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The Amigo share price plunges 30%. Here’s why

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The Amigo (LSE: AMGO) share price is sliding today after trading in the company’s shares resumed after a short suspension. It would appear as if investors are selling up ahead of a decision from the High Court regarding the company’s customer compensation plan. 

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.

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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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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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