Amigo Holdings Up 5%, Back To Flat – What’s Going On?

Amigo Holdings (LON: AMGO) or Amigo Loans as some call it, was up 5% this morning and now is back to flat at pixel time. This sort of volatility in a share price isn’t usual so it’s worth trying to work out why it’s happening here. The answer being that amigo possibly faces an extinction level event, possibly doesn’t. That’s going to lead to considerable volatility as views change about which of the two results are going to win out.

As we’ve noted before about Amigo Holdings the base problem here is that business was conducted on one set of terms and is now being evaluated under another. The mismatch between the two sets of terms could cause bankruptcy. After all, that is exactly what happened to Wonga under a slightly different set of rule changes. We can also say that this is grossly unfair, how could they, and all that but we must trade the world as it is.

The other way of saying much the same thing is that Amigo Loans risks being eaten by the lawyers in compensation claims. Not a fate to be desired of course. Whether it actually will be so eaten or not is the great uncertainty. It’s this which leads to the volatility in the Amigo share price.

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As background the Amigo story was of offering high interest loans to low credit borrowers. The innovation was to use guarantors which is what made the business boom. But then politics turned against the very idea of high interest lending to low credit borrowers. The fees and interest, when converted into an APR, shocked people. So, the law changed on who may lend how much to whom on what basis. The problem is that the lawyers have realised that loans made could be either refuted or, worse, become a source of compensation. It’s this which is affecting all of the low credit lending companies.

Not that they cannot lend into a new lending book, but that the old book will come back and bite them. The problem with this is that of course those potential costs were not built into the past lending rates or decisions. It is possible that the compensation claims could bankrupt Amigo. Of course, if that happens, then shareholders lose all. But then so would any compo claimants lose their money too. So there’s a stand off. The company needs to keep trading in order to be able to pay compensation, which means a limit on how much the compensation can be.

It’s this needle that Amigo is trying to thread. Matters are in the courts, there is a scheme presented and the whole decision is whether that’s going to be accepted. As we don’t know whether it will there’s that uncertainty. That uncertainty is what drives the volatility of the shares in AMGO.

Thus a 5% rise this morning, followed by a fall back to flat. There’s no news driving this, just shifting opinions of what might happen.