Amigo Holdings PLC (LSE:AMGO) shares slumped 40% in early deals on Monday as it flagged a massively dilutive rights issue.
The controversial guarantor loans provider has to raise money to settle complaints from customers relating to its business practices in the previous decade and this morning it said its new business scheme would require the company to issue at least 19 new shares for every existing Amigo share. Shareholders who do not participate in the rights issue would therefore see their stake in the company reduce by at least one twentieth.
Amigo said this level of dilution reflects a UK market standard level of economic interest for equity holders where creditors are not being paid in full.
The beleaguered company, which is in danger of going out of business if it cannot come up with a scheme of arrangement that both satisfies the High Court and its shareholders, said it would probably augment the rights issue with a share placing to raise further funds.
The Amigo loans business is currently in run-down mode as the company is not allowed to issue new loans. It has previously indicated an initial contribution of £97mln to provide redress to creditors, a large chunk of which would come from the existing loan book.
The High Court was concerned that there did not appear room for further payments to redress creditors beyond those provided for by the previous scheme of arrangement and that the scheme was being parsimonious in order to protect shareholders' existing investment. The new business scheme will include provision for an additional payment to redress creditors in the event that the existing loan book generates a better return than currently anticipated, Amigo said.
If shareholders do not approve the rights issue, the new business scheme will revert into a wind down under which the shareholders will receive nothing in respect of Amigo Loans Ltd.
“The board is fully committed to providing the maximum amount of redress possible for qualifying creditors. Should creditors vote for the new business scheme and the court subsequently approve it, these provisions provide additional protection for creditors and address certain of the concerns raised by the court above the previous scheme. They are necessary for Amigo to survive and avoid insolvency,” said Gary Jennison, the chief executive officer of Amigo.