The fall of the Amigo share price

Amigo’s business model is to help individuals gain access to capital that would otherwise be unavailable through traditional banks. While this does mean customers are often carrying a higher chance of default, a guarantor system is put in place to mitigate this risk.

However, this risk factor still requires responsible lending practice by the company. The company needs to ensure that both the customer and guarantor can meet their financial obligations along with the near-50% interest charges before a loan is issued. And that’s something the old management team decided not to do.

In 2019, a series of earnings reports revealed a rapidly rising number of loan impairments. Customers were not paying back the money they borrowed. And when the enormous bills landed on guarantors’ doors, complaints to the Financial Conduct Authority (FCA) started to pile up rapidly.

To satisfy the claims being made by both customers and creditors, a new management team submitted a Scheme of Arrangement with the British courts. But this initial proposal was heavily opposed by the FCA on the grounds that any successful claim would only see 5-10% of compensation issued. And in May 2021, the scheme was rejected by the courts.

To date, the Amigo share price has collapsed by 97.5% since this whole mess started!

 A light at the end of the tunnel?

After the first scheme was rejected, the new leadership team have been working on a revised version. And after its day in court on 23 May, the new scheme was accepted. The group will now begin restructuring its balance sheet, satisfying valid customer claims, and fulfilling its duties to creditors.

Problem solved? Not quite. The risk of bankruptcy has fallen drastically, but it’s not entirely gone. Even with the scheme approval, Amigo still needs to be re-authorised by the FCA. Otherwise, it cannot resume its lending activities or raise fresh capital.

That means until the new management team can prove it has learned from past mistakes and demonstrates new safeguards to prevent them from happening again, the revenue stream will remain non-existent. Beyond this, the company also needs to start working on rebuilding its reputation with customers. Needless to say, that’s easier said than done.

Having said that, these latest developments are obviously a step in the right direction. And providing everything goes smoothly, the Amigo share price may begin its long uphill recovery.

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The guarantor loans specialist was hit by predatory lending complaints back in 2019. And it had to settle a lot of claims and repay large numbers of creditors. The big crash followed, amid fears that the company was going under.

A Scheme of Arrangement (SoA) proposed by the company, which needed court approval, might be the only thing that could keep the Amigo share price from hitting zero. The idea was to limit the amount of compensation Amigo would pay, in order to keep it afloat.

The Financial Conduct Authority objected to the terms of the SoA, pointing out that most borrowers would see only around 5-10% of their compensation money. The alternative, according to the company’s management, was near-certain bankruptcy with claimants getting nothing.

Back from the brink

So there were hopes the court would accept the SoA filing, and that Amigo would pull back from the brink and continue towards long-term solvency. By May, ahead of the court ruling, the Amigo share price had stormed back to 30p. And as soon as the court approved the SoA, the shares would soar even higher, right?

Well, it didn’t happen. The court rejected Amigo’s SoA, and it was crunch time again. The shares didn’t fall quite as far as January’s low, but they did crash to 6.6p. It was surely only a matter of time before the sword of bankruptcy fell, lopping off any possible future for the company.

Except that didn’t happen either. With hindsight, it appears Amigo’s management had over-egged the pudding a little. And, what’s more, it even looks like there’s a bit of optimism creeping back. In the past month, the Amigo share price has risen by more than 35% to 11p.

Long-term plan?

As recently as 27 August, Amigo announced a management share options award under its Long Term Incentive Plan. Long-term. That’s impressive for a company that apparently thought it was going bust just a few months ago.

I can’t really criticise the bosses too much for trying to do the best for their shareholders back then. And they’re a new bunch, so the company has essentially moved on from any stigma associated with the authors of the 2019 crisis.

Full-year results showed a big fall in the number of customers and a drop in revenue. The firm wasn’t actively lending. And after big payments to settle complaints, plus a hefty further complaints provision, the bottom line showed a £284m pre-tax loss. Not great, eh?

Amigo share price revival?

But if we wind forward to the first quarter of the new year, things are looking different. Amigo actually reported a Q1 pre-tax profit, albeit a modest £15m. And since then, we’ve seen the latest Amigo share price rise.

If this apparent return to profit proves to be sustainable, and Amigo gets back to lending before too much longer, I reckon we might see positive share price progress in the next year or two.

It’s way too risky for me though, and I’ll keep away.

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Since the start of September, the Amigo share price is once again on the rise. So, the question becomes, is this a temporary spike? Or is Amigo finally making a comeback? Let’s take a closer look at what’s going on and whether now is the time for me to buy.

The collapse of the Amigo share price

The last time I looked at this business was in May, shortly before the firm heard the court ruling surrounding its scheme of arrangement. As a reminder, Amigo entered into a world of trouble back in 2019. Under the leadership of old management, the firm started engaging in predatory lending. This resulted in a surge of customer complaints to financial regulators as customers (and their guarantors) simply couldn’t afford to pay the 49.9% interest rate on the issued loans.

Long story short, Amigo has had to satisfy a lot of customer claims and repay its creditors all at once, causing the stock to collapse by 95% between 2019 and 2020. A scheme of arrangement was supposedly the last option to save the business. Unfortunately, the scheme was ultimately rejected by the courts, triggering Amigo’s share price crash in May. But since the company is still alive today, management may have been a bit melodramatic, especially since the stock is on the rise this month.

A turnaround in progress?

Amigo recently published its first-quarter results. And there were actually some encouraging signs. Management has suspended any additional lending until the current situation has been resolved. This decision has caused revenues to suffer by 33%. But, the impairment ratio has been slashed from 37.9% to 23.4%. In other words, more customers are actually paying their bills.

The rise in payments is in part due to the shorter than expected Covid-19 impact. But another contributing factor is that no new complaints have been filed against Amigo in the last three months. As a result, the lender actually noted a £15m profit before tax this quarter, up from £1.4m a year ago.

Needless to say, this is a positive sign of progress for the troubled business. So, seeing the Amigo share price rise on the news is hardly surprising.

Is the rising Amigo share price a buying opportunity?

As encouraging as this latest performance is, I’m not tempted to jump in anytime soon. Why? Because Amigo still has a lot of debts to repay. In April 2020, the firm negotiated a suspension of interest payments on its obligations with creditors. This suspension comes to an end later this month. So, I wouldn’t be surprised if profits margins suddenly take a hit.

All things considered, the Amigo share price looks like it’s back on track. But I expect significant volatility as the underlying business attempts to claw itself back to financial health. Personally, that’s not something I’m interested in adding to my portfolio, so I’m keeping Amigo on my watchlist for now.

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What happened to the Amigo share price

I’ve previously explored the situation that Amigo is in. But as a reminder, the business is a guarantor lender. Its customers can borrow relatively small sums of money for short periods of time at quite a high interest rate of 49.9%. And should these borrowers become unable to pay, a guarantor, such as a family member, would cover the costs.

But in 2019, the company released a series of unpleasant earnings reports, which showed a continually rising level of impairments on its loans. In other words, its customers were not paying their bills on time. So it fell to guarantors to pick up the tab. As a result, it saw a massive surge in complaints made to the Financial Conduct Authority (FCA), which subsequently sparked an ongoing investigation and brought the company to where it is today.

Since this chaos began two years ago, the Amigo share price has fallen by almost 95%.

The fear of bankruptcy

In order to satisfy the complaints made against the firm as well as repay its creditors, the management team filed for a Scheme of Arrangement (SoA). This process is often used as a last resort that allows a company to restructure its balance sheet to try and bring it back from the brink of insolvency.

But this requires approval from the courts, which is hardly a pain-free process. While Amigo’s creditors overwhelmingly voted in favour of the proposed SoA, the FCA wasn’t swayed. In fact, the regulator objected to the proposal as most customers would only see as little as 5%-10% of any successful compensation claim.

The court hearing took place last week, and shares of Amigo were temporarily suspended from trading. While the stock’s suspension has been lifted, investors remain in limbo as the judge has given no verdict yet. If the SoA is approved, the Amigo share price will likely rise as investors regain confidence in the future of the business. However, if the judge rejects the proposal, the management team has said that bankruptcy would be almost certain.

What’s next?

The situation in which Amigo finds itself adds a significant level of risk to its share price. Will it go to zero? Only time will tell, but it’s entirely possible. And yet, there are some reasons to be optimistic. First and foremost, the management team that caused this mess is long gone. Looking at the list of directors, the majority were brought in after the 2019 scandal in order to restore the business.

Whether they can succeed remains to be seen. But it’s worth noting that the new board does have confidence, given that several members actively bought shares throughout 2020. Having said that, I won’t be adding this business to my portfolio. The risk is simply too high versus the potential reward, especially since there are plenty of other growth opportunities available today.

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Amigo share price decline 

Amigo had applied to the High Court for permission to cap compensation payments to its customers. It made this application following a deluge of compensation claims, which management warned the company can’t afford.

The application was also made to provide a more equitable outcome for all stakeholders. Unfortunately, the industry’s regulator, the Financial Conduct Authority (FCA), has already opposed the plan. This doesn’t necessarily mean the court will deny it, but it doesn’t instil confidence.

The FCA is fighting the company in the High Court as it doesn’t believe shareholders should benefit at the expense of borrowers. However, Amigo said if it doesn’t win the case, not only will the firm’s shareholders suffer, but so will borrowers too.

Management estimates the group will face claims totalling around £320m if the company goes into administration. Its assets are worth £312m-£325m, and the insolvency process would cost £37m. That would leave most creditors out of pocket. 

The Amigo share price was suspended on Wednesday, pending the decision by the court. Trading has been resumed after the court said it could take a few days to arrive at a conclusion. 

Even if it’s granted permission to cap payouts, it’s unlikely this will be the end of the saga. With claims against the group mounting, and resources drying up, it seems like Amigo will have to raise additional funding from shareholders to keep the lights on. Even if it can avoid a cash call, it could be a while before the business fully recovers.

Breathing room 

That said, the company still has breathing room. While this remains the case, it still has the chance to turn itself around. Peer Provident Financial has drawn a line under its mis-selling claims by refocusing the business on its credit card division. It’s not too late for Amigo to take a similar course. Management could refocus the enterprise on another regulated credit market. This could have a positive impact on the Amigo share price. 

Still, despite this potential, I think the risks are stacked against the business. Therefore, I wouldn’t buy the stock from my portfolio today. In my opinion, whichever course the company takes, it could be years before we see any final resolution. There are also some serious ethical concerns surrounding guarantor lending that I’m not entirely comfortable with.

I think there are plenty of other businesses on the market with more attractive risk/return ratios and no ethical dilemmas.

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Should I buy this penny stock for my portfolio? Let’s take a look at what’s driving Amigo’s share price higher.

Why Amigo’s share price rose

In my last article on Amigo Holdings, published on 9 March, I mentioned that one of the key risks surrounding the company was complaints from customers. Between October and December last year, the Financial Ombudsman Service received more than 10,000 complaints about the firm, up from just over 300 in the same period a year before.

Late last year, Amigo decided that the best way to address this problem was through a ‘Scheme of Arrangement.’ This is a court-approved agreement between a company and its shareholders or creditors. This would cap its potential compensation payments in relation to the complaints and allow Amigo to restructure itself.

For a few months, things were going to plan for Amigo. In late March, for example, the UK’s main financial regulator, the Financial Conduct Authority (FCA), stated that it had completed its assessment of the terms of the Scheme of Arrangement and said that it was not proposing to take any additional regulatory action that might stop the scheme. This saw the AMGO share price move higher.

However, last week, Amigo advised that it had received a letter from the FCA stating that the regulator felt the scheme was unfair and that it planned to oppose it at a final court hearing (which takes place tomorrow). This was obviously bad news for Amigo. If its Scheme of Arrangement fails, the company is likely to go bust, according to CEO Gary Jennison. On the back of this news, Amigo’s share price fell over 20%.

It’s fair to say that this recent development adds risk to the investment case. However, it’s hard to know if the FCA is serious about stopping the move. If the regulator was to stop it, and Amigo went bust, it would not be a good result for claimants. We are likely to have more clarity on the situation tomorrow after the court hearing. If the scheme is approved, there will be less uncertainty. 

My view on Amigo Holdings

Looking at what’s going on at Amigo right now, I see the penny stock as quite risky. Given the binary nature of the court hearing, the stock is very speculative in nature.

There are also a few other issues that concern me in relation to Amigo Holdings. One is the company’s balance sheet. At 31 December 2020, Amigo had net borrowings of around £180m. By contrast, shareholders’ equity was just £81m. This debt means the company is quite vulnerable.

Another concern is growth forecasts. For the year ending 31 March 2022, analysts expect Amigo’s revenue to fall about 45% to £102m. That’s concerning. 

Of course, there are some positives. Recently, the company appointed a new management team. Some directors even bought Amigo shares. 

All things considered though, I see Amigo as too risky for my portfolio. I think there are better penny stocks and growth stocks I could buy today.

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Before I look at the news behind the share price dip, we need some background. Though Amigo shares are flying in 2021, the bigger picture is far less rosy. Since the company floated in 2018, it’s shares have lost 90% of their value. So what we’re looking at in 2021 is a recovery situation, and it’s not actually a big one yet. But what caused the crash in the first place?

Sub-prime lending is a risky business at the best of times. And a deadly virus pandemic, and economic slump, and a stock market crash really didn’t help. On top of these general woes, Amigo has been facing large numbers of mis-selling claims. The Financial Conduct Authority (FCA) has investigated Amigo’s lending practices, plus the way it’s managed the flood of complaints. And decisions have been coming down in favour of customers. It’s really no surprise the Amigo share price has been suffering.

Amigo’s rescue plan

To get out of the mess, Amigo has been working towards a scheme of arrangement, which would cap its potential compensation payments. It looked like the planned scheme was on the way to being accepted, and that was helping boost the Amigo share price. Until Tuesday morning, that is.

The plan required the consent of at least 50% of the firm’s creditors. That was going swimmingly well, with around 95% of votes in favour the the scheme. But then came opposition from the FCA. It appears “the FCA has decided that it intends to appear at the Court sanction hearing through counsel to oppose the sanction of the Scheme, even if approved by the requisite majority of the Scheme creditors, on the basis that the Court cannot be satisfied that the Scheme in its current form is fair.”

Should the scheme fail, Amigo has previously said it would go bust. And that would send the Amigo share price all the way down to zero. So what actually is the FCA’s objection, and is it likely to succeed?

The FCA’s unfairness claim stems from some creditors’ claims “being significantly reduced whilst other stakeholders such as shareholders are not being asked to contribute.” The FCA also finds fault in the scheme’s proposals not coming from negotiations with creditors.

Amigo share price future?

The court hearing of the scheme takes place on 19 May, and my guess is it will still be successful. Even if the FCA thinks the deal is unfair, 95% of creditors appear to be happy with it. And they’ll get nothing if the company goes bust. I’d be surprised to see the court going against the clearly-expressed wishes of creditors and forcing a worse outcome.

With the Amigo share price still way down despite the 2021 gains, would I buy now? I see it as a risky investment in a risky business, and it could still go badly wrong. It’s a big NO for me.

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The subprime lending industry

As a subprime lender, Amigo lends to customers with very poor credit histories who cannot borrow from a traditional bank. Although these loans generate large amounts of interest, defaults are also common. This means that the guarantors often have to pay off the loans, and this has led to a large number of consumer complaints.

Coronavirus has also had a negative impact on the subprime lending industry and the Amigo share price. Indeed, as of January this year, Covid-19-related payment holidays had been granted to over 63,000 customers. As the company only had 156,000 customers at the end of 2020, it is evident that the pandemic has had a severe impact on a large number of Amigo customers. This also led to a pause on all new lending until 2021, resulting in decreased revenues.

Furthermore, it has recently been reported that another major name in the sector, Provident, is getting rid of its subprime lending arm. Although this may reduce competition for Amigo, it shows that subprime lending is not a healthy industry right now.

Consumer complaints and scheme of arrangement

Amigo has also been inundated with mis-selling claims after customers accused the firm of failing to carry out basic financial checks. Unfortunately for the company, the financial ombudsman has found in favour of the customers in the majority of cases. This has led to it applying for a scheme of arrangement. This plans to cap compensation payments to a maximum £35m and 15% of profits over the next four years. News that the FCA would not oppose the deal has also seen the Amigo share price rise rapidly.

Implementing this scheme of arrangement is vital for Amigo’s survival. Indeed, management has warned that without the scheme of arrangement, it will have to file for administration. Such a result would be catastrophic for shareholders, who could be left with absolutely nothing.

Has the Amigo share price got further to rise?

Fortunately, it seems that the scheme of arrangement is likely to be implemented and this should benefit Amigo greatly. Furthermore, new management also seems keen to “get Amigo back to life again”. Recent insider buying from the CEO and the CFO has perhaps given reason for optimism on this front. It shows that management believes the Amigo share price has further to rise.

Nonetheless, I’m not convinced that the Amigo share price will be able to rise much further. The subprime lending industry is evidently struggling and there is the chance that the company will have to file for administration. This makes Amigo shares too risky for me. 

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The 2019 Amigo share price collapse

Back in June 2019, the Amigo share price was trading at around 292p. Since then it has fallen by 95%. So what happened? Concerns started brewing among investors regarding the firm’s ability to collect payments from its borrowers. And what started out as a steady decline quickly turned into a crash, following the publication of a quarterly earnings report.

The report showed that the ratio between revenue and loan impairments had grown to 30%. That means a plenty of customers weren’t paying their bills on time. And so guarantors were having to pick up the tab, subsequently leading to a massive rise in customer complaints, which ultimately sparked an ongoing investigation by the Financial Conduct Authority (FCA).

Meanwhile, a conflict erupted between company founder James Benamor and the management team. After openly accusing them of making Amigo commit “slow-motion suicide”, Benamor threatened to liquidate his 60% stake unless shareholders voted to elect a new management team. This coup ultimately failed, and the Amigo share price continued to collapse.

Time for a comeback?

The rising complaints of both customers and creditors have led the management team to apply for a Scheme of Arrangement. If successful, this could allow all parties to be satisfied while simultaneously allowing Amigo to restructure itself and its balance sheet. The process has already begun following approval from the UK High Court last month. However, the final decision won’t be made until 19 May.

Besides this, the management team is also actively seeking to sell the entire business. In fact, it had previously received a formal offer of 20.9p per share last year. This has yet to materialise into a finalised and signed deal. But if it were to go through, or another similar offer is made, then based on the Amigo share price today, it could represent a potential return of around 30%.

The bottom line

The business looks like it’s taking the rights steps to turn itself around. However, this process is likely going to take several years, even with the most optimistic outcomes. Therefore, I’m sceptical that the Amigo share price is going to recover in 2021.

Over the long term, perhaps a recovery will eventually take place, assuming it doesn’t get acquired. But at this stage, I see an exceptionally high level of risk attached to this business. Even the management team acknowledged this by stating that if it fails to acquire the Scheme of Arrangement, the company will likely go bankrupt. Therefore I won’t be adding any of the shares to my portfolio today.

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In addition to investgating Amigo’s past lending practices, the FCA is now also investigating how Amigo has handled the wave of complaints it’s faced over the last year. These have threatened to overwhelm the company, which has suspended new lending.

Amigo shares are down by a relatively modest 16% over the last year, but they’ve lost 95% of their value since the company’s flotation in June 2018. I think it’s safe to assume that this business has serious problems.

Spiralling out of control?

Amigo specialises in guarantor loans. These are loans where the borrower doesn’t qualify for credit, but a second person offers to guarantee their repayments. With a typical interest rate of 49.9% APR, according to Amigo’s website, it’s an expensive way to borrow money.

Despite this, growth was strong when the company floated in 2018. Amigo’s 2018–19 results showed adjusted pre-tax profit rising by 38% to £100m. The group’s loan book increased by 17% to £708m during that year.

Amigo’s share price started to slide in August 2019, when the company flagged up the FCA’s growing interest in the guarantor loan sector. With an 80% share of this market, I thought that Amigo was likely to attract further interest.

Sure enough, in May 2020, the FCA launched an investigation to make sure Amigo had been checking the affordability of new loans correctly.

Around the same time, the number of complaints received by the firm about historic lending began to rocket higher. In June 2020, Amigo estimated that it would need £35m to clear the backlog of complaints. By December 2020, the company was budgeting for a cost of £150m to resolve all of the complaints it had received.

Is Amigo Holdings’ share price heading to 0p?

Will Amigo survive? I don’t know. The company is currently trying to reach a “scheme of arrangement” that will allow it to pay a fixed amount now to resolve complaints, plus a share of any future profits.

In the meantime, Amigo is continuing to collect loan repayments, but isn’t issuing any new loans. As a result, customer numbers fell by 33% last year, while revenue fell 37%.

My concern is that as a potential investor, there’s nothing I could use to value the shares as a going concern. Even if the company fixes all of its problems, I suspect that tougher regulation on high-cost credit will make profits lower than in the past.

In my view, buying Amigo shares is a pure gamble. I think that the share price could fall to zero or it might double. That’s too speculative for me, so this is a stock I plan to avoid.

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