Sub-prime lender Amigo Holdings (LSE: AMGO) has had a cracking run so far in 2021, more than trebling in value since the start of the year. But we saw a sharp decline Tuesday morning, with the Amigo share price down 39%, at the time of writing.
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?
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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.