting the stage 2 backstop (two contractual payments past due) and stage 3 status. This short-term trend is expected to reverse when many of the assets exit payment plans later in the financial year. To address this temporary shortfall in the ageing of assets granted Covid-19 payment holidays, a management overlay has been applied to the impairment provision to uplift the stage 2 and 3 provision. The management overlay estimates the possible incremental provision which would have been required at the reporting date had the loan book demonstrated arrears levels more consistent with those experienced at 31 March 2020, i.e. immediately preceding the launch of the Covid-19 forbearance scheme (see note 9 for further details).

2.2 Effective interest rates

Revenue comprises interest income on amounts receivable from customers. Loans are initially measured at fair value (which is equal to cost at inception) plus directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest rate method. Revenue is presented net of amortised broker fees which are capitalised and recognised over the expected behavioural life of the loan as part of the effective interest rate method. The key judgement applied in the effective interest rate calculation is the behavioural life of the loan.

The historical settlement profile of loans, which were initially acquired through third-party brokers, is used to estimate the average behavioural life of each monthly cohort of loans. Settlements include both early settlements and top-ups as they are considered derecognition events (see note 1.2v). The average behavioural life is then used to estimate the effective interest on broker originations and thus the amortisation profile of the deferred costs.

Broker costs are predominantly calculated as a percentage of amounts paid out and not as a fixed fee per loan. Therefore, in determining the settlement profile of historical cohorts, settlement rates are pay-out weighted to accurately match the value of deferred costs with the settlement of loans.

2.3 Provisions

Provisions included in the statement of financial position refers to a provision recognised for customer complaints. The provision represents an accounting estimate of the expected future outflows arising from certain customer-initiated complaints, using information available as at the date of signing these financial statements (see note 14 for further detail).

Identifying whether a present obligation exists and estimating the probability, timing, nature and quantum of the redress payments that may arise from past events requires judgements to be made on the specific facts and circumstances relating to the individual complaints. Management evaluates on an ongoing basis whether complaints provisions should be recognised, revising previous judgements and estimates as appropriate; however, there is a wide range of possible outcomes.

The key assumptions in these calculations which involve significant, complex management judgement and estimation relate primarily to the projected costs of potential future complaints, where it is considered more likely than not that customer redress will be appropriate. These key assumptions are:

· Future estimated volumes - estimates of future volumes of customer-initiated and claims management company (CMC) raised complaints.

· Uphold rate (%) - the expected average uphold rate applied to future estimated volumes where it is considered more likely than not that customer redress will be appropriate.

· Average redress (£) - the estimated compensation, inclusive of balance adjustments and cash payments, for future upheld complaints included in the provision.

These assumptions remain subjective due to the uncertainty associated with future complaint volumes and the magnitude of redress which may be required. Complaint volumes may include complaints under review by the Financial Ombudsman Service, complaints received from CMCs or complaints received directly from customers.

The provision is very sensitive to these assumptions, which means that the potential range of estimates is large. The selection of these assumptions is a significant estimate. Sensitivity analysis has therefore been performed on the complaints provision considering incremental changes in the key assumptions, should current estimates prove too high or too low. Sensitivities are modelled individually and not in combination.

1 Future estimated volumes. Sensitivity analysis shows the impact of a 20% change in the number of complaints on the provision.

2 Uphold rate. Sensitivity analysis shows the impact of a 10 percentage point change in the applied uphold rate on the forward-looking provision.

3 Average redress. Sensitivity analysis shows the impact of a £500 change in average redress on the forward-looking provision.

It is possible that the eventual outcome may differ materially from the current estimate (and the sensitivities provided above) and this could materially impact the financial statements as a whole, given the Group's only activity is guarantor-backed consumer credit. This is due to the risks and inherent uncertainties surrounding the assumptions used in the provision calculation.

In particular, in the current estimate there is significant uncertainty around the impact of regulatory intervention, Financial Ombudsman actions and potential changes to remediation arising from continuous improvement of the Group's operational practices, which may have a material impact on the eventual volume and outcome of complaints. Therefore, although the directors believe the sensitivities presented above, both positive and negative, represent reasonably possible changes; there is a greater risk of a less favourable outcome to the Group.

The Group has disclosed a contingent liability with respect to the FCA investigation announced on the 29 May 2020. The investigation is with regards to Amigo's creditworthiness assessment process, and the governance and oversight of this, was compliant with regulatory requirements. The FCA investigation will cover lending for the period from 1 November 2018 to date. There is significant uncertainty around the impact of this on the business, the assumptions underlying the complaints provision and any future regulatory intervention. See note 14 for further details.

2.4 Modification of financial assets

2.4.1 Assessment of Covid-19 payment holidays as a non-substantial modification

From 31 March 2020, Covid-19 relief measures were formally introduced; for customers that request it, depending on their individual circumstances, initial payment holidays with durations of one, two or three months were offered. At the end of the payment holiday the customer's monthly instalments reverted to the contractual instalment with the term of the loan effectively extended by the duration of the payment holiday.

During the period, following the FCA's announcement of the extension to customer payment holidays for personal loans for up to six months, Amigo's payment holiday policy was revised. If a customer applied for a plan extension, the payment holiday automatically renewed on a monthly basis, up to a maximum of six months. The customer had the option to opt out and end the payment holiday at any time. For the first three months of the payment holiday no interest accruals were applied to customer balances; from four to six months interest began to accrue again on the loan. As a result of Amigo's interest cap, the reintroduction of interest accrual between months four and six of a payment holiday did not increase the total interest payable by the customer over the life of the loan. Rolling monthly extensions were predominantly granted from 1 July 2020 onwards.

No capital or interest is forgiven as part of the forbearance despite no interest accruing during the first three months of the payment holiday; the customer is still expected to repay the loan in full.

The Group has assessed the payment holidays from both a qualitative and quantitative perspective and has concluded that the modifications are non-substantial; Amigo is not originating new assets with substantially different terms, the original asset's contractual cashflows are deferred. Hence, Covid-19 payment holidays are accounted for as non-substantial modification of financial assets under IFRS 9. Amigo considers the granting of a payment holiday to be a non-substantial modification event; when a customer is offered an extension to their original plan this is considered a second non-substantial modification event. Hence, modification losses have been recognised in both Q1 and Q2 respectively. The impact of Covid-19 payment holiday modifications is discussed in note 5.

2.4.2 Measurement of modification losses

The Group has estimated modification losses arising from Covid-19 payment holidays on a cohort basis. Future contractual cash flows are forecast collectively in cohorts based on the remaining contractual term. The cash flow forecasts are then further segmented by month of modification (being payment holiday start date or date of plan extension) and payment holiday duration.

Following the introduction of automatic rolling extension of payment plans up to a maximum of six months, a key judgement is the expected payment plan duration. Customers on plans of one and two month initial durations can first extend to a backstop of a three month payment plan. Should the customer apply for an extension to their original payment holiday beyond the three month backstop, the payment holiday will automatically extend on a monthly basis up to a maximum of six months unless the customer opts out. For all payment holidays with durations of three months and over offered in Q1 of the financial year ended 31 March 2021, if the customer has not already opted out or the payment holiday ended, it has been assumed that plans will continue to extend up to a maximum of six months. For new payment holidays granted in Q2 where customers have not opted out, it has been assumed that one and two month plans will extend to the three month backstop and all customers plans three months and over as at 30 September will continue to extend to six month plans.

Forecast cash flows are lagged by the relevant payment holiday duration and discounted using the original effective interest rate to calculate net present value of each cohort. The difference between the net present value of the revised cash flows and the carrying value of the assets is recognised in the income statement as a modification loss.

Customers granted Covid-19 payment holidays are assessed for other potential indicators of SICR. This assessment includes a historical review of the customer's payment performance and behaviours. Following this review, those customers that have been granted a Covid-19 payment holiday and are judged to have otherwise experienced a SICR are transitioned to stage 2. Where the modification loss relates to customers that have been transitioned from stage 1 to stage 2 as a result of this assessment, the modification loss has been recognised as an impairment in the Consolidated Statement of Comprehensive Income. If the customer was already in arrears, suggesting a significant increase in credit risk event prior to them being granted a payment plan, the modification loss relating to these customers is also recognised in impairment. The remainder of the modification loss has been recognised in revenue (see note 5 for further details).

3. Revenue and segment reporting

At the beginning of 2019, the Group set up an operation in Ireland in order to lend to Irish customers. Prior to this, the Group did not have more than one operating segment. The Group now has two operating segments based on the geographical location of its operations, being the UK and Ireland. IFRS 8 requires segment reporting to be based on the internal financial information reported to the chief operating decision maker. The Group's chief operating decision maker is deemed to be the Group's Executive Committee (ExCo) whose primary responsibility is to support the Chief Executive Officer (CEO) in managing the Group's day-to-day operations and analyse trading performance. The Group's segments comprise Ireland (Amigo Loans Ireland Limited) and UK businesses (the rest of the Group). The table below illustrates the segments reported in the Group's management accounts used by ExCo as the primary means for analysing trading performance. ExCo assesses net loan book and revenue performance. The table below presents the Group's performance on a segmental basis for 6 months to 30 September 2020 in line with reporting to the chief operating decision maker:

The carrying value of property, plant and equipment and intangible assets included in the statement of financial position materially all relates to the UK. The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.

4. Interest payable and funding facility fees

Interest payable represents the total amount of interest expense calculated using the effective interest method for financial liabilities that are not treated as fair value through the profit or loss. Non-utilisation fees within this figure are immaterial. No interest was capitalised by the Group during the period.

Included within bank interest payable for the period is £0.7m of written-off fees in relation to the Group's revolving credit facility (RCF) (H1 2020: £2.2m). These were previously capitalised and were being spread over the expected life of the Group's RCF. The facility was cancelled in May 2020. Also included are £1.2m of written off fees relating to the Group's securitisation facility; following renegotiation of the waiver period in place over the facility on 14 August 2020 it was deemed a substantial modification of the terms of the facility occurred. Hence, all previously capitalised fees relating to the prior facility have been written off.

Funding facility fees include non-utilisation fees and amortisation of initial costs of the Group's senior secured notes.

5. Modification of financial assets

Covid-19 payment holidays have been assessed as a non-substantial financial asset modification under IFRS 9 (see note 2.4 for further details).

The amortised cost of loan balances pre-modification for all payment holidays granted in the six month period to 30 September 2020 was £245.4m of which £167.7m relates to loan balances that have undergone a non-substantial modification in the second quarter of the financial year (via plan extension or the granting of a new plan). A modification loss of £32.0m recognised in the period, of which £16.0m was recognised in the first quarter of the financial year for initial payment plans granted and £16.0m in the second quarter, relating to Q1 plan extensions and new plans in Q2. The modification loss represents the change in the gross carrying amounts (i.e. before impairment allowance) of the financial assets. The impact of modification on the ECL allowances associated with these assets as at 30 September 2020 was a charge of £5.7m being a modification loss of £7.1m net with a £1.4m reduction in impairment caused by reduced post-modification carrying amounts.

Of the £167.7m amortised cost of loan balances that were non-substantially modified in the second quarter of the year, the gross carrying amount for which 12 month ECLs were applied and calculated was £125.5m whilst the carrying amount where lifetime ECLs were applied was £42.2m. Where the modification loss relates to customers that have been transitioned from stage 1 to stage 2 as a result of the Covid-19 payment holiday, the modification loss has been recognised as an impairment in the Consolidated Statement of Comprehensive Income. The remainder of the modification loss has been recognised in revenue. The total modification loss relating to Covid-19 payment holidays is £32.0m.

6. Strategic review, formal sale process and related financing costs

Strategic review, formal sale process and related financing costs are disclosed separately in the financial statements because the Directors consider it necessary to do so to provide further understanding of the financial performance of the Group. They are material items of expense that have been shown separately due to the significance of their nature and amount.

Strategic review and formal sale process costs relate to advisor and legal fees in respect of the strategic review and formal sale process announced on 27 January 2020.

7. Taxation

The applicable corporation tax rate for the period to 30 September 2020 was 19% and the effective tax rate is negative 8.5%. The Group's effective tax rate for the period to 30 September 2019 was 12.5%. The effective tax rate is lower than the prevailing UK corporation tax rate of 19% due to: a tax asset and corresponding tax credit has not been recognised on current period losses, the release of prior year tax provisions no longer considered necessary and the write off of a deferred tax asset.

Following the period end, Amigo received tax refunds totalling £27.2m from HMRC increasing the cash position and reducing net borrowings respectively. £7.1m relates to loss relief for carried back losses, and the remainder relates to repayment of prior payments on account.

8. (Loss)/earnings per share

Basic loss/earnings per share is calculated by dividing the loss/profit for the period attributable to equity shareholders by the weighted average number of ordinary shares outstanding during the period.

Diluted loss/profit per share calculates the effect on loss/profit per share assuming conversion of all dilutive potential ordinary shares. Dilutive potential ordinary shares are calculated as follows:

i) For share awards outstanding under performance-related share incentive plans such as the Share Incentive Plan (SIP) and the Long Term Incentive Plans (LTIPs), the number of dilutive potential ordinary shares is calculated based on the number of shares which would be issuable if: (i) the end of the reporting period is assumed to be the end of the schemes' performance period; and (ii) the performance targets have been met as at that date.

ii) For share options outstanding under non-performance-related schemes such as the Save As You Earn scheme (SAYE), a calculation is performed to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated is compared with the number of share options outstanding, with the difference being the dilutive potential ordinary shares.

Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share.

1 Adjusted basic (loss)/earnings per share and earnings for adjusted basic (loss)/earnings per share are non-GAAP measures.

The Directors are of the opinion that the publication of the adjusted (loss)/earnings per share is useful as it gives a better indication of ongoing business performance.

Reconciliations of the loss/earnings used in the calculations are set out below. Note figures are presented net of tax:

1 Adjusted basic (loss)/earnings per share and earnings for adjusted basic (loss)/earnings per share are non-GAAP measures.

2 Dilutive potential ordinary shares decreased from 3.8m at Q1 to 2.6m as a result of share scheme forfeiture following the former Chief Executive Officer leaving Amigo.

9. Customer loans and receivables

The table shows the gross loan book and deferred broker costs by stage, within the scope of the IFRS 9 ECL framework.

1 Deferred broker costs are recognised within customer loans and receivables and are amortised over the expected life of those assets using the effective interest rate (EIR) method.

As at 30 September 2020, £255.7m of loans to customers had their beneficial interest assigned to the Group's special purpose vehicle (SPV) entity, namely AMGO Funding (No. 1) Ltd, as collateral for securitisation transactions (2019: £371.5m).

Ageing of gross loan book (excluding deferred brokers fees and provision) by days overdue:

The following table further explains changes in the gross carrying amount of loans receivable from customers to explain their significance to the changes in the loss allowance for the same portfolios.

As shown in the table above, the loan book inclusive of deferred broker cost decreased from £770.4m at 31 March 2020 to £579.5m at 30 September 2020. This was primarily driven by the effect of passage of time, customer settlements and minimal originations in the period.

Upon revising the ECL model at 31 March 2020, the distribution between stages has changed significantly since the prior year. The prior model used the collective estimated cash shortfalls for each credit risk portfolio based on forecast loss curves. Forecast loss curves were prepared on a risk segment basis for annual vintages and combine the Group's historical trends, current credit loss behaviour and management judgements. Recoveries were not factored into these loss curves.

The new probability of default (PD) methodology has increased the stage 1 provision as a result of the refined PD forecasting methodology. This is offset by a lower stage 2 and stage 3 provision owing to the inclusion of discounted recoveries factored into the LGD working.

The following tables explain the changes in the loan loss provision between the beginning and the end of the period:

As shown in the above tables, the allowance for ECL decreased from £86.6m at 30 September 2019 to £78.7m at 30 September 2020. The overall provision has reduced in line with the amortisation of the loan book in the absence of any meaningful originations.

The following table splits the gross loan book by arrears status, and then by stage respectively for the 6 months to 30 September 2020.

The following table splits the gross loan book by arrears status, and then by stage respectively for the 6 months to 30 September 2019.

The following table further explains changes in the gross carrying amount of loans receivable from customers to explain their significance to the changes in the loss allowance for the same portfolios.

1Deferred broker costs are recognised within customer loans and receivables and are amortised over the expected life of those assets using the effective interest rate (EIR) method.

10. Financial instruments

The below tables show the carrying amounts and fair values of financial assets and financial liabilities, including the levels in the fair value hierarchy. All financial assets fall within the IFRS 9 category of amortised cost. The tables analyse financial instruments into a fair value hierarchy based on the valuation technique used to determine fair value:

a) Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

b) Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

c) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

1 The Group has disclosed the fair values of financial instruments such as short-term trade receivables and payables at their carrying value because it considers this a reasonable approximation of fair value.

2 The unobservable inputs in the fair value calculation of amounts receivable from customers are expected credit losses, forecast cash flows and discount rates.

3 Senior secured notes are presented in the financial statements net of unamortised fees. As at 30 September 2020, the gross principal amount outstanding was £234.1m.

Financial instruments not measured at fair value

The fair value of amounts receivable from customers has been estimated using a net present value calculation using discount rates derived from the blended effective interest rate of the instruments. As these loans are not traded on an active market and the fair value is therefore determined through future cash flows, they are classed as Level 3 under IFRS 13 Fair Value Measurement. The fair value of senior secured notes has been taken at the Bloomberg Valuation Service (BVAL) market price.

All financial instruments are held at amortised cost, with the exception of the derivative asset which is held at FVTPL.

The fair value of the securitisation facility is estimated using a net present value calculation using discount rates derived from contractual interest rates, with cash flows assuming no principal repayments until maturity date.

The Group's activities expose it to a variety of financial risks, which can be categorised as credit risk, liquidity risk, interest rate risk, foreign exchange rate risk and market risk. The objective of the Group's risk management framework is to identify and assess the risks facing the Group and to minimise the potential adverse effects of these risks on the Group's financial performance. Financial risk management is overseen by the Group Risk Committee.

11. Other receivables

12. Trade and other payables

13. Bank and other borrowings

Borrowings include senior secured notes with a principal value of £234.1m, £231.7m net of unamortised fees (H1 2020: £231.0m). The senior secured notes are secured by a charge over the Group's assets and a cross-guarantee given by other subsidiaries.

The Group also has a £250m securitisation facility, of which £168.0m was drawn down as at 30 September 2020. The facility reduced from £300m to £250m on 14 August 2020. The facility renegotiations were deemed to cause a substantial modification of the facility, meaning £1.2m of previously capitalised fees have been charged to the income statement (see note 4). Following modification of the facility, all cash collections on assets transferred to the special purpose vehicle have subsequently been used to pay down the principal.

The bank loan relates to the Group's prior revolving credit facility, which was cancelled on 27 May 2020; this resulted in £0.7m of capitalised fees being charged to the income statement (see note 4).

14. Provisions

Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefit will be necessary to settle the obligation, which can be reliably estimated.