Full Year Results

RNS Number : 1116T

Arrow Global Group PLC

23 March 2021

Arrow Global Group plc

Preliminary results for the twelve months ended 31 December 2020

Robust cashflow generation and strong return to profitability in H2; new five-year targets reflect confidence in capital-light fund management strategy

Highlights

· Loss before tax of £114.8 million (FY 2019: £51.3 million profit) – loss driven by non-cash impairment from ERC asset write-down taken at HY 2020

· Year-end leverage of 5.1x comfortably within revised covenant levels

· Delivery against ambitious five-year targets set in November remains on track

Fund and Investment Management business (FIM) – strong fundraising performance

· Achieved final close of Arrow Credit Opportunities 1 fund (ACO 1) with total capital commitments of €1.7 billion, with €1.3 billion from third party investors

· Total Funds Under Management (FUM) of €4.3 billion (FY 2019: €3.7 billion)

· Increased capital deployment from H2 2020 in line with increasing investment opportunities – 35% of Arrow Credit Opportunities 1 (ACO 1) fund deployed or committed by end February 2021 – expect this to have increased by end of Q1 2021

Asset Management and Servicing business (AMS) – resilient revenue performance

· AMS third-party income grew 2.8% to £97.0 million (FY 2019: £94.4 million)

· Record 26 new third-party contract wins in 2020, evidencing increased demand for Arrow’s services – expected to contribute materially to AMS income in 2021

· Further 6 AMS contract wins in 2021

Balance Sheet business (BS) – continued cashflow generation

· Cash collections of £338.9 million (FY 2019: £442.3 million) – strong performance in collections at 125% of revised 84-month ERC in H2 2020

· Approach taken to revalue balance sheet assets against uncertain economic outlook at HY 2020 remains appropriate – current cash collections outperformance supports methodology

Managed business effectively throughout COVID-19

· Maintained a strong liquidity position with liquidity headroom of £174.6 million (FY 2019: £152.9 million)

· Additional ABS facility of €104.7 million enhanced liquidity

· Revolving credit facility covenant restructure achieved – year end leverage of 5.1x remains well within covenant levels

· €75 million Eurobond tap completed in January 2021 extending duration and demonstrating continued access to the funding market

Attractive outlook and updated targets

· Economic outlook more positive than original forecasts used to inform ERC write-down. However, economic dislocation expected to present increased investment and asset servicing opportunities

· Expect to continue to perform at least in line with revised ERC and win further AMS contracts

· Expect to reach 70% deployment of ACO 1 around end of 2021, enabling start of fundraising for ACO 2

· Confident in ability to deleverage to circa 4.0x by end 2021 and enter target range of 3.0-3.5x by 2023

· Plan to resume dividend payments earlier than originally planned, with a final dividend in respect of year-end 2021

Commenting on today’s results, Lee Rochford, Group chief executive officer, said:

“2020 was a year when Arrow remained true to its purpose and values and ensured we put colleagues and customers first. Indeed, Arrow’s rapid ability to ensure that 100% of our staff were working fully operationally from home, combined with our excellent customer treatment, has been a notable driver of our record third-party servicing contract wins. Despite the disruption from COVID-19, the Group performed resiliently in 2020. Decisive management action taken early in the year ensured the maintenance of strong liquidity levels and the business registered a clear return to profitability in H2 2020 following the non-cash impairment in H1 2020 relating to the ERC asset write-down.”

“It is exciting to see a notable increase in investment returns available in the market as economic dislocation generates new opportunities. We are therefore confident that we will continue to increase investment volumes and win new servicing contracts, driving further capital-light revenue increases and positioning us well to start raising the ACO 2 fund faster than originally planned.”

“Trading in 2021 has started the year strongly. Our new set of five-year targets demonstrate our confidence in our ability to grow both the quantum and quality of the Group’s earnings significantly as we look to raise new funds and grow funds under management.”

Group highlights	31 December 2020	31 December 2019	Change
Capital-light % of Group EBITDA (%)	(48.4)*	33.3	(81.7)
FIM EBITDA margin (%) AMS EBITDA margin (%) Free cash flow (£m)	7.2 12.4 156.6	38.6 17.9 261.4	(31.4) (5.5) (104.8)
(Loss)/profit after tax (£m)	(114.8)	51.3	(166.1)
Basic EPS (£) Return on Equity (%)	(0.52) (63.7)	0.20 17.9	(0.72) (81.6)
Leverage (x) FUM (€bn)	5.1 4.3	3.4 3.7	1.7 0.6

* Negative Group EBITDA

Presentation and Q&A details

A presentation is available to download on the company’s investor relations website here:https://bit.ly/3tIrIne.

There will be a presentation from Arrow’s management team via conference call starting at 0830. There will be a Q&A session with management following the presentation. The dial-in details for the conference call and Q&A session are copied below.

Conference call:

Dial-in details: +44 (0)330 336 9126

Confirmation Code: 3678637

Notes:

A list of alternative performance measurements and a glossary of definitions can be found at the end of the document.

More details explaining Arrow’s business can be found on the Group’s website atwww.arrowglobal.net

For further information:

Arrow Global Group plc
Duncan Browne, Head of investor relations	+44 (0) 7925 643 385 dbrowne@arrowglobal.net
FTI Consulting
Tom Blackwell	+44 (0)20 3727 1141 arrowglobal@fticonsulting.com

Forward looking statements

This document contains statements that constitute forward-looking statements relating to the business, financial performance and results of the Group and the industry in which the Group operates. These statements may be identified by words such as “expectation”, “belief”, “estimate”, “plan”, “target”, or “forecast” and similar expressions or the negative thereof; or by the forward-looking nature of discussions of strategy, plans or intentions; or by their context. All statements regarding the future are subject to inherent risks and uncertainties and various factors could cause actual future results, performance or events to differ materially from those described or implied in these statements. Such forward-looking statements are based on numerous assumptions regarding the Group’s present and future business strategies and the environment in which the Group will operate in the future. Further, certain forward-looking statements are based upon assumptions of future events which may not prove to be accurate and neither the Company, the Group nor any other person accepts any responsibility for the accuracy of the opinions expressed in this document or the underlying assumptions. The forward-looking statements in this document speak only as at the date of this presentation and the Company and the Group assume no obligation to update or provide any additional information in relation to such forward-looking statements.

Group chief executive officer’s review

An exciting new chapter for Arrow

Putting our purpose and values front and centre

The unique challenges presented by the events of 2020 meant that we were determined that our response would be shaped by our purpose and values. Our foremost priority was to safeguard the health and wellbeing of our colleagues and ensure the continuity of service for customers and clients. I believe Arrow succeeded on both counts. We ensured that 100% of our workforce could work from home effectively within three weeks of the pandemic’s outbreak. We maintained full service to clients, while also offering customers appropriate levels of forbearance where necessary through an enhancement of our already comprehensive vulnerable customer policy. The Group’s policy of offering forbearance to those in financial distress or ill health was expanded by implementing a specific COVID-19 customer support programme enabling us to help customers directly affected by the virus.

Arrow proved its resilience in a challenging operating environment

Trading conditions in the first half of 2020 were dominated by the global COVID-19 pandemic. The business started the year strongly before the impact from the global crisis. After outperforming Estimated Remaining Collections (ERC) in January and February 2020, Balance Sheet (BS) cash collections began to be impacted by the end of March 2020 and reduced to a low point in April 2020, as the macroeconomic environment deteriorated and the business’s ability to operate was significantly restricted due to European lockdowns. Since then, we have seen improvements in cash collections in H2 2020, where cash collections outperformed the reforecast ERC by 24.6%.

Third-party Asset Management and Servicing (AMS) income also remained robust, with performance relatively flat on FY 2019, demonstrating the resilience of the business’s capital-light cash flows, the impact of a record 26 new contract wins and the early signs of the benefits to AMS from our ACO 1 fund launch.

Overall, this resilient operational performance meant that the Group returned strongly to profitability in H2 2020.

Decisive action taken to secure the balance sheet and enhance liquidity

The Group also took a highly proactive response to the crisis’s impact on our balance sheet. Early on, we sought to compensate for COVID-19 induced cash collection weakness by reducing investments and costs. We also raised additional funds through the execution of a €104.7 million ABS facility and completed a long-term support agreement with our revolving credit facility banks, providing ample covenant headroom to deliver fully against our strategy. Post year end we issued €75 million senior secured notes maturing 2026. Taken together, these actions ensure that we can look forward to capturing the significant investment opportunities presented by COVID-19 economic dislocation with confidence, backed by a strong and highly liquid balance sheet with long-term lender support.

Refined approach taken to revalue balance sheet assets against uncertain economic outlook

At the interim results, we ran a number of macroeconomic scenarios through our ERC model and booked a reforecast ERC asset which we believe represents a blend of ‘baseline’ and ‘downside’ macroeconomic scenarios. This led to a balance sheet write down of portfolio investments and associated non-cash charge of £133.6 million to the statement of profit or loss at H1 2020, subsequently reducing to £95.5 million at FY 2020, resulting in an accounting loss before tax for the year of £114.8 million. We have re-assessed this approach at the end of the year and reaffirmed our view of the appropriateness of this valuation approach.

Following this write down the Group’s balance sheet cash collections strongly outperformed our reforecast ERC. While this is clearly positive, it is the Group’s view that as the substantial levels of economic support that has been provided by governments across Europe begins to fall away in 2021, there will be a deterioration in the near-term macroeconomic outlook which will have an adverse impact on the operating environment. Therefore, no material changes in the valuation of the ERC following our reforecasting exercise at H1 2020 have been made.

Completed the strategic pivot to a more capital-light model and successfully raised our inaugural distressed credit fund, ACO 1

We announced the first close of our inaugural pan-European fund, ACO 1, in December 2019. Fundraising continued throughout 2020, with final close of €1.7 billion announced in November 2020, representing one of the largest ever first-time fundraises in the European private credit market. I am enormously proud of this achievement as it not only entailed passing the stringent due diligence tests set by some of the most sophisticated alternative asset allocators in the world, but was also conducted during the current global pandemic where the usually necessary face-to-face contact was rendered impossible. Our success in raising such a large first-time fund, therefore, not only represents the attractiveness of Arrow’s fund management offering, but also the confidence sophisticated investors have in our long track record of delivering strong through-the-cycle returns.

At our fund and investment management analyst seminar in November 2020, we unveiled a new segmental structure which reflects the Group’s new model better. Alongside Arrow’s current Balance Sheet business and Asset Management and Servicing business, we launched a new Fund and Investment Management business segment. This segment comprises the new fund manager, AGGCM, alongside our current Fund and Investment Management businesses of Norfin, Europa Investimenti and Arrow Portfolio Management, which manages Arrow’s balance sheet assets. Together Arrow’s Fund and Investment Management business has total Funds Under Management (FUM) of €4.3 billion at the end of 2020. We are confident we can grow FUM to over €10.0 billion by the end of 2025.

New five-year targets underline our ambition to become a scaled integrated alternative asset manager and significantly grow capital-light earnings

Following the successful final close of ACO 1, we announced an updated set of five-year targets that better reflect our ambition to grow into a fully scaled integrated alternative asset manager. These targets underline our belief that we can increase both the quantum and quality of our earnings as we grow profits from our capital-light Asset Management and Servicing and Fund and Investment Management businesses, while simultaneously significantly reducing net debt and leverage.

Five-year targets:

· Greater than €10.0 billion of FUM by end 2025

· Greater than 50% of EBITDA from capital-light businesses (Fund and Investment Management business (FIM) and Asset Management and Servicing business (AMS)) by FY end 2025

· 40% EBITDA margin from FIM and at least 25% EBITDA margin in AMS by end 2025

· Return on equity of greater than 25% through-the-cycle between FY 2021 – FY 2025

· Greater than £500 million of cash generation after fund investments between FY 2021 – 2025

· Leverage of circa 4.0x by end 2021 and within target range of 3.0-3.5x by 2023

Business well positioned to take advantage of the significant market opportunity

Arrow’s business model is structured to benefit from times of economic dislocation. Even prior to COVID-19, Arrow’s addressable market was extremely large with around €1.5 trillion of non-core and non-performing assets estimated across Europe, with around €1 trillion of these still sitting on bank balance sheets. This is despite over €800 billion of assets being sold by banks into the capital markets in the last seven years; this alone is expected to generate a secondary market of around €300 billion over the next four years as these assets are characterised by their long lives and initial buyers will sell on many of the assets. Based on the provisions that banks incurred in 2020, early estimates suggest that the non-performing loan market will increase at least 50% to around €500 billion in the coming years.

While Arrow’s market is growing rapidly, deployment of capital into attractive market opportunities was limited in the first half as the Group looked to preserve liquidity and assess the market pricing and availability of assets. Deployment picked up in the second half of 2020, with attractive returns available, as markets began to reopen following European-wide lockdowns. In 2020, the Group had deployed or committed the ACO 1 fund at a current net deal IRR of 17%. We expect capital deployment to pick up significantly in 2021. ACO 1 was 35% deployed or committed by end February 2021; we expect this to have increased by the end of Q1 2021 and to have deployed 70% of the ACO 1 fund by early 2022, with Arrow’s balance sheet expected to constitute around 25% of that investment volume. We also continue to see evidence of available returns increasing.

Alongside an attractive investment market opportunity, there is also a significant opportunity for Arrow to grow its Asset Management and Servicing business. This will be driven by an increase in banks requiring more support to service their non-performing assets and institutional investors requiring a servicer to manage their investment assets. Arrow won a record 26 new Asset Management and Servicing contracts in 2020, providing us with further confidence that we can meet our ambitious targets to grow revenues in this business by 10% per annum over the next five years.

A message for the entire Arrow team

2020 has been an extraordinarily tough year for the entire world. I am enormously proud of how my Arrow colleagues rose to the challenge of adapting so quickly to a drastically new way of working in the face of the global COVID-19 pandemic. Recent events have been the ultimate test of every company’s resilience and culture and I believe that Arrow rose to that challenge on both fronts. The work of our support functions to enable the entire company to work fully operationally from home by the end of March and of our operations teams, who supported our customers and clients through this difficult time, meant we were able to ensure quality continuity of service. Our underwriting and investment teams worked tirelessly to ensure we appropriately revalued our back book of assets, as well as access new investment opportunities in response to client demand. The external recognition we have received, is testament to the quality of service we have continued to deliver this year and we were delighted, therefore, to win awards for our customer-service operations, most notably the Credit Strategy ‘Best Outsourcing and Partnership’ Initiative for Onboarding and Customer Engagement, in recognition of our work with Virgin Money.

Outlook

We are looking forward to 2021 with optimism. I am confident that our approach to the valuation of the assets on our balance sheet in line with our cautious view on the macro-economic outlook means we are well insulated against further economic shocks. However, we remain highly alert for any signs of further macroeconomic deterioration that could impact operations. Our analysis of the impact of the pandemic on the balance sheets of European financial institutions shows that our addressable market is set to increase significantly due to economic dislocation, providing strong tailwinds for our investment and servicing activities. The raising of €1.7 billion within our ACO 1 fund means we are well positioned to be a leading investor in the European NPL market, with a record amount of dry investment powder at a time when the cycle has turned significantly in our favour, increasing the likelihood of investment returns rising.

The work we undertook this year to maximise liquidity and renegotiate our banking covenant under favourable terms means we have ample liquidity to invest into this market opportunity through our 25% co-investment alongside ACO 1, which means that Arrow will continue to grow strongly while simultaneously reducing capital intensity and increasing capital-light earnings from the Fund and Investment Management and Asset Management and Servicing businesses. Our confidence in our ability to deliver this capital-light strategy is reflected in the new set of five-year targets, announced as part of our Q3 results in November 2020, that reflect our commitment to scale significantly the Group’s funds under management and increase the proportion of our earnings that come from capital-light sources to at least 50% over the next five years. This will result in a significantly higher quality of earnings with significantly less leverage and net debt. This is a strategy I am hugely excited to deliver.

Offer

On 22 February 2021, Arrow received a preliminary, conditional proposal from TDR Capital LLP, in its capacity as manager of various TDR Capital LLP managed investment funds, for a possible cash offer of 307.5 pence per share for the entire issued and to be issued ordinary share capital of Arrow. The board of Arrow has confirmed to TDR Capital LLP that it is minded to recommend a firm offer for Arrow at this price, subject to the agreement of terms relating to the proposal.

Lee Rochford

Group chief executive officer

23 March 2021

Group chief financial officer’s review

Decisive action to protect the business and take advantage of opportunities

Overview

In what has been an unprecedented year, Arrow responded rapidly to the challenges presented by the COVID-19 pandemic, taking early and decisive action to secure the balance sheet and enhance liquidity. At the half year, the Group undertook a comprehensive exercise to review the Estimated Remaining Collections (ERC) balance sheet asset in light of the significant economic uncertainty present in all its markets. This led to a write down of portfolio investments generating a non-cash impairment of £133.6 million, subsequently reducing to £95.5 million at FY 2020, and was the main driver for the Group’s pre-tax loss of £114.8 million (2019: £51.3 million pre-tax profit). At the end of 2020, the 84-month ERC was £1,555.8 million (2019: £1,817.9 million). See the cash ERC to portfolio investments reconciliation on page 29 for more detail. In the second half of the year, we returned strongly to profitability, principally driven by a resilient performance in collections, action to reduce costs, contract wins in AMS and a targeted approach to deploying capital in response to uncertain external market conditions.

The Group reached an important landmark in November 2020, with the final close of ACO 1, which raised total capital commitments of €1.7 billion. We also invested significant time and resource to ensure we have the right strategy in place to scale the Fund and Investment Management business. At our fund and investment management analyst seminar in November 2020, we presented our updated five-year targets and segmental business model aligned with our ambition to drive significant growth through our capital-light businesses. As a result, Arrow’s financial reporting has been updated to disclose four segments to better reflect the development of the Group’s fund management capabilities: Balance Sheet, Asset Management and Servicing, Fund and Investment Management and Group functions.

Balance Sheet business

The balance sheet predominantly reflects the performance of the assets purchased with Arrow’s own capital. In 2020, balance sheet cash collections from our portfolio asset base were £338.9 million (2019: £442.3 million).

Whilst recent collections performance has been encouraging, Arrow remains cautious and the Group anticipates that there continues to be high probability of a deterioration in the economic outlook in 2021 and beyond as the government support that has been provided throughout the pandemic begins to recede. Balance sheet segment income was £65.0 million (2019: £226.5 million) as the revaluation of the ERC balance sheet asset at the half year resulted in a non-cash impairment of portfolio investments of £133.6 million, subsequently reducing to £95.5 million at FY 2020. Cash collections performed strongly against revised estimates in the second half, outperforming by 24.6%. However, due to the significant level of uncertainty, no material changes in the valuation of the ERC balance sheet asset have been made. Gross margin was (51.7%) (2019: 51.0%) so collections costs in absolute terms declined year on year in line with volumes.

Due to the COVID-19 pandemic, we proactively managed cash in H1 2020 and took decisive action to reduce capital deployment. We saw a slowdown in the market, predominantly driven by financial institutions taking a prudent approach to valuations and banks focusing on initial provisioning over asset sales in H1 2020, returning to significant investment opportunities in H2 2020.

Going forward, we are well positioned to invest at substantial volume into a growing market opportunity. Full-year purchases for 2020 were £109.9 million (2019: £303.7 million), partly due to COVID-19 impact discussed above and also due to our new investment model. In 2020, Arrow’s balance sheet was typically invested alongside ACO 1 fund investments. Participation in the current ACO 1 fund was around 25%. We expect this percentage to reduce over time and for Arrow balance sheet investments to remain at around £150 million per annum. Arrow still runs investment committees on all deals and has carve-outs to support policy requirements, thereby having strong control over liquidity risk.

The co-invest model, where Arrow invests alongside most ACO 1 investments, requires lower Arrow balance sheet investment volume than historic levels, likely leading to a faster deleveraging profile and absolute net debt reduction. 2020 year-end leverage was 5.1x (2019: 3.4x), within covenant levels and secured net debt was £1,181.0 million (2019 as represented: £1,107.6 million. See note 14 on page 27 for more detail). Strong trading in 2021, provides increased confidence that leverage will reduce to circa 4x by the end of 2021 – significantly lower than the amended covenant requirements – and return back to the Group’s target range of 3.0x to 3.5x by the end of 2023. Leverage is expected to peak towards the middle of 2021, as the negative impact of H1 2020 COVID-19 lockdowns on collections remain in the Group’s trailing 12-month secured net debt to Adjusted EBITDA leverage calculation. See page 35 for more detail on net debt.

In addition, the co-invest structure with the ACO 1 fund will simplify Arrow’s accounting profile. As assets purchased through the fund co-invest structure increase, the proportion of income accounted for on a fair value basis through the Arrow SMA and Fund SPVs will increase, and the share of portfolios accounted for on an amortised cost basis will therefore decline.

Asset Management and Servicing business

Segment Asset Management and Servicing income remained robust at £125.4 million (2019: £128.8 million), demonstrating the resilience of this capital-light income stream through a significant economic downturn. Throughout 2020, we secured a record 26 new contract wins. The Group is well placed to win further new third-party Asset Management and Servicing contracts as a servicing partner for financial institutions which require additional collections capacity with growing non-performing loan volumes as a result of the pandemic. There are also significant opportunities for the Asset Management and Servicing business created by the ACO 1 fund launch. It is estimated that around 75% of fund purchases will be serviced on Arrow’s servicing platforms and that the ACO 1 fund will pay market referenced fees for servicing. As a result of the above, the Asset Management and Servicing business is in a strong position for future growth, with total income expected to increase at a 10.0% CAGR over next five years. Profitability for the AMS business is steadily increasing as we continue to develop our operational efficiency. The AMS EBITDA margin for the year was 12.4% (2019: 17.9%) and the Group is targeting a 25% EBITDA margin from the AMS business by 2025.

Fund and Investment Management business

This segment comprises the new ACO 1 fund, alongside our current Fund and Investment Management businesses of Norfin, Europa Investimenti, Sagitta and Arrow Portfolio Management. Limited Partners in ACO 1 will pay AGGCM, the fund and investment manager, fees predominantly on drawn capital with a small amount paid on committed capital.

In addition, Limited Partner investors incentivise the fund managers of ACO 1 through performance fees. Arrow participates in this performance fee regime with a 30 to 40% share, which represents an income stream to the Fund and Investment Management business.

Europa Investimenti and Norfin earn fees relating to fund and investment activity. Income earned by for Arrow Portfolio Management is predominantly intra-segmental and relates to the commercial charges between Arrow’s Balance Sheet business and the Fund and Investment Management business. These commercial charges cover portfolio management services relating to the assets held on Arrow’s balance sheet at a rate of 150bps on net asset value and for the Arrow SMA based ona rate of 175bps during 2020 and 150bps from 1 January 2021 on drawn capital during the investment period. The total blended fee rate for Fund and Investment Management is 0.9%.

Fund and Investment Management’s EBITDA margin was 7.2% (2019: 38.6%). During the year we have continued to build the Fund and Investment Management business alongside the ACO 1 fund raise and have therefore continued to incur £3.7 million of set-up costs as part of the overall investment. We are targeting a 40% EBITDA margin from Fund and Investment Management by 2025.

Group function costs

These relate predominantly to support functions and reflect those costs incurred as a result of running an international group, which is a listed business in the UK, comprising predominantly plc executives and plc Group oversight costs. This segment made a loss for the year of £78.3 million (2019: £82.1 million), with all costs included in the underlying trading result with no adjusting items.

Across all segments we have continued to focus on efficiency and strong cost control throughout 2020. Total operating expenses were £224.8 million, which represents a reduction on 2019 on a cash basis (2019: £233.7 million). The £10 million cost reduction programme announced at the half year is on track.

Finance costs and tax

Net interest and financing costs of £57.5 million were 5.5% higher than 2019 (2019: £54.5 million) linked to the additional ABS facility, which was raised to secure the balance sheet and provide additional financing during the COVID-19 pandemic.

The taxation credit for the year was £21.2 million (2019: £14.0 million taxation charge) with an effective tax rate of (18.5)% (2019: 27.3%). The rate is in line with the UK corporation tax rate, which is reflective of the Group’s full-year result having been primarily generated in the UK.

Leverage, cash and liquidity

The Group maintained a strong cash and liquidity position, having raised an additional €104.7 million through ABS financing and a covenant amendment agreement with the revolving credit facility banks. Liquidity headroom was £174.6 million (2019: £152.9 million).

The Group’s secured net debt position was £1,181.0 million (2019 as represented: £1,107.6 million. See note 14 on page 27 for more detail). Leverage at the year-end was 5.1x (2019: 3.4x), the increase being predominantly related to lower cash flows in H1 2020 due to the impact of European lockdowns. Free cash flow was £156.6 million (2019: 261.4 million). Arrow’s increased focus on reducing capital intensity and growing earnings from its capital-light businesses should result in high levels of cash generation. The Group is targeting £500 million of cash generation after fund investments over the next five years and expects leverage to circa 4.0x by end of 2021 and within our target 3.0x-3.5x range by 2023. This is well in advance of the first bond refinancing requirement in 2024.

The Group’s borrowing facilities weighted average period to maturity is 3.7 years (2019: 4.8 years), with a weighted average cost of debt 3.7% (2019: 3.7%).

Returns to shareholders

Return on equity (ROE), one of the key performance metrics for the Group, was (63.7)% (2019: 17.9%), which was adversely impact by external events and the subsequent losses in the first half. ROE in the second half of the year was 11.6% (2019 H2: 6.7%) and represents a return to profitability from the first half of 2020 as well as an improvement from the second half of 2019.

The Group currently expects to resume dividend payments at year-end 2021.

Summary and outlook

Despite the events of 2020, the Group demonstrated a resilient performance across its business lines in the context of significant macroeconomic uncertainty. The pre-tax loss in the first half of 2020, was the result of the non-cash impact of the impairment of portfolio investments of £133.6 million, subsequently reducing to £95.5 million at FY 2020, due to the reforecast ERC balance sheet asset in light of the Group’s view that the macroeconomic environment will continue to deteriorate in 2021. In the second half of the year, the Group outperformed its reforecast significantly, with cash collections 24.6% above forecasts and Arrow registered a strong return to profitability in H2 2020. Despite this outperformance, no material revaluations of the ERC balance sheet asset were considered necessary at the full year as the Group remains cautious regarding the macroeconomic outlook for 2021 and beyond.

The completion of the ACO 1 fundraise is a landmark achievement for the Group. The accelerated capital-light strategy and five-year targets underline our confidence that Arrow can quickly evolve into a fully fledged integrated alternative asset manager with the majority of its earnings originating from higher quality, capital-light sources in our Fund and Investment Management and Asset Management and Servicing businesses. The restructure of our income statement into four segments demonstrates our commitment to be measured against this ambition and allow the market to value each business line independently.

Due to the decisive action taken throughout the year to secure the balance sheet, liquidity and cash position, Arrow is well positioned to take advantage of the significant market opportunities likely to be presented by the current economic dislocation being seen across the world’s economies. It is encouraging that trading has started strongly in 2021 and I am optimistic about the improved prospects for the Group’s performance in 2021 and beyond.

Matt Hotson

Group chief financial officer

23 March 2021

Consolidated statement of profit or loss and other comprehensive income

For the year ended 31 December 2020

	Note	2020 £000	2019 £000

Income from portfolio investments at amortised cost	12	164,597	199,094
Fair value gains on portfolio investments at FVTPL	12	4,976	32,397
Impairment (losses)/gains on portfolio investments	12	(100,436)	12,714
Income from real estate inventories	12	492	561
Total income from portfolio investments		69,629	244,766
Income from asset management and servicing and fund and investment management	3	97,026	94,360
Gainon disposal of leases		453	–
Other income		384	392
Total income		167,492	339,518
Operating expenses:
Collection activity and fund management costs	5	(130,572)	(131,527)
Other operating expenses	5	(94,248)	(102,173)
Total operating expenses		(224,820)	(233,700)
Operating (loss)/profit		(57,328)	105,818
Finance income		61	61
Finance costs	4	(57,556)	(54,559)
(Loss)/profit before tax		(114,823)	51,320
Taxation credit/(charge) on ordinary activities	6	21,206	(14,033)
(Loss)/profit after tax		(93,617)	37,287

Other comprehensive income:
Items that are or may be reclassified subsequently to profit or loss:
Foreign exchange translation difference arising on revaluation of foreign operations		6,741	(7,077)
Movement on hedging reserve		356	161
Total comprehensive (loss)/income		(86,520)	30,371

(Loss)/profit after tax attributable to:
Owners of the Company		(92,829)	35,223
Non-controlling interest		(788)	2,064
		(93,617)	37,287

Comprehensive (loss)/income attributable to:
Owners of the Company		(85,732)	28,307
Non-controlling interest		(788)	2,064
		(86,520)	30,371

Basic EPS (£)	7	(0.52)	0.20
Diluted EPS (£)	7	(0.52)	0.19

Note -There has been a reclassification between the two operating expenses rows ‘collection activity and fund management costs’ and ‘other operating expenses’ in the prior year. This change was made to better reflect the evolved nature of the Group’s business model and presenting direct costs of the Group’s business lines is deemed to provide more relevant information. As such, we have reclassified £21,729,000 from ‘other operating expenses’ to ‘collection activity and fund management costs’ in the prior period. The total operating expenses impact is £nil. Further information can be found in note 5.

Consolidated statement of financial position

As at 31 December 2020

	Note	Group 2020 £000	As Re-presented Group 2019 £000
Assets
Cash and cash equivalents	14	182,892	115,376
Trade and other receivables		71,372	48,483
Portfolio investments – amortised cost	12	793,554	932,199
Portfolio investments – FVTPL	12	187,421	169,799
Portfolio investments – real estate inventories	12	61,240	61,626
Property, plant and equipment		17,612	24,521
Intangible assets		38,709	38,159
Deferred tax asset		31,782	10,759
Goodwill	8	278,338	267,700
Total assets		1,662,920	1,668,622
Liabilities
Bank overdrafts	13	3,648	1,386
Revolving credit facility	13	277,552	230,963
Derivative liability		83	509
Trade and other payables	9	166,965	223,001
Current tax liability		2,110	7,645
Other borrowings	13	3,247	3,672
Asset-backed loans	13	143,985	84,077
Senior secured notes	13	930,575	897,875
Deferred tax liability		18,056	17,637
Total liabilities		1,546,221	1,466,765
Equity
Share capital		1,774	1,769
Share premium		347,436	347,436
Retained earnings		38,506	129,240
Hedging reserve		(67)	(423)
Other reserves		(274,451)	(280,630)
Total equity attributable to shareholders		113,198	197,392
Non-controlling interest		3,501	4,465
Total equity		116,699	201,857
Total equity and liabilities		1,662,920	1,668,622

The 2019 balance sheet has been re-presented to show £26,611,000 of bank balances subject to certain restrictions within cash and cash equivalents in the year, that were previously shown within trade and other receivables. See note 14 on page 27 for more detail.

Consolidated statement of changes in equity

For the year ended 31 December 2020

Group	Ordinary shares £000	Share premium £000	Retained earnings £000	Hedging reserve £000	Own share reserve¹ £000	Translation reserve¹ £000	Merger reserve¹ £000	Total £000	Non- controlling interest £000	Total £000
Balance at 1 January 2019	1,763	347,436	115,642	(584)	(5,800)	9,214	(276,961)	190,710	601	191,311
Profit after tax	–	–	35,223	–	–	–	–	35,223	2,064	37,287
Exchange differences	–	–	–	–	–	(7,077)	–	(7,077)	–	(7,077)
Recycled to profit after tax	–	–	–	7	–	–	–	7	–	7
Net fair value gains – cash flow hedges	–	–	–	187	–	–	–	187	–	187
Tax on hedged items	–	–	–	(33)	–	–	–	(33)	–	(33)
Total comprehensive income for the year	–	–	35,223	161	–	(7,077)	–	28,307	2,064	30,371
Shares issued	6	–	–	–	–	–	–	6	–	6
Repurchase of own shares	–	–	–	–	(6)	–	–	(6)	–	(6)
Share-based payments net of tax	–	–	1,437	–	–	–	–	1,437	–	1,437
Dividend paid	–	–	(23,062)	–	–	–	–	(23,062)	–	(23,062)
Non-controlling interest on acquisition	–	–	–	–	–	–	–	–	1,800	1,800
Balance at 31 December 2019	1,769	347,436	129,240	(423)	(5,806)	2,137	(276,961)	197,392	4,465	201,857
Loss after tax	–	–	(92,829)	–	–	–	–	(92,829)	(788)	(93,617)
Exchange differences	–	–	–	–	–	6,741	–	6,741	–	6,741
Net fair value gains – cash flow hedges	–	–	–	427	–	–	–	427	–	427
Tax on hedged items	–	–	–	(71)	–	–	–	(71)	–	(71)
Total comprehensive loss for the year	–	–	(92,829)	356	–	6,741	–	(85,732)	(788)	(86,520)
Shares issued	5	–	–	–	–	–	–	5	–	5
Repurchase of own shares	–	–	–	–	(562)	–	–	(562)	–	(562)
Share-based payments net of tax	–	–	1,946	–	–	–	–	1,946	–	1,946
Repurchase of non-controlling interest	–	–	232	–	–	–	–	232	(232)	–
Change in non-controlling interest	–	–	(83)	–	–	–	–	(83)	56	(27)
Balance at 31 December 2020	1,774	347,436	38,506	(67)	(6,368)	8,878	(276,961)	113,198	3,501	116,699

1. Other reserves total £274,451,000 deficit (2019: £280,630,000 deficit).

Consolidated statement of cash flows

For the year ended 31 December 2020

	Note	Group 2020 £000	As Re-presented Group 2019 £000
Net cash generated by operating activities	14	41,510	6,456
Investing activities
Purchase of property, plant and equipment		(2,449)	(1,269)
Purchase of intangible assets		(11,375)	(11,830)
Proceeds from disposal of intangible assets and property, plant and equipment		–	18
Acquisition of subsidiaries, net of cash acquired		(27)	(2,850)
Deferred consideration paid in connection withsubsidiary acquisitions		(7,149)	(12,004)
Net cash used in investing activities		(21,000)	(27,935)
Financing activities
Movements in other banking facilities		34,687	(7,499)
Proceeds from ABS issuing		62,440	85,604
Increase in non-controlling interest on acquisition		–	1,800
Repayment of interest on senior notes		(38,860)	(33,726)
Repayment of interest on asset-backed loans		(3,909)	(2,144)
Repurchase of own shares		(562)	(6)
Issue of share capital		5	6
Bank interest received		61	61
Bank and other similar fees paid		(7,622)	(8,452)
Lease payments		(5,636)	(5,061)
Payment of dividends	10	–	(23,062)
Payment of deferred interest		(328)	–
Net cash flow generated by/(used in) financing activities		40,276	7,521
Net increase/(decrease) in cash and cash equivalents		60,786	(13,958)
Cash and cash equivalents at beginning of year		115,376	132,672
Effect of exchange rates on cash and cash equivalents		6,730	(3,338)
Cash and cash equivalents at end of year		182,892	115,376

Included within cash and cash equivalents is £12,902,000 (2019: £26,611,000) of cash which may be subject to constraints regarding when the balance can be remitted, such as cash in a consolidated securitisation structure awaiting a payment date. The 2019 reconciliation above has been re-presented to remove these amounts from the net cash generated by operating activities, as in the prior year they were included within this line item, but are now included within cash and cash equivalents at the beginning and end of each year.

1. Statutory information

This document does not constitute the Group’s statutory accounts for the years ended 31 December 2019 or 31 December 2020, but is derived from those accounts. Statutory accounts for 31 December 2019 have been delivered to the Registrar of Companies, and those for 2020 will be delivered to the Registrar of Companies following the Group’s annual general meeting.

The auditor has reported on the 2019 and 2020 accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The financial statements of the Group have been prepared under the historical cost convention other than the fair value of derivative contracts and certain portfolio investments and the amortised cost accounting for other financial assets and liabilities. The accounting policies are the same as those that will be disclosed in the annual report and accounts for the year ended 31 December 2020. The financial information included in this preliminary announcement is based on the Group’s annual report and accounts for the year ended 31 December 2020, which are prepared in accordance with the international accounting standards in conformity with the requirements of the Companies Act 2006 (‘Adopted IFRS’). The Group financial statements have also been prepared in accordance with IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU. The annual report and accounts for the year ended 31 December 2020 will be posted to shareholders in April 2021. The annual general meeting will take place on 2 June 2021.

2. General information

Arrow Global Group plc is a company incorporated in England and Wales and is the ultimate parent company of the Group. The address of the registered office is Belvedere, 12 Booth Street, Manchester, M2 4AW. The financial statements are presented in Pounds Sterling, which is the Company’s functional currency. All amounts have been rounded to the nearest thousand except when otherwise indicated.

The Group’s principal activity is to identify, acquire and manage secured and unsecured defaulted and non-core loan portfolios and real estate from, and on behalf of financial institutions such as banks, institutional investors and credit card companies.

3. Segmental reporting

The Group launched its first fund in December 2019. As the Group moves increasingly to an integrated asset manager model, it has aligned its segmental methodology during the year to the new business model. Segmental information has been provided in line with what is reviewed on a regular basis by the chief operating decision maker (CODM), which is the board of directors collectively, as defined in IFRS 8. In the Annual Report and Accounts 2019, the Group reported under three separate reportable segments. Under the new segmental disclosure, the Group will now report under four separates reportable segments, with the Fund and Investment Management business separated out from the Asset Management and Servicing business segment. The principal business categories are as follows:

Balance Sheet business	All portfolio investments that the Group owns, and the income and costs associated with them.
Asset Management and Servicing business (AMS)	Income and costs associated with managing debt portfolios on behalf of the Group and external servicers.
Fund and Investment Management business (FIM)	Income and costs associated with managing debt portfolios on behalf of our fund clients and the Group’s Balance Sheet business.
Group functions	Costs not directly associated with the other three segments, but relevant to overall oversight and control of the Group’s activities.

These segments represent how the Group manages the wider business, and the organisational structure is aligned to these segments. Therefore, this has been deemed to be the appropriate level of disaggregation to provide information to the CODM. Further granularity, such as type of AMS contract, or type of Balance Sheet business portfolio, is not how the business is managed or organised, and hence such further detail has not been presented to the CODM, or in the segmental disclosures.

As part of the move to understand and provide more details over the segments under the integrated asset manager model, further work has been completed to reallocate depreciation, amortisation and forex from the Group functions to the relevant segments.

The intra-segment elimination column below removes charges made from the AMS business segment to the Balance Sheet business segment and the FIM business segment on behalf of the Group for servicing and collection of the Group and FIM’s portfolio investments and performance fees charged by the FIM business in respect to its investments on behalf of the Group. The intra-segment charge is calculated on equivalent commercial terms to charging third parties.

2020	Balance Sheet business £000	AMS business £000	FIM business £000	Group functions £000	Intra-segment elimination £000	Total 2020 £000
Total income	64,882	125,361	36,774	837	(60,362)	167,492
Collection activity and fund management costs	(98,446)	(71,164)	(21,324)	–	60,362	(130,572)
Gross margin	(33,564)	54,197	15,450	837	–	36,920
Gross margin %	(51.7)%	43.2%	42.0%
Other operating expenses excluding depreciation, amortisation and forex	(10,724)	(38,599)	(12,800)	(12,472)	–	(74,595)
EBITDA	(44,288)	15,598	2,650	(11,635)	–	(37,675)
EBITDA margin %	(68.3)%	12.4%	7.2%
Depreciation, amortisation and forex	(5,094)	(4,903)	(513)	(9,143)	–	(19,653)
Operating (loss)/profit	(49,382)	10,695	2,137	(20,778)	–	(57,328)
Net finance costs	–	–	–	(57,495)	–	(57,495)
(Loss)/profit before tax	(49,382)	10,695	2,137	(78,273)	–	(114,823)

2019	Balance Sheet business £000	AMS business Restated¹ £000	FIM business Restated¹ £000	Group functions Restated¹ £000	Intra-segment elimination Restated¹ £000	As re-presented Total 2019 £000
Total income	226,475	128,785	48,329	392	(64,463)	339,518
Collection activity and fund management costs²	(110,936)	(68,071)	(16,983)	–	64,463	(131,527)
Gross margin	115,539	60,714	31,346	392	–	207,991
Gross margin %	51.0%	47.1%	64.9%
Other operating expenses excluding depreciation, amortisation and forex²	(10,654)	(37,638)	(12,711)	(21,717)	–	(82,720)
EBITDA	104,885	23,076	18,635	(21,325)	–	125,271
EBITDA margin %	46.3%	17.9%	38.6%
Depreciation, amortisation and forex	(5,845)	(6,921)	(365)	(6,322)	–	(19,453)
Operating profit/(loss)	99,040	16,155	18,270	(27,647)	–	105,818
Net finance costs	–	–	–	(54,498)	–	(54,498)
Profit/(loss) before tax	99,040	16,155	18,270	(82,145)	–	51,320

1. In line with the requirements of IFRS 8:29, due to the change of the segmental reporting structure aligned to the Group now being managed through an integrated asset manager model, the corresponding information for 2019 has also been restated. The adjusting items for 2019 have been absorbed within the segments as part of the restatement.

2. The split of total operating expenses has changed from the Annual Report and Accounts 2019, with a reclass between ‘collection activity and fund management costs’ and ‘other operating expenses’, as part of the change in the segmental reporting structure aligned to the Group now being managed through an integrated asset management model. The total operating expenses impact is £nil. The main movements between the categorisation relate to allocation of internal staff costs and professional fees. The prior year has been re-presented accordingly on this basis.

Total income includes income from portfolio investments, fund and investment management and performance fees, asset management and servicing and other income.

2020 Geographical information	UK and Ireland £000	Portugal £000	Italy £000	Netherlands £000	Intra-Group trading £000	Total £000
Total income	74,787	65,518	43,299	44,250	(60,362)	167,492
Third-party AMS and FIM income	42,795	34,868	42,336	37,389	(60,362)	97,026
Non-current assets	109,546	79,587	85,029	60,497	–	334,659

2019 Geographical information	UK and Ireland £000	Portugal £000	Italy £000	Netherlands £000	Intra-Group trading £000	Total £000
Total income – as re-presented¹	141,184	104,999	88,244	69,554	(64,463)	339,518
Third-party AMS and FIM income – as re-presented¹	42,428	38,365	38,864	39,166	(64,463)	94,360
Non-current assets	114,110	74,535	82,226	59,509	–	330,380

1. See page 17 for more detail.

Income from contracts with customers has been disaggregated on a geographical basis, as a similar set of services are provided to customers across the geographies, and therefore this was deemed to be the most appropriate level of disaggregation for this disclosure.

Non-current assets are assets with a useful life of more than one year with the exception of deferred tax which has been excluded.

Gross AMS income includes commission income, debt collection, due diligence, real estate management, advisory fees and intra-Group income for these services.

Gross FIM income includes fund management and performance fees and intra-Group income for these services.

	2020 £000	2019 £000
Third-party AMS and FIM income	97,026	94,360
Intra-Group AMS and FIM income	60,362	64,463
Income reallocation from Balance Sheet business	4,747	18,291
Gross AMS and FIM income	162,135	177,114
Balance sheet business income	69,629	244,766
Income reallocation to FIM business	(4,747)	(18,291)
Gross Balance Sheet income	64,882	226,475
Other income	837	392
Gross income	227,854	403,981

Gross income includes commission income, debt collection, due diligence, real estate management, advisory fees and intra-Group income for Asset Management and Servicing, fund and investment management and performance fees and intra-Group income for Fund and Investment Management, total income for the Balance Sheet business, and other income.

4. Finance costs

	2020 £000	2019 £000
Interest and similar charges on bank loans	8,324	8,028
Interest and similar charges on senior secured notes	38,648	38,232
Interest and similar charges on asset-backed securitisation	6,205	2,509
Interest rate swap and forward exchange contract hedge costs	370	515
Lease liability interest	1,107	1,395
Other interest	2,902	3,880
Total finance costs	57,556	54,559

5. Collection activity and fund management costs, other operating expenses and staff costs

5.a Total operating expenses

Total operating expenses are made up of direct and indirect costs, the detail of each is shown in the following tables:

Collection activity and fund management costs	Note	2020 £000	As re-presented 2019 £000
External collection costs		28,345	31,499¹
Staff costs	5.b	62,458	62,761¹
Direct temp labour		4,981	5,476¹
Direct operating costs		22,828	15,057
Legal disbursements		8,944	14,416
Other collection activity costs		3,016	2,318¹
Total collection activity and fund management costs		130,572	131,527

1. The split of total operating expenses has changed from in the Annual Report and Accounts 2019, with a reclass between the ‘collection activity and fund management costs’ and ‘other operating expenses’, as part of the change in the segmental reporting structure aligned to the Group now being managed through an integrated asset management model. The total operating expenses impact is £nil. The main movements between the categorisation relate to allocation of internal staff costs and professional fees. The prior year has been re-presented accordingly on this basis.

Other operating expenses	Note	2020 £000	As re-presented 2019 £000
Staff costs	5.b	40,074	36,170¹
Other staff related costs		6,389	11,591¹
Premises		4,485	5,401¹
IT		14,459	13,830¹
Depreciation and amortisation		18,910	18,435
Write off of PPE and intangible assets		249	6,377
Net foreign exchange losses/(gains)		743	1,018
Acquisition related expenses		–	1,457
Contingent consideration remeasurement		(5,755)	–
Deferred consideration renegotiations		–	(21,119)
Other operating expenses		14,694	29,013¹
Total other operating expenses		94,248	102,173

The other staff-related costs largely relates to temporary labour, recruitment and training.

5.b Staff costs

	2020 £000	2019 £000
Wages, bonuses and salaries	82,889	77,698
Pension costs	4,415	2,833
Social security costs	13,037	12,576
Share-based payments	1,753	1,437
Staff restructuring	438	4,387
	102,532	98,931

6. Taxation

The Group’s activities are predominantly UK based. The analysis below therefore uses the UK rate of corporation tax.

a. Amounts recognised in profit and loss	2020 £000	2019 £000
Current tax (credit)/expense
Tax charge at standard UK corporation tax rate	6,241	14,152
Changes in estimate related to prior years	(5,374)	1
Total current tax expense	867	14,153
Deferred tax expense
Origination and reversal of temporary differences	(23,212)	(1,332)
Adjustment in relation to prior years	297	2,421
Recognition of previously unrecognised tax losses	842	(1,209)
Total deferred tax (credit)/expense	(22,073)	(120)

Total income tax (credit)/expense	(21,206)	14,033

The differences in the effective tax rate for the period and the standard rate of corporation tax in the UK at 19% (2019: 19%) are as follows:

b. Reconciliation of effective tax rate	2020 £000	2019 £000
(Loss)/profit before tax	(114,823)	51,320
Tax (credit)/charge at standard UK corporation tax rate	(21,816)	9,751
Effect of tax rates in foreign jurisdictions	1,950	2,052
Expenses not deductible for tax purposes	2,293	(358)
Changes in corporate tax rates in the year	842	(1,209)
Movements in unrecognised deferred tax	602	1,376
Changes in estimate relating to prior years	(5,077)	2,421
Total income tax (credit)/expense	(21,206)	14,033

		2020			2019
c. Amounts recognised in OCI	Before tax £000	Tax (expense)/ benefit £000	Net of tax £000	Before tax £000	Tax (expense)/ benefit £000	Net of tax £000
Items that are/may be reclassified to profit or loss
Movement in hedging reserve:
Effective portion of changes in fair value	427	(71)	356	187	(33)	154
Net amount reclassified to profit or loss	–	–	–	7	–	7
Total movement in hedging reserve	427	(71)	356	194	(33)	161

The rate of UK corporation tax, as enacted under previous Finance Acts, was expected to reduce to 17% from 1 April 2020. The UK Government enacted legislation for the rate to remain at 19% and deferred tax recognised in the UK has been restated accordingly, with a credit of £305,000 reflected during the year ended 31 December 2020.

In December 2019, a new corporate tax law was enacted in the Netherlands. Consequently, as of 1 January 2020, the corporate tax rate in the Netherlands will be reduced from 25% to 21.7%. This change resulted in a gain of €1,147,000 related to the remeasurement of deferred tax assets and liabilities of the Group’s Dutch subsidiaries being recognised during the year ended 31 December 2019. In September 2020, the Dutch Government announced the reversal of this planned decrease, maintaining the rate at 25%. A credit of £1,147,000 has been reflected in the year ended 31 December 2020, which reverses the prior year restatement.

Deferred tax

The Group has recognised a deferred tax asset in relation to losses of £27,683,000 (2019: £6,353,000), of which £18,669,000 (2019: £nil) relate to the UK. The UK losses arose in the current period as a result of an impairment of portfolio balances due to COVID-19. The underlying profitability of the Group has remained, and such losses are expected to be utilised against future taxable profits.

The Group has not recognised a deferred tax asset in respect of £2,864,000 (2019: £2,634,000) of tax losses carried forward, due to uncertainties over the future utilisation of the losses, including the future profitability of the relevant subsidiaries. These losses may be available for offset against future profits and have no expiry date. There are no unrecognised deferred tax liabilities.

The rate of UK corporation tax is expected to increase to 25% from 1 April 2023. Deferred taxation is measured at the rates that are expected to apply in the periods in which the temporary timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted at the statement of financial position date. As noted above, there is a significant UK deferred tax asset in relation to losses carried forward, the restatement of which is expected to generate a statement of profit and loss tax credit once the applicable legislation has been substantially enacted.

7. Earnings per share (EPS)

	2020 £000	2019 £000
Profit after tax attributable to shareholders	(92,829)	35,223
Weighted average ordinary shares	177,150	175,859
Potential exercise of share options	7,698	4,942
Weighted average ordinary shares (diluted)	184,848	180,801
Basic earnings per share (£)	(0.52)	0.20
Diluted earnings per share (£)	(0.52)	0.19

8. Goodwill

	£000
Cost
At 1 January 2019	264,988
Additions	14,519
Adjustment of the discounted value of deferred consideration paid for EI	462
Modification to Drydens’ opening balance sheet fair value post-acquisition	693
Exchange rate differences	(10,653)
At 31 December 2019	270,009
Exchange rate differences	10,638
At 31 December 2020	280,647
Amortisation and impairment
At 31 December 2019 and 31 December 2020	2,309
Net book value
At 31 December 2020	278,338
At 31 December 2019	267,700

The following table provides a breakdown of goodwill acquired during the current and prior year:

	£000
Goodwill on acquisition
At 1 January 2019	264,988
Drydens Limited (Drydens)	14,519
Exchange rate differences	(9,498)
At 31 December 2019	270,009
Exchange rate differences and	10,638
Impairment	(2,309)
At 31 December 2020	278,338

Goodwill acquired in a business combination is allocated, at acquisition, to the CGUs that are expected to benefit from that business combination. The carrying amount of goodwill has been allocated to four aggregated CGUs on the basis that these represent the lowest level at which goodwill is monitored for internal management purposes and are not larger than the single operating segment defined under IFRS 8 (Operating Segments).

Goodwill CGU allocation

In relation to goodwill, the four CGUs identified are UK and Ireland, comprising all Group companies acquired in the Capquest acquisition, Arrow Global Receivables Management Limited, Mars Capital, Bergen and Drydens; Portugal, comprising all of the Group companies acquired in the Whitestar, Gesphone, Redrock and Norfin acquisitions; Benelux, comprising all the Group companies acquired in the Vesting acquisition; and Italy, comprising Zenith, Parr Credit and Europa Investimenti S.p.A. The UK and Ireland, Portugal, Benelux, and Italy CGUs, represent the cash flows generated principally from collections on acquired portfolio investments and management and servicing of third-party debt.

Given the structure and operating model of the Group, it has been deemed appropriate to combine a number of CGUs for impairment testing purposes. This is in line with the Group’s stated strategy of providing a range of services in each geographic region in which the Group operates and represents the lowest level at which the Group’s resources and assets are allocated internally.

The discount rate was a post-tax rate based on the yield of average European 10-year government bonds, adjusted for a risk premium to reflect both the increased risk of investing in equities generally and the systemic risk of the specific CGU.

Five years of cash flows were included in the discounted cash flow model. A long-term growth rate into perpetuity has been determined as the lower of the nominal gross domestic product rates for the countries in which the CGU operates and the long-term compound annual profit before taxes, depreciation and amortisation growth rate estimated by management.

Budgeted profit before taxes, depreciation and amortisation were based on expectations of future outcomes taking into account past experience, adjusted for the anticipated revenue growth. Revenue growth was projected taking into account the average growth levels experienced over the past five years and the estimated growth for the next five years.

The key assumptions described above may change as economic and market conditions change. The Group estimates that likely possible changes in these assumptions would not cause the recoverable amount of any CGU to decline below the carrying amount.

The Group’s goodwill balance has been assessed and no part of the overall balance is deemed to be deductible for tax purposes.

For the purposes of impairment testing, goodwill is allocated to the Group’s CGUs as follows:

	2020 £000	2019 £000
UK and Ireland	78,900	79,476
Portugal	73,662	69,156
Benelux	43,124	40,824
Italy	82,652	78,244
	278,338	267,700

An impairment review was carried out at 31 December 2020 that resulted in no impairment to goodwill. The goodwill was assessed to be appropriately stated. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amount of the CGUs is determined as the higher of fair value, less cost to sell and value in use. Discount rate and forward-looking growth assumptions applied in the value in use calculations were as follows:

			2020				2019
	UK and Ireland	Portugal	Benelux	Italy	UK and Ireland	Portugal	Benelux	Italy
Discount rate %	8.9%	9.3%	8.4%	9.4%	8.6%	9.0%	8.2%	9.0%
Growth rate used to extrapolate forecasts	2.0%	2.2%	2.0%	1.7%	2.0%	2.2%	2.0%	1.7%

Discount rates

Management estimates discount rates using post-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. Post-tax rates are used alongside post-tax cash flows, as the post-tax discount rate is more readily derived from observable market information. Any potential differences between post-tax discount rates and cash flows and the pre-tax method under IAS 36 – Impairment of assets have been considered, and no material differences between approaches have been identified.

The starting point for determining the discount rates for each CGU was to use the Group’s weighted average cost of capital (WACC) and adjust this for specific factors for each of the CGUs to derive a market participant’s rate. The factors took into account the risks inherent in each of the CGUs; such as currency, regulatory, and economic risks and the different operations in the CGUs were also considered.

In determining the appropriate WACC to use in the current impairment test, in line with advice from experts, management took into account both the current and target leverage structure of the Group, as well as pre-COVID-19 and post-COVID-19 market conditions. An average of these approaches provided a balanced view of the appropriate discount rate to use for the value in use calculation in the midst of the uncertainty created by COVID-19.

The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next five years and extrapolates cash flows into perpetuity. The forecasts assume growth rates in collection activity which in turn drive forecast collections and cost figures. These assumptions are in keeping with the directors’ expectations of future growth. Appropriate tax rates are applied to the cash flow forecasts for each CGU. The analysis has been prepared using post-tax cash flows and discount rates, as post-tax discount rates can be more readily derived from observable market data. The Group is satisfied that this is materially equal to performing the analysis on pre-tax cash flows and discount rates.

The result of the goodwill impairment review was that no impairment was deemed to exist as at 31 December 2020. The Group has conducted a sensitivity analysis over the key inputs used in the impairment test of the CGU’s carrying value. The CGUs would become impaired based on a net post-tax cash flow reduction set out below, or based on an increase in the discount rate noted below:

	A cash flow reduction of	A discount rate increase of
UK and Ireland	39%	4%
Portugal	23%	3%
Benelux	21%	2%
Italy	48%	7%

9. Trade and other payables

Current	2020 £000	2019 £000
Trade payables	9,889	15,635
Deferred consideration on acquisition of subsidiaries	18,497	11,332
Deferred consideration on portfolio investments	10,538	62,944
Taxation and social security	2,001	356
Accruals	33,300	35,006
Liabilities arising on acquisition of bankruptcy portfolios	12,959	–
Other liabilities	5,123	19,495
Lease liability	3,560	5,312
	95,867	150,080

Non-current
Trade payables	8,137	15,278
Deferred consideration on acquisition of subsidiaries	1,633	19,040
Deferred consideration on portfolio investments	1,500	–
Taxation and social security	(124)	–
Accruals	887	–
Liabilities arising on acquisition of bankruptcy portfolios	23,367	16,629
Other liabilities	21,057	3,782
Lease liability	14,641	18,192
	71,098	72,921
Total trade and other payables	166,965	223,001

Deferred consideration on acquisition of subsidiaries has reduced as amounts were repaid in the period, alongside remeasurements of deferred contingent consideration liabilities in the period which reduced their value. Deferred consideration on portfolio investments have decreased in the period as significantly less portfolio acquisitions had an element of deferred consideration outstanding at 31 December 2020 than 31 December 2019.

10. Dividends

The following dividends were recognised as distributions to owners during the year ended 31 December 2020:

	2020 £000	2019 £000
Interim dividend 2020: nil (2019: 4.4p per ordinary share)	–	7,751
Final dividend 2019: nil (2018: 8.7p per ordinary share)	–	15,311
	–	23,062

In line with the Group’s near-term focus in Q1 2020, being the preservation of cash and liquidity, on the 6 April 2020, the Group announced its intention to withdraw its recommended final dividend for 2019, preserving approximately £15.0 million of cash within the business.

The board has also not paid an interim dividend for H1 2020, however it expects to resume dividend payments at year-end 2021.

11. Related party transactions

Related party balances as at each year end were as follows:

	Key management personnel £000	Total £000
As at 31 December 2020 and 2019:
Trade	–	–
	–	–

Summary of transactions

Key management, defined as permanent members of the board plus all non-executive directors, were awarded the following compensation for the financial year:

Remuneration	2020 £000	2019 £000
Salaries and performance-related bonus	1,220	1,628
Pension-related benefits	87	110
Share-based payments	–	(306)
	1,307	1,432

The number of key management during the year was 7 (2019: 6).

12. Portfolio investments

Split of portfolio investments by period:

	2020 £000	2019 £000
Expected falling due after one year	742,153	916,123
Expected falling due within one year	300,062	247,501
Total	1,042,215	1,163,624

The movements in portfolio investments were as follows:

As at 31 December 2020

Financial instruments
	Amortised cost £000	FVTPL £000	Real estate inventories £000	Total £000
As at the beginning of the year	932,199	169,799	61,626	1,163,624
Portfolios purchased during the year	47,169	62,681	–	109,850
Balance sheet cash collections in the year	(287,662)	(46,074)	(5,136)	(338,872)
Income from portfolio investments at amortised cost	164,597	–	–	164,597
Fair value gain on portfolio investments at FVTPL	–	4,976	–	4,976
Income from portfolio investments – real estate inventories	–	–	492	492
Net impairment losses	(100,022)	–	(414)	(100,436)
Exchange and other movements	37,273	(3,961)	4,672	37,984
As at the year end	793,554	187,421	61,240	1,042,215

As at 31 December 2019

Financial instruments
	Amortised cost £000	FVTPL £000	Real estate inventories £000	Total £000
As at the beginning of the year	869,056	217,974	–	1,087,030
Portfolios purchased during the year	248,470	30,052	25,165	303,687
Transfer between categories	11,483	(55,262)	43,779	–
Balance sheet cash collections in the year	(390,734)	(48,034)	(3,543)	(442,311)
Income from portfolio investments at amortised cost	199,094	–	–	199,094
Fair value gain on portfolio investments at FVTPL	–	32,397	–	32,397
Income from portfolio investments – real estate inventories	–	–	561	561
Net impairment gains/(losses)	12,720	–	(6)	12,714
Exchange and other movements	(4,729)	(7,328)	(4,330)	(16,387)
Portfolio restructure	(13,161)	–	–	(13,161)
As at the year end	932,199	169,799	61,626	1,163,624

Transfer between categories represents positions where the Group has originally held one type of instrument relating to a portfolio, and subsequently increased or changed its interest in the portfolio, leading to the requirement to consolidate the underlying structure onto the Group’s balance sheet. This leads to a change in the classification of the portfolio investment held. The ‘portfolio restructure’ represents the restructure of a leveraged structured deal to move to a de-levered position, and hence change the nature of the holding whilst extinguishing related liabilities. Note that for real estate inventories, which are not financial instruments, the balance sheet cash collections figure above is analogous to total sales of inventories, and the net of balance sheet cash collections and income from portfolio investments – real estate inventories, is analogous to cost of sales of inventories. Sales of inventories are accounted for as revenue under IFRS 15, as they are not financial instruments, but are presented alongside the other portfolio investments for ease of reference.

13. Borrowings and facilities

	2020 £000	2019 £000
Senior secured notes net of transaction fees of £10,480,000 (2019: £12,780,000)	930,575	897,875
Revolving credit facility net of transaction fees of £2,790,000 (2019: £3,720,000)	277,552	230,963
Asset-backed loans net of transaction fees of £4,708,000 (2019: £1,658,000)	143,985	84,077
Bank overdrafts	3,648	1,386
Other borrowings	3,247	3,672
	1,359,007	1,217,973
Total borrowings:
Amount due for settlement within 12 months	362,427	257,500
Amount due for settlement after 12 months	996,580	960,473

Senior secured notes

The senior secured notes comprise three publicly issued Euro and Sterling senior notes secured by substantially all of the assets of the Group; £320 million 5.125% fixed-rate notes due September 2024, €400 million floating rate senior secured notes due April 2025 at a coupon of 3.75% over three-month Euribor and €285 million floating rate senior secured notes due March 2026 at a coupon of 3.75% over three-month Euribor. The Euro notes are subject to a zero percent floor on Euribor.

Revolving credit facility

On 26 February 2019, the £285 million revolving credit facility was extended to 2024, with no change to the 2.5% margin.

On 12 August 2020, the Group executed an amendment agreement with its lenders under the revolving credit facility to amend the financial covenants under the facility to reflect the potential impact on the business of COVID-19. The amendments to the financial covenants are for the period from September 2020 up to and including June 2022 and provide suitable headroom based upon the Group’s downside projections, including an amendment to the maximum permitted leverage and minimum liquidity, and a move to a more dynamic margin calculation.

Asset-backed securitisation

On 30 April 2019, the Group entered into a £100 million non-recourse committed asset-backed securitisation facility with an advance rate of 55% of 84-month ERC. On the same date, the Group sold £137 million of ERC into AGL Fleetwood Limited, a wholly owned Arrow Global Group subsidiary, and borrowed an initial amount of £75 million non-recourse funding at LIBOR plus 3.1%, under the facility.

On 31 July 2019, the Group sold a further £44 million of ERC into AGL Fleetwood Limited and subsequently borrowed an additional £25 million non-recourse funding on the same terms under the facility.

On 31 March 2020, the Group sold a further £30 million of ERC into AGL Fleetwood Limited and on 2 April 2020 borrowed an additional £21 million non-recourse funding on the same terms under the facility. As at 2 April 2020, the amount drawn under the facility was £100 million. The facility had a five-year term comprising an initial two-year revolving period followed by a three-year amortising period with an option to extend the revolving period by one-year subject to lender consent.

During July 2020, the Group entered into further arrangements in connection with the non-recourse facility to mitigate potential balance sheet cash collections impacts of COVID-19. An additional £33 million of 84-month ERC was sold into the structure with no additional borrowings made. In consideration of the additional ERC pledged, the lender agreed to amend certain performance criteria.

During July 2020, a second non-recourse amortising loan of €104,700,000 was fully drawn during the month. The second loan was secured against €356 million of Portuguese 84-month ERC at a margin of 4.25%.

As at 31 December 2020, £299,117,000 of the portfolio investments, set out in note 12, are pledged as collateral for the asset-backed securitisations.

14. Notes to the statement of cash flows

	2020 £000	As Re-presented 2019 £000
(Loss)/profit after tax	(93,617)	37,287
Adjusted for:
Balance sheet cash collections in the year	338,872	442,311
Income from portfolio investments	(165,089)	(199,655)
Fair value gains on portfolios	(4,976)	(32,397)
Net impairment losses/(gains)	100,436	(12,714)
Deferred consideration renegotiations	–	(21,119)
Depreciation and amortisation	18,910	18,435
(Profit)/loss on write-off and disposal of property, plant and equipment	(453)	1,419
Loss on write-off and disposal of intangible assets	249	5,766
Net interest payable	56,388	53,103
Lease liability interest	1,107	1,395
Foreign exchange losses	743	1,018
Equity settled share-based payment expenses	1,753	1,437
Tax (credit)/charge	(21,206)	14,033
Operating cash flows before movement in working capital	233,117	310,319
(Increase)/decrease in other receivables	(30,551)	1,740
(Decrease)/increase in trade and other payables	(44,715)	12,120
Cash generated by operations	157,851	324,179
Income taxes and overseas taxation paid	(6,491)	(14,036)
Net cash flow from operating activities before purchases of portfolio investments	151,360	310,143
Purchase of portfolio investments	(109,850)	(303,687)
Net cash generated by operating activities	41,510	6,456

Included within cash and cash equivalents is £12,902,000 (2019: £26,611,000) of cash which may be subject to constraints regarding when the balance can be remitted, such as cash in a consolidated securitisation structure awaiting a payment date. The 2019 reconciliation above has been re-presented to remove these amounts from the movement in other receivables, as in the prior year they were included within this line item, but are now included within cash and cash equivalents.

15. Post balance sheet events

On 12 February 2021, Arrow Global Finance plc issued €75,000,000 senior secured notes maturing 2026 at an issue price of 99%. This tap issue of the existing €285,000,000 senior secured floating rate bonds due 2026 means that all terms and conditions of the new bonds are identical to those of the existing 2026 bonds, except for the issue price. The proceeds from the transaction of €74,250,000 less transaction fees and expenses will be used to partially repay drawings under the Group’s revolving credit facility.

Additional information (unaudited)

IFRS to cash measure reconciliations

We provide two reconciliations between reported IFRS profit and cash measures. The first looks at the movement in our portfolio investments compared to the movements in the ERC – the gross cash value of the portfolio before it is discounted to present value for inclusion in the reported results. The second reconciles the reported profit for the year to free cash flow. A number of the terms referred to in this section are defined in the glossary.

As part of the Group’s Balance Sheet business, we acquire portfolios and turn these into regular, predictable and long-term cash flows. This predominantly involves high volumes of low-value balance sheet cash collections from customers, and therefore we use analytical models to estimate cash flows we expect at an individual account level. The output of these account level forecasts is aggregated to a portfolio and then into the Group’s total ERC.

When we purchase portfolio investments, we recognise them in the statement of financial position at the purchase price in accordance with IFRS. In terms of the equivalent cash measure, we add the portfolio ERC to the Group ERC at the point of purchase. We quote both 84-month and 120-month ERC forecasts as key performance measures for the business.

Balance sheet cash collections from portfolios can extend beyond 15 years; however, we only include 84-months of cash flow in assessing the majority of our portfolio investments. As we progress through the months of each year, we roll forward the ERC forecast, meaning we always have 84-months of expected cash flow from our portfolios recognised on the statement of financial position.

Due to the nature of our business, actual balance sheet cash collections on portfolio investments will not perform exactly as initially forecast and, each half year, we review performance against balance sheet cash collections experience and update the ERC forecast where appropriate. This updated cash flow forecast, discounted at the applicable rate is the year-end carrying value of the portfolio investments. This movement of the portfolio investments is reflected as income in the statement of profit or loss. The size of the portfolio asset, associated ERC and cash balance sheet cash collections in the year are therefore all key drivers to the result we report.

Movement in portfolio investments under IFRS reconciled to cash ERC – total portfolios

Total portfolio investments	IFRS £000	ERC 84-month £000	ERC 120-month £000
Brought forward	1,163,624	1,817,940	2,035,421	ERC brought forward
Portfolios acquired during the year¹	109,850	158,607	172,072	ERC acquired during the year
Balance sheet cash collections in the year²	(338,872)	(338,872)	(338,872)	Balance sheet cash collections in the year
Income from portfolio investments at amortised cost³	164,597	–	–
Fair value gains on portfolio investments at FVTPL⁴	4,976	–	–
Net impairment losses⁵	(100,436)	–	–
Net income from real estate inventories	492	–	–
Exchange and other movements	37,984	–	–
		(81,924)	(146,266)	ERC roll forward and reforecast⁶
		1,555,751	1,722,355	ERC carried forward
Effect of discounting⁷		(513,536)
Carried forward 31 December 2020	1,042,215	1,042,215

Movement in portfolio investments under IFRS reconciled to cash ERC – amortised cost

Portfolio investments – amortised cost	IFRS £000	ERC 84-month £000	ERC 120-month £000
Brought forward	932,199	1,426,516	1,608,448	ERC brought forward
Portfolios acquired during the year¹	47,169	57,191	68,665	ERC acquired during the year
Balance sheet cash collections in the year²	(287,662)	(287,662)	(287,662)	Balance sheet cash collections in the year
Income from portfolio investments at amortised cost³	164,597	–	–
Net impairment losses⁵	(100,022)	–	–
Exchange and other movements	37,273	–	–
		(26,759)	(56,545)	ERC roll forward and reforecast⁶
		1,169,286	1,332,906	ERC carried forward
Effect of discounting⁷		(375,732)
Carried forward 31 December 2020	793,554	793,554

1. Portfolios acquired in the year are added to the statement of financial position carrying value of portfolio investments at their initial purchase price. The undiscounted forecast of estimated remaining balance sheet cash collections is included in the ERC.

2. Balance sheet cash collections made in the period are deducted from both the IFRS carrying value of portfolio investments and ERC.

3. Income on portfolio investments at amortised cost is calculated with reference to the effective interest rate (EIR) of the portfolio. This income is recognised after taking account of new portfolios, balance sheet cash collections, updated ERC forecast, disposals and any foreign exchange impacts. See footnote 1. in the reconciliation of profit after tax to free cash flow below for more detail on total income.

4. Fair value gain on portfolio investments at FVTPL re-presents net increases to carrying values, discounted to calculate the market interest rate of portfolio investments held at FVTPL as a result of reassessments to their estimated future cash flows.

5. Net impairment losses represents net increases to carrying values, discounted at the credit-adjusted EIR rate, of portfolio investments held at amortised cost as a result of reassessments to their estimated future cash flows.

6. The ERC roll forward and reforecast reflects management’s updated estimation of future balance sheet cash collections. It takes account of updated information on specific portfolios, the latest exchange rate and rolls forward the 84-month and 120-month forecast collection period.

7. Under IFRS, the carrying value of portfolio investments primarily includes 84-months of discounted cash flows, however we expect to see cash flows beyond this period and report a 120-month ERC also, as is customary for the industry.

Reconciliation of profit after tax to free cash flow

	Reported profit £000	Other items £000	Cash result £000
Income from portfolio investments	165,089	173,783	338,872	Balance sheet cash collections in the period
Fair value gains on portfolio investments at FVTPL	4,976	(4,976)	–
Net impairment losses	(100,436)	100,436	–
Income from AMS and FIM	97,026	–	97,026	Income from AMS and FIM
Gainon disposal of leases	453	(453)	–
Other income	384	–	384
Total income¹	167,492	268,790	436,282
Total operating expenses	(224,820)	21,701²	(203,119)	Cash operating expenses
Operating (loss)/profit	(57,328)	290,491	233,163	Adjusted EBITDA⁴
Net finance costs	(57,495)	1,200³	(56,295)
(Loss)/profit before tax	(114,823)	291,691	176,868
Taxation credit/(charge) on ordinary activities	21,206	(27,697)	(6,491)
(Loss)/profit after tax	(93,617)	263,994	170,377
			(13,824)	Capital expenditure
			156,553	Free cash flow⁵

1. Total income is largely derived from income from portfolio investments as explained in footnote 3. above, plus income from asset management and servicing, being commission on balance sheet cash collections for third parties and fee income received. The non-cash items add back loan portfolio amortisation to get to balance sheet cash collections. Amortisation reflects a reduction in the statement of financial position carrying value of the portfolio investments arising from balance sheet cash collections, which are not allocated to income. Amortisation plus income from portfolio investments equates to balance sheet cash collections.

2. Includes non-cash items including depreciation and amortisation, share-based payment charges and foreign exchange.

3. Non-cash amortisation of fees and interest.

4. Adjusted EBITDA is a key driver to free cash flow. This measure allows us to monitor the operating performance of the Group. See additional information provided on page 31 for detailed reconciliations of Adjusted EBITDA.

5. Free cash flow is the Adjusted EBITDA after the effect of capital expenditure and working capital movements.

Adjusted EBITDA reconciliations

Reconciliation of net cash flow to Adjusted EBITDA	31 December 2020 £000	As re-presented 31 December 2019 £000
Net cash flow used in operating activities	41,510	6,456
Purchases of portfolio investments	109,850	303,687
Income taxes paid	6,491	14,036
Working capital adjustments	75,266	(13,860)
Amortisation of acquisition and bank facility fee	46	127
Write off and disposal of intangible asset and property plant and equipment	–	(7,185)
Adjusting items	–	26,789
Adjusted EBITDA	233,163	330,050
Reconciliation of balance sheet cash collections to Adjusted EBITDA
Income from portfolio investments including fair value and impairment losses and gains	69,629	244,766
Portfolio amortisation	269,243	197,545
Balance sheet cash collections (includes proceeds from disposal of portfolio investments)	338,872	442,311
Income from asset management and servicing, fund and investment management and other income	97,410	94,752
Operating expenses	(224,820)	(233,700)
Depreciation and amortisation	18,910	18,435
Foreign exchange losses	743	1,018
Amortisation of acquisition and bank facility fees	46	127
Deferred consideration renegotiations	–	(21,119)
Loss on disposal of intangible assets	249	–
Share-based payments	1,753	1,437
Adjusting items	–	26,789
Adjusted EBITDA	233,163	330,050
Reconciliation of operating (loss)/profit to Adjusted EBITDA
(Loss)/profit after tax for the year	(93,617)	37,287
Net finance costs	57,495	54,498
Taxation (credit)/charge on ordinary activities	(21,206)	14,033
Operating (loss)/profit	(57,328)	105,818
Portfolio amortisation	269,243	197,545
Depreciation and amortisation	18,910	18,435
Foreign exchange losses	743	1,018
Amortisation of acquisition and bank facility fees	46	127
Profit on disposal of leased property	(453)	–
Loss on disposal of intangible assets	249	–
Share-based payments	1,753	1,437
Deferred consideration renegotiations	–	(21,119)
Adjusting items	–	26,789
Adjusted EBITDA	233,163	330,050

For more detail on the re-presentations, see note 14 on page 27.

Glossary of alternative performance measures

APM	Definition	Why is the measure used?
Adjusted EBITDA	The Adjusted EBITDA figure represents the Group’s earnings before interest, tax, depreciation and amortisation, adjusted for any non-cash income or expense items.	Adjusted EBITDA is an approximate measure of the underlying cash EBITDA of the Group. In addition, the leverage ratio of the Group is calculated as the ratio of secured net debt to Adjusted EBITDA. This makes the Adjusted EBITDA figure a key component of this metric, which also features in the Group’s banking covenant measures.
Free cash flow	The free cash flow represents current cash generation on a sustainable basis and is calculated as Adjusted EBITDA less cash interest, income taxes and overseas taxation paid, purchase of property, plant and equipment and purchase of intangible assets.	Free cash flow provides a measure of how much cash the Group generates across the reporting period which it can utilise on a discretionary basis.
Balance sheet cash collections	Balance sheet cash collections represent cash collections on the Group’s existing portfolio investments including ordinary course portfolio sales and put-backs.	Balance sheet cash collections is a key metric as it represents the Group’s most significant cash inflow. It is also a key component of Adjusted EBITDA which is used to calculate the Group’s leverage position.
84-month ERC	The 84-month ERC means the Group’s estimated remaining balance sheet cash collections on portfolio investments (of all classifications) over the next 84-months, representing the expected future balance sheet cash collections on portfolio investments during this period. The expected future balance sheet cash collections are calculated at the end of each month, based on the Group’s proprietary ERC forecasting model, as amended from time to time.	The 84-month ERC is particularly important for the Group as it shows the forecast cash inflows over the same period that is used to calculate the future cash flows of the Group’s portfolio investments.
120-month ERC	The 120-month ERC means the Group’s estimated remaining balance sheet cash collections on portfolio investments (of all classifications) over the next 120-months, representing the expected future balance sheet cash collections on portfolio investments during this period. The expected future balance sheet cash collections are calculated at the end of each month, based on the Group’s proprietary ERC forecasting model, as amended from time to time.	The 120-month ERC is an important metric for the Group as in some cases the collection profile of a particular portfolio can extend beyond 84-months, and as such, the 120-month ERC gives a more holistic view of potential remaining balance sheet cash collections from the Group’s portfolio investments.
Leverage	Leverage is calculated as secured net debt over Adjusted EBITDA.	The leverage metric provides an indication of the level of indebtedness of the Group, relative to its underlying cash earnings.

Glossary of terms

‘ABS’ means asset-backed security.

‘ACO 1’ is Arrow Credit Opportunities Scsp, our first closed fund encompassing all fund vehicles.

‘AMS’ Income from Asset Management and Servicing (AMS) contracts. The Group recognises revenue when it satisfies a performance obligation related to a service it has undertaken to provide to a customer.

‘AMS EBITDA margin’ is the EBITDA margin for the AMS segment and can be seen in note 3.

‘APM’ means alternative performance measure.

‘Average net assets’ is calculated as the average quarterly net assets from 2019 to 2020 as shown in the quarterly and half yearly statements.

‘Balance Sheet business’ was previously referred to as Investment Business (IB).

‘Capital-light % of Group EBITDA’ is the Asset Management Servicing and Fund and Investment Management segment EBITDAs as a percentage of total EBITDA.

	2020 £000	2019 £000
AMS EBITDA	15,598	23,076
FIM EBITDA	2,650	18,635
Total capital-light	18,248	41,711
Group EBITDA	(37,675)	125,271
Capital light % of Group EBITDA	(48.4)%	33.3%

‘CGU’ means cash generating unit.

‘CODM’ means chief operating decision maker.

‘Creditors’ means financial institutions or other initial credit providers to consumers, certain of which entities choose to sell paying accounts or non-paying accounts receivables related to debt purchasers (such as the Group).

‘Customers’ means consumers whose unsecured loan obligation is owed to the Group as a result of a portfolio purchase made by the Group.

‘Defaulted debt’ means a debt where a customer has breached the repayment terms governing that debt such that it is unlikely to be paid. Under the Consumer Credit Act 1974, there are specific legal obligations which require a customer to be sent the relevant statutory default notice(s) after which the customer’s agreement may ultimately be terminated. Other types of debts may also be defined as defaulted in the event that they remain unpaid for a period of 90 days or more, if there is not an acceptable arrangement in place to bring the account back up to date, in which case the creditor or lender may reasonably believe that the relationship has broken down. Under the Data Protection Act 1990, it is a requirement that any organisation seeking to register a default with a credit reference agency must also send a notice of intention to file a default, this notice is very similar in nature to that required under the Consumer Credit Act both of which give the debtor 28 days to bring the account back up to date before action is taken.

‘Diluted EPS’ means the earnings per share whereby the number of shares is adjusted for the effects of potential dilutive ordinary shares, options and LTIPs.

‘EBITDA’ means earnings before interest, taxation, depreciation and amortisation.

‘EIR’ means effective interest rate (which is based on the loan portfolio’s gross internal rate of return) calculated using the loan portfolio purchase price and forecast gross ERC at the date of purchase. On acquisition, there is a short period that is required to determine the EIR, due to the complexity of the portfolios acquired.

‘EPS’ means earnings per share.

‘ERC’ means Estimated Remaining Collections. More information on the 84-month and 120-month ERCs can be seen on page 32.

‘ERC roll forward’ relates to additional cash flows from rolling the asset life on all portfolios to seven years from the date of ERC, including the impact of any foreign exchange movement and the impact of reforecast in the period.

FCA’ means the Financial Conduct Authority.

‘FIM’ means the Fund and Investment Management.

‘FIM EBITDA margin’ is the EBITDA margin for the FIM segment and can be seen in note 3.

‘Free cash flow’ or ‘FCF’ means Adjusted EBITDA after the effect of capital expenditure and working capital movements.

‘FVTPL’ means Financial instruments designated at fair value with all gains or losses being recognised in the profit or loss.

‘FUM’ means the value of all fund management assets managed by Arrow Global plc, including Arrow Credit Opportunities, Norfin Investimentos, Europa Investimenti, Sagitta, any of Arrow’s own capital which it has committed to invest alongside third parties committed capital and Arrow’s back book. FUM is an important metric used to understand the scale of the Group’s Fund and Investment Management business and how this compares with others in the market.

‘Gross AMS and FIM income’ includes commission income, debt collection, due diligence, real estate management, advisory fees and intra-group income for these services.

	2020 £000	2019 £000
Third-party AMS and FIM income	97,026	94,360
Intra-Group AMS and FIM income	60,362	64,463
Income reallocation from Balance Sheet business	4,747	18,291
Gross AMS and FIM income	162,135	177,114

‘Gross income’ includes commission income, debt collection, due diligence, real estate management, advisory fees and intra-group income for Asset Management and Servicing, total income for the Balance Sheet business and other income.

	2020 £000	2019 £000
Third-party AMS and FIM income	97,026	94,360
Intra-Group AMS and FIM income	60,362	64,463
Income reallocation from Balance Sheet business	4,747	18,291
Gross AMS and FIM income	162,135	177,114
Balance Sheet business income	69,629	244,766
Income reallocation from FIM business	(4,747)	(18,291)
Gross Balance Sheet income	64,882	226,475
Other income	837	392
Gross income	227,854	403,981

‘Gross money multiple’ means balance sheet cash collections to date plus the 84-month gross ERC or 120-month gross ERC, as applicable, all divided by the purchase price for each portfolio, excluding REO purchases and purchase price adjustments relating to asset management fees.

‘IAS’ means International accounting standards.

‘Income from AMS’ includes commission income, debt collection, due diligence, real estate management and advisory fees.

‘Loan to value’ or ‘LTV ratio’ represents the ratio of 84-month ERC to net debt.

‘LTIP’ means the Arrow long-term incentive plan.

‘NCI’ means non-controlling interest.

‘Net debt’ means the sum of the outstanding principal amount of the senior secured notes, interest thereon, amounts outstanding under the revolving credit facility and deferred consideration payable in relation to the acquisition of portfolio investments, less cash and cash equivalents. Net debt is presented because it indicates the level of debt after taking out of the Group’s assets that can be used to pay down outstanding borrowings, and because it is a component of the maintenance covenants in the revolving credit facility. The breakdown of net debt for the year ended 31 December 2020 (with 2019 re-presented, as set out in note 14) is as follows:

	2020 £000	As re-presented 2019 £000
Cash and cash equivalents	(182,892)	(115,376)
Senior secured notes (pre-transaction fees net off)	935,487	902,656
Revolving credit facility (pre-transaction fees net off)	280,342	234,683
Asset-backed loans (pre-transaction fees net off)	148,044	85,604
Secured net debt	1,180,981	1,107,567
Deferred consideration – portfolio investments	12,038	62,944
Deferred consideration – business acquisitions	20,130	30,372
Senior secured loan notes interest	5,568	7,999
Asset-backed loan interest	649	–
Bank overdrafts	3,648	1,386
Other borrowings	3,247	3,672
Net debt	1,226,261	1,213,940

‘NPL’ means non-performing loan.

‘OCI’ means other comprehensive income.

‘Paying account’ means an account that has shown at least one payment over the last three months or at least two payments over the last six months.

‘Portfolio amortisation’ represents total balance sheet cash collections plus income from portfolio investments.

‘Portfolio investments’ are on the Group’s statement of financial position and represent all debt portfolios that the Group owns at the relevant point in time. A portfolio comprises a group of customer accounts purchased in a single transaction.

‘REO portfolio’ means a portfolio investment which is related to real estate owned assets.

‘ROE’ means the return on equity as calculated by taking profit after tax divided by the average equity attributable to shareholders. Average equity attributable is calculated as the average quarterly equity from 2019 to 2020 as shown in the quarterly and half-yearly statements. The quarterly and half-yearly statements can be found here https://www.arrowglobal.net/en/investors/results-reports-presentations.html.

‘Secured net debt’ see table in ‘net debt’ definition.

‘Translation reserve’ comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contactrns@lseg.comor visitwww.rns.com.

RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see ourPrivacy Policy.

END

FR ZZGZFFZMGMZZ

Full Year Results

Sign up to our quarterly newsletter