Amigo Holdings Just Got Even More Crazily Fun

Summary

• The founder and majority shareholder of Amigo Holdings is a willing seller as we've known for a few weeks now.
• It gets better - his current insistence is that the company should all three of cease lending, recoup all advances and sue the regulator.
• It's hard to see where, in the absence of a Hail Mary bid, this doesn't go to zero.

The basic Amigo Holdings (TCPK:AMHLF) problem

As I said a few months back the basic problem for Amigo is that there's a significant risk of their business model being regulated out of existence. For those who don't think this is even possible we should recall that this is what happened to Wonga, exactly what has happened to payday lending itself in a number of US states. Interest caps and other regulations mean the business simply cannot exist.

How likely this is to happen is the risk to the stock?

The intervention

The founder of the business got himself re-elected to the board and then said that, as the majority (over 60%) shareholder, he was open to being bought out. This is not known as a great upside for a stock.

The latest

That founding and majority shareholder has now come back again with his full point, something that has led to another drop in the stock:

(Amigo Holdings share price from London Stock Exchange)

The core of his argument is here from him in a Medium post.

To paraphrase. The company lent money on certain conditions and making certain checks on ability to repay. They thought these met the regulations of the time. The regulator is now stating that this isn't good enough. And if the regulator says that about all future lending then that's fine, the regulator is correct.

However, the claim is at least that the regulator is demanding that all previous lending be retrospectively changed.

This has horrible implications for the company:

In spring 2019, the FOS had a meeting with senior Amigo executives and informed them that they had changed their stance on irresponsible lending, and that Amigo should too. Previously, a commitment to a feasible budget plan based on a combination of verified and self certified data was sufficient. Now, irrespective of the budget plan, any indication that the customer had been living beyond their means (or might do in the future) became a reason to retrospectively refund all interest payments as far back as 2010. Loans to customers with no credit problems, but who had an overdraft or a credit card which had not been cleared in full at the end of each month, became ‘irresponsible’ loans- as did loans to virtually everyone else. Later the FOS issued figures showing that, true to their word, they did actually uphold 90% of all complaints relating to guarantor-backed loans in 2019.

Their future business disappearing has one implication - the future of the business is dead. But all of their past income being declared refundable has another implication - that there's nothing left in the company at all.

So, the claim from that founding shareholder is that the company should stop making new loans. Collect on all past loans and sue the regulator for trying to make retrospective changes.

There is, he insists, capital within the company, sufficient for a substantial return to shareholders, if this is done.

However, to follow the current path means that there will not be. For, as alleged, the company is making new loans, knowing that the regulator will find for complainants, thus new loans cannot possibly make a profit. Even if one can be booked until people complain.

My view

I stick with my view that the regulator is going to regulate Amigo out of business. The general tenor of the time is that high interest loans, "usury" to some, simply should not be allowed to happen. This current fashion insisting that however much people do want to borrow they just shouldn't be allowed to.

Well, OK, if that's what they're gonna do then that's what they're gonna do.

For Amigo though there's a choice here. Assume that the investor is correct. That there is value in recouping the loan book and then suing the regulator. Assume also that I'm right and there's no future for the business as the model will not be viable in the future.

The question then is, well, what's that recovery value of the loan book?

We don't know of course and that's where the speculation comes in.

The investor view

One commentary on all of this says:

Some believe the founder is being disruptive to drive down the share price so he can take Amigo private cheaply, though he could face regulator opposition to running it.

That sounds about right to me. And Benamor, that majority shareholder, isn't even saying that he'd like to run it again. In reality he's saying it should be wound up and the recoup value of the loan book be returned to shareholders. Collect the loan book, brazen it - perhaps fight it out - out with the regulator over retrospective regulation and thereby maximize shareholder value.

And I can imagine that he is trying to talk the price lower so that he can take it private and undertake that task.

So, what's our reaction? The answer is, I think, at this price, nothing. But if there's another significant drop then I think it becomes an interesting option premium on just that takeover and private wind up happening.

On the information we've got at the moment another drop to say 10 pence or so would see me thinking that's a fair option on that course of action. So, monitor for developments and see what happens next.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.