The Amigo (LSE: AMGO) share price fell by over 30% last week. It’s still higher than at the start of 2021. But, over the last 12 months, it’s down 32%. The firm appeared to be making a comeback after a tough period following rapid rise in complaints during 2019. But now, its comeback is being questioned by investors and creditors with fears of bankruptcy on the rise. So, will the Amigo share price crash to zero? Let’s take a look.
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.
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.
Zaven Boyrazian does not own shares in Amigo. 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.