Is the Amigo share price back from the dead?

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The Amigo (LSE:AMGO) share price erupted by double-digits yesterday following the latest development in its ongoing attempt to restore its reputation. Despite the positive movement, the stock is still down more than 60% over the last 12 months. So how exactly did the guarantor lender get into this mess? And what can investors expect to happen next?

The fall of the Amigo share price

Amigo’s business model is to help individuals gain access to capital that would otherwise be unavailable through traditional banks. While this does mean customers are often carrying a higher chance of default, a guarantor system is put in place to mitigate this risk.

However, this risk factor still requires responsible lending practice by the company. The company needs to ensure that both the customer and guarantor can meet their financial obligations along with the near-50% interest charges before a loan is issued. And that’s something the old management team decided not to do.

In 2019, a series of earnings reports revealed a rapidly rising number of loan impairments. Customers were not paying back the money they borrowed. And when the enormous bills landed on guarantors’ doors, complaints to the Financial Conduct Authority (FCA) started to pile up rapidly.

To satisfy the claims being made by both customers and creditors, a new management team submitted a Scheme of Arrangement with the British courts. But this initial proposal was heavily opposed by the FCA on the grounds that any successful claim would only see 5-10% of compensation issued. And in May 2021, the scheme was rejected by the courts.

To date, the Amigo share price has collapsed by 97.5% since this whole mess started!

 A light at the end of the tunnel?

After the first scheme was rejected, the new leadership team have been working on a revised version. And after its day in court on 23 May, the new scheme was accepted. The group will now begin restructuring its balance sheet, satisfying valid customer claims, and fulfilling its duties to creditors.

Problem solved? Not quite. The risk of bankruptcy has fallen drastically, but it’s not entirely gone. Even with the scheme approval, Amigo still needs to be re-authorised by the FCA. Otherwise, it cannot resume its lending activities or raise fresh capital.

That means until the new management team can prove it has learned from past mistakes and demonstrates new safeguards to prevent them from happening again, the revenue stream will remain non-existent. Beyond this, the company also needs to start working on rebuilding its reputation with customers. Needless to say, that’s easier said than done.

Having said that, these latest developments are obviously a step in the right direction. And providing everything goes smoothly, the Amigo share price may begin its long uphill recovery.

The post Is the Amigo share price back from the dead? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.