Results for nine months ended 30 September 2020

12 November 2020

Arrow Global Group plc

 Interim results for the nine months ended 30 September 2020
 

Strong balance sheet cash collections and return to profitability in Q3; new five-year targets announced aligning to Arrow’s capital light fund management strategy

Strong Q3 performance

·   Q3 discrete profit after tax up 15.8% at £9.1 million (Q3 2019: £7.9 million)

·   Balance sheet cash collections of £260.9 million (Q3 2019: £312.5 million)

·   Continued improving trend in balance sheet cash collections performance following the impact of COVID-19 lockdowns – Q3 2020 discrete collections of £85.1 million represents 141% of revised 84-month ERC

·   Remain cautious of economic outlook upon the winding down of government support schemes; no change to balance sheet write-down taken at the half year 2020 following Q3 review

·   Asset Management and Servicing (AMS) business cashflows remained resilient

o AMS revenues improved 2.1% to £70.2 million (Q3 2019: £68.7 million)

o Record 16 new third-party contract wins in 2020 – currently equating to £4.8 billion of gross book value, evidencing increased demand for Arrow’s services

·   Increased capital deployment in line with increasing investment opportunities – total investments of £64.2 million, including pro-rata fund co-investments

·   Q3 discrete total operating expenses of £56.0 million represents a 12.8% reduction on 2019 on a cash basis (2019: £55.4 million including benefits of £8.9 million of non-cash deferred consideration release) 

·   £10 million cost reduction programme on track

Balance sheet and liquidity remain robust

·   The Group maintained a strong liquidity position – latest available cash headroom of £225.5 million (FY 2019: £153.0 million)

·   Free cash flow (FCF) generation of £120.4 million (Q3 2019: £174.4 million)

·   LTM leverage of 4.2x (Q3 2019: 3.7x)

·    Expect leverage to be circa 4.0x by end 2021 and within target 3.0x-3.5x range by 2023 – well in advance of first bond refinancing requirement in 2024

Further fundraising success – Arrow Credit Opportunities (ACO) fund closed

·   Total ACO capital commitments at close €1.7 billion, with €1.3 billion from third party investors

·   Total Funds Under Management (FUM) at close of €4.2 billion – new target of €10 billion by 2025

·   Analyst seminar teach-in and Q&A scheduled for 14:00 today (12 November 2020)

Attractive medium-term outlook and updated targets

·   Economic dislocation expected to present increased investment and asset servicing opportunities

·   New targets reflect an acceleration of our capital-light strategy in an increasingly attractive operating environment:

o Greater than €10.0 billion of FUM by end 2025

o Greater than 50% of EBITDA from capital light businesses (Fund and Investment Management Business (FIM) and Asset Management and Servicing Business (AMS)) by FY 2025

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

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

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

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

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

“Arrow performed well in Q3 2020, registering a clear return to profitability and strong balance sheet cash collections. It is encouraging to see a notable increase in investment returns available in the market as the economic dislocation generates new opportunities. This has also led to increased demand for Arrow’s third-party asset servicing capabilities, driving new, long-term contract wins for our Asset Management & Servicing Business.

Today we have also announced the final close of the fundraising for Arrow Credit Opportunities, our first discretionary closed-end fund, with total capital commitments of €1.7 billion. This marks an exciting new chapter for the business as it continues its pivot towards an increasingly capital-light model. Raising such a significant pool of third-party capital means that we are well positioned to be a leading investor into a large and fast-growing market with an improving returns trend, underpinning our target to manage €10 billion of FUM by 2025.

The close of our flagship fund has led us to outline a new set of 5-year targets for the Group which reflects our confidence in the business’s ability to grow earnings, increase the contribution from capital-light fund management and servicing operations and significantly reduce leverage.”

Presentation and Q&A details for Q3 2020 results and analyst fund management seminar

Q3 Results presentation:

A presentation detailing Arrow’s Q3 2020 results is available on the Group’s Investor Relations website.

Fund Management Analyst Seminar

A separate Fund Management Analyst Seminar will take place via video conference at 14:00 (GMT) and will be available to view via the Company’s investor relations websitehttps://www.arrowglobal.net/en/index.html.

Investors and analysts wishing to view this can register here:https://bit.ly/3mPx8t2

Investors and analysts wishing to listen to the presentation via audio only may do so using the below dial-in details.  Please dial-in at least 10 minutes prior to the start of the session in order to ensure registration can take place in time for the call to commence:

Dial-in details for audio only listening

+44 (0)330 336 9126

Meeting ID: 2178984

A full recording will subsequently be made available on the Group’s Investor Relations website

https://www.arrowglobal.net/en/index.html

Q&A for Fund Management Analyst Seminar and Q3 results

A live Q&A session will take place with Arrow’s management team immediately following the session.  Analysts and investors watching the video conference will be able to submit written questions via the viewing platform at any time during the presentation, which management will answer once the Q&A session starts. 

Questions can also be submitted to the company’s Investor Relations email address (IR@arrowglobal.net) at any time during the presentation

If investors and analysts would prefer to ask questions in person, they may use theaudio only dial-in details above to submit their questions over the phone line. Registration will be required, so dialling in ahead of the Q&A session is advised to ensure questions can be asked without unnecessary delay.

Notes:

A glossary of terms can be found at the end of the document.

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

For further information:

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.

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

For the period ended 30 September 2020

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 September 2020

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the period ended 30 September 2020

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the period ended 30 September 2020

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS 

1.   Significant accounting policy updates

These financial statements are unaudited and do not include all the information required for annual or interim financial statements and therefore are not fully compliant with IAS 34 – Interim financial reporting. These quarterly results should be read in conjunction with the Group’s consolidated annual report and accounts for the year ended 31 December 2019 and the Group’s consolidated interim results for the period ended 30 June 2020.

The Group’s consolidated annual report and accounts are prepared in accordance with IFRS as adopted for use in the EU, and therefore comply with Article 4 of the EU IFRS Regulation. As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, these financial statements have been prepared by applying the accounting policies and presentation that were applied in the preparation of the Group’s published consolidated annual report and accounts for the year ended 31 December 2019.

The consolidated annual report and accounts for the year ended 31 December 2019 are available upon request from the Company’s registered office at Belvedere, 12 Booth Street, Manchester, M2 4AW and can also be found online atwww.arrowglobal.net.

2.  Portfolio investments 

The movements in portfolios investments were as follows:

Period ended 30 September 2020

Year ended 31 December 2019

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 whist extinguishing related liabilities.
 

Period ended 30 September 2019                                                           

3.   Borrowings and facilities

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 comprised of 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 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 30 September 2020, £303,498,000 of the portfolio investments, set out in note 2, are pledged as collateral for the asset backed securitisations.

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.

ADDITIONAL INFORMATION (UNAUDITED)

The adjusted EBITDA reconciliations for the periods ended 30 September 2020 and 30 September 2019 respectively are shown below:

The table below reconciles the reported profit after tax for the period to the free cash flow result.

Reconciliation of profit after tax to the free cash flow result

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

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

³Non-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 12 for detailed reconciliations of adjusted EBITDA.

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

GLOSSARY OF KEY PERFORMANCE INDICATORS (KPIs)

A description of the Group’s KPIs relating to clients, financial position and performance is set out in the ‘additional information’ section.

The Group’s KPIs are used throughout this document to help explain the performance of the business. This glossary sets out why each of these KPIs are important to the Group.

84-month ERC

The 84-month ERC means the Group’s estimated remainingbalance sheet cashcollections 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 ratio

The Group’s leverage ratio is calculated by dividing the secured net debt outstanding at the end of the period by the LTM (12 months’ rolling average) Adjusted EBITDA. The leverage ratio presented in the condensed consolidated interim financial statements is calculated on the same basis as the financial covenant stipulated within the Group’s revolving credit facility provided by a syndicate of banks. As at 30 September 2020, the actual leverage was 4.2x.

Funds under management (FUM)

The funds under management figure for the Group represents the current gross discretionary capital that the Group is responsible for managing in some capacity, including any of its own capital which it has committed to invest alongside third-parties. FUM is an important metric used to understand the scale of the Group’s Fund and Investment Management business and how this compares to others in the market.

Net IRR

The net Internal Rate of Return (Net IRR) is calculated by taking the cumulative expected returns from a portfolio investment (or group of portfolio investments) and discounting these at a rate that makes the net present value of such returns equal to the price paid for the investment(s). This is an important metric for the business as it is a measure of the returns which are being generated by investing the Group’s own capital into new purchases in the period.

GLOSSARY OF ALTERNATIVE PERFORMANCE MEASURES

GLOSSARY OF OTHER ITEMS

‘ABS’means asset-backed security.

‘ACO’is Arrow Credit Opportunities, 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.

‘APM’means alternative performance measure.

‘Collection activity costs’represents the direct costs of balance sheet cash collections related to the Group’s portfolio investments, such as internal staff costs, commissions paid to third party outsourced providers, credit bureau data costs and legal costs associated with balance sheet cash collections.

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

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

‘EPS’means earnings per share.

‘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 movements and the impact of reforecast in the period.

‘FIM’means Fund and Investment Management.

‘Free cashflow’or‘FCF’means adjusted EBITDA after the effects of capital expenditure, financing and tax cash impacts and before the replacement rate.

‘Funds under management (FUM)’meansthe value of all fund management assets managed by Arrow Global plc., including Arrow Credit Opportunities, Norfin Investimentos, Saggita, 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 to others in the market.

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

‘FY’means full year being the 12 months to 31 December 2019.

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

‘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.

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

‘IFRS’means EU adopted international financial reporting standards.

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

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

‘LTM’means last twelve months and is calculated by the addition of the consolidated financial data for the year ended 31 December 2019 and the consolidated financial data for the three months to 30 September 2020, and the subtraction of the consolidated financial data for the three months to 30 September2019.

‘NCI’means non-controlling interest.

‘Net debt’means the sum of the outstanding principal amount of the senior secured notes and asset-backed loans, interest thereon, amounts outstanding under the revolving credit facility and deferred consideration payable in relation to the acquisition of portfolio investment, less cash and cash equivalents. Net debt is presented because it indicates the level of debt after removing 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 as at 30 September 2020 is as follows:

‘OCI’means other comprehensive income.

‘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.

‘Secured netdebt’see table in net debt definition.

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

END