Last week the High Court today approved Amigo Loans’ scheme of arrangement. The Amigo Scheme will provide redress to customers who are due it for being mis-sold loans and who raise a complaint. The FCA objected to Amigo’s previous scheme because they believed that a fairer compromise could have been offered to customers. It turns out they were right. They were happy to let the new offering to customers go ahead. The new offering will see Amigo loans refunds much higher than the previously proposed scheme.
It is still not guaranteed. The plan is dependent on them being allowed, by the FCA, to lend again. They will also need to raise funds from shareholders. If either of these fails then they will have to go rely on a “fallback” option. However, even getting this far sets a new standard for an insolvent high-cost lender using a scheme to survive.
Amigo Refunds
According to the company, this will likely see eligible customers get refunded around 40% of what they are owed, compared to around 30% in administration. A previous scheme by Money Shop saw customers get less than 5% of what they were owed in refunds. Such a result wouldn’t make schemes an appealing solution in the future.
The 10% improvement compared to the administration option could be quite meaningful to some past customers. The high-interest rates Amigo leant at, along with the longer length of the loans compare to payday loans, and the practice of allowing many customers to top-up loans, again and again, means some claims are worth many thousands of pounds. Claimants still need to have their claim approved by the company, or a separate committee if the company reject it and they appeal. They have until November 2022 to claim, with payouts not happening until late 2023. So there is still a long wait to long-suffering past customers of Amigo.
Future Claims and Refunds
If past Amigo customers can claw back 40% plus of their compensation, such a solution could be repeated. Most high-cost lenders (offering payday, guarantor and doorstep loans) have had a wave of complaints against them in recent years. High profile companies, like the payday lender Wonga, have failed in the past. Recently there have been announcements that refunds have caused problems for Morses Club, a publicly listed doorstep loan lender. On top of this, their CEO has hastily sold his shareholding and stepped down and their annual report has been delayed two months. These are all usually signs of trouble ahead. If high-cost loan lenders find themselves in trouble, similar schemes may appear.
Shareholders
Immediately following the news Amigo’s share price leapt around 50%. This exuberance was short-lived, however, as it gradually crept back to its original level. This was probably because the reality of the downsides of the scheme set in. One condition is that the FCA allow Amigo to start lending again. While not guaranteed, Amigo should be able to convince the FCA that the lender, who employs over 400 individuals, can act responsibly and should be allowed to continue doing business. However, it is another uncertainty and could mean a further delay until they start generating revenue again. What is likely more of an issue to shareholders is the need to raise funds to execute the scheme. This would massively dilute current shareholders.
Normally dilution would at least cause the company to have a corresponding increase in funds available. In Amigo’s case, a portion of these funds will be going to pay off previous customers. If investors dislike the idea of this situation enough, raising capital might not even be possible. The question is whether buying into a company where the share of net equity is less than what is invested, is worth it to own some of the Amigo brand. Also, whether this brand is worth less after years of not taking on new loans and being accused of systematic irresponsible lending.
Summary
The reality is that the scheme is actually the lesser of all evils. Maybe this is why CEO Gary Jennison commented the scheme is “good news for creditors, customers and employees” without mentioning shareholders. While not a bad result for creditors and past customers, the situation still isn’t great for shareholders. A previous successful scheme by CPP group, which got in trouble for selling credit card protection products that the customer didn’t need, didn’t stop a terminal decline in share price. The huge dilution for shareholders was followed by an inability to find growth without mis-selling tactics. Maybe Amigo can find their mojo again, however, doing so will be harder if they can’t lend irresponsibly.
