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Amigo Holdings, AMGO, Up 15% Again – Will This Go Further?

Tim Worstall
Tim Worstall trader
Updated 11 Apr 2022

Trade Amigo Shares Your Capital Is At Risk

Key points:

Amigo Holdings (LON: AMGO) shareholders have a certain justice to any feelings they might have about having been wronged. Like other low and bad credit lenders, they’ve found that the legal environment around the business has changed. More to the point, it’s arguable that the change has been retrospective which can indeed seem a little unfair.

Styles and methods of lending which appeared to be legal at the time they were done turn out, in the new environment, to lead to compensation claims. At which point the company can be eaten out by the lawyers and their claims of course.

This has put paid to some low and bad credit lenders – Wonga is an obvious example. Others have been able to slice out those past activities, cap owings, and continue writing new business under the new terms. The question for Amigo Holdings, and it’s really an existential one, is which way will they be able to go? The volatility of the Amigo share price is likely a function of changing views on exactly this point.

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High priced lending to low credit customers is – or at least can be in the absence of compensation claims – a nicely profitable business. The return on capital is good but not massive, for the costs of doing business this way are also high. But, well run low credit rating credit suppliers do make good money. So there’s a business opportunity out there if it’s possible to get there.

On the other hand, that weight of the past compo claims is indeed heavy. The last announcement we have from the company is that the High Court has allowed the scheme of arrangement (basically, how are those past claims to be capped) to go forward to the stage of being put to creditors. That was back a month or so ago, March 15th. The essential choice here is between a new business scheme – capped compo claims that allow new lending to take place and the business to proceed – or a wind down scheme.

The next decision day is really the creditors meeting on 12 May. It’ll be possible to gain some idea of which scheme is likely to succeed at that point. The thing that’s driving the volatility in Amigo’s shares before then is likely that the new business plan maximises returns to all and allows the business to continue. The wind down obviously is an extinction level event. So, views about which are likely to win between those two will drive volatility in the share price until then.

The risk that the wind down scheme will win is obviously a weight upon the Amigo share price, as it should be of course. The trading decision is over whether the possibility to probability of the new business scheme being approved overcomes that risk.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.