The Amigo (LON: AMGO) share price is in trouble. When the subprime lender launched its Initial Public Offering in June 2018, it raised £1.3 billion and started at 275p per share. It then experienced moderate demand, rising to 298p by December.

And its business plan seemed to make sense. The company offered loans of up to £10,000 to customers with poor credit scores. These were guaranteed by a friend or family member with good credit, who took on the legal liability for the debt in case of default.

But Amigo offered their loans at an APR of 49.9%. This means that low-credit customers who borrowed £5,000 over three years would need to find £8,782.20 to pay the loan back. And unlike similarly high-interest credit cards, customers were paying interest from day one.

It’s not hard to see where Amigo went wrong. The company is now trading at around 2p a share, having collapsed more than 99% since its all-time high.

Amigo share price: unaffordable lending

The FCA banned Amigo from lending in May 2021. Ostensibly, it explains this is due of ‘ongoing uncertainty surrounding COVID-19.’ But while it insists this is a ‘temporary measure,’ the company lies on the verge of bankruptcy.

Under Financial Conduct Authority (FCA) rules, lenders have a legal obligation to check that borrowers can afford to pay back loans without being forced to borrow more or left unable to pay essential bills.

And according to Money Saving Expert’s Rosie Hamilton, guarantor loans are now the most complained-about financial product, with ‘more than 90%’ of these complaints directed at Amigo. And the Ombudsman has found in favour of the complainant in 81% of guarantor loan complaints, the highest rate of complaint success out of all financial products.

Moreover, because both borrowers and guarantors can complain, the potential complainants pool is double what it would be for a standard financial product. And successful complaints against Amigo haven’t just been about initial affordability. Amigo has been accused of treating struggling customers unfairly, for example by not setting up special payment plans, calling in debt collection agencies too early, or not explaining liabilities to guarantors.

And under FCA rules, complainants can get back all the interest and any fees charged on their loan. Moreover, in further bad news for the Amigo share price, they can claim additional compensation worth 8% interest of the overpaid amount.

Bankruptcy or extreme share dilution?

Amigo has calculated that paying off complaints in full would cost £338 million. This is money it simply does not have. Accordingly, it proposed a ‘scheme of arrangement’ last year that would allow complainants to receive between five and 10% of monies owed. The compensation pool would be capped at £35 million and 15% of profits over the next four years. However, after the FCA objected, the High Court rejected the plan, calling for higher payments to customers and for shareholders to lose more of their stakes instead.

The lender has now offered to increase the compensation pot to £97 million, with a further £15 million to be generated from 'a new equity and capital raise.' This would involve issuing 19 new shares for every existing one, diluting the stakes of existing shareholders by a factor of 20.

Goodbody analyst Ronan Dunphy believes that 'while it is positive that progress on the Scheme of Arrangement and Amigo's new business plans are progressing, the statement also starkly outlines the extent of prospective dilution for existing shareholders.’

But CEO Gary Jennison argues that the new scheme is ‘necessary for Amigo to survive and avoid insolvency.’ Furthermore, Amigo claims that if the court or shareholders reject the improved offer, ‘redress Creditors will receive less than under the New Business Scheme, and the Company's shareholders would receive nothing in respect of Amigo Loans Ltd.’

And in further bad news, CFO Mike Corcoran has stepped down with immediate effect. In one positive note, November’s interim results showed the company still had over 100,000 customers with £224.1 million of loans on its books.

But as bankruptcy looms, the Amigo share price is on the cusp of worthlessness. Even its best-case scenario is an extreme share dilution— and this is by no means guaranteed.

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