Results for the 9 months ended 30 September 2018

8 November 2018

Arrow Global Group PLC

Results for the nine months ended 30 September 2018

Reduced leverage while continuing to grow a diversified platform generating strong cashflows at high returns

Arrow Global Group PLC (the “Company”, and together with its subsidiaries the “Group”), a leading European investor and asset manager in non-performing and non-core assets, announces its results for the nine months ended 30 September 2018.

Key Highlights

ØStrong Group operating and financial performance

·    Core collections increased 18.2%, driving a strong adjusted EBITDA result, up 28.8%

·    Underlying profit after tax increased 10.2% to £42.9 million

·    Profit after tax increased 28.4% to £20.5 million

·    Underlying LTM ROE of 33.4%

·    Improved underwriting performance increased to 104% of original forecast

·    Completion of the Europa Investimenti S.p.A. acquisition marks the successful scaling of our European platform with the primary focus now on organic growth

ØInvestment Business

·    Record organic portfolio acquisitions of £200.1 million, increasing from £155.0 million in Q3 2017, and on track to deliver £230 million to £240 million of portfolio purchases

·    Non-UK portfolio investments now represent more than 50% of ERC

ØAsset Management & Servicing business (AMS)

·   Third party AMS income increased 25.1% to £63.3 million

·   Assets under management increased 22.6% to £51.5 billion

·   New target to double AMS income, growing to 50% of total income over the next five years

ØStrong balance sheet discipline

·    Leverage decreased to 3.8 times secured net debt to adjusted EBITDA, with new five year target leverage ratio of 3.0 to 3.5 times

·    Strong cash interest cover at 6.6 times

·    Commitment to prudent balance sheet management maintained

·    Attractive WACD of 3.9% and no bond maturities until 2024; strong liquidity with £128.8 million cash headroom to fund organic growth

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

“I am delighted that our successful diversification of the business continues to bear fruit. Our Investment Business continues to thrive, with growing volumes and our highly disciplined approach generating resilient cashflows and unlevered returns ahead of our mid-teens target.

“Our AMS Business continues to flourish and its strong growth contributes to an improving diversification and quality of earnings.

“In combination, our two operating segments are generating a strong increase in earnings and cashflow at very attractive returns and we remain confident in delivering our targets for the year.”

A Capital Markets day and Q3 presentation for investors and analysts will be held at 0900 at the The Savoy, Strand, London WC2R 0EZ

Webcast Details:

Webcast link:https://fotwlive.videosync.fi/2018-11-08-arrow-cmd-2018

Alternatively, if you are in transit and wish to listen to the webcast via an audio bridge, please use the following number:

+44 203 695 0088

Meeting ID: 602 149 665

International numbers available:https://zoom.us/u/agE9ZkZGm 

Notes:

A glossary of terms can be found on pages 14 to 16.

More details explaining the business can be found in the Annual Report & Accounts 2017 which is available on the Company’s website at www.arrowglobalir.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 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 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 assumes no obligation to update or provide any additional information in relation to such forward-looking statements.

Unaudited consolidated statement of profit or loss and other comprehensive income

For the nine months ended 30 September 2018

UNDERLYING PROFIT

Underlying profit is considered to be a key measure in understanding the Group’s ongoing financial performance.

Adjusting items are those items that management deem by virtue of their size, nature or incidence (i.e. outside the normal operating activities of the Group) are not considered to be representative of the ongoing performance of the Group and these items are excluded from underlying profit.

Reconciliation between reported profit and underlying profit

The adjustments for collection activity costs and other operating expenses in the period relate to ‘One Arrow’ costs of £6.0 million and business acquisition and other costs of £3.1 million.

Bond refinancing costs in both periods relate to costs associated with restructuring the Group’s long-term financing.

Unaudited consolidated statement of financial position

As at 30 September 2018

Unaudited consolidated statement of changes in equity

For the nine months ended 30 September 2018

Unaudited consolidated statement of cash flows

For the nine months ended 30 September 2018

Notes

1.         Significant accounting policy updates

These financial statements do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 December 2017.

The annual financial statements of the Group 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 Guidance and Transparency Rules of the Financial Conduct Authority, these financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Group’s published consolidated annual report for the year ended 31 December 2017, other than IFRS 9 and IFRS 15, which have been applied for the first time this year. Changes to significant accounting policies in 2018 have been disclosed in the condensed consolidated interim financial statements of the Group for the period ended 30 June 2018.

The consolidated financial statements of the Group for the year ended 31 December 2017 are available upon request from the Company’s registered office at Belvedere, 12 Booth Street, Manchester, M2 4AW and can also be found, along with the condensed consolidated interim financial statements of the Group for the period ended 30 June 2018, online atwww.arrowglobalir.net.

2.         Portfolio investments 

The Group recognises income from portfolio investments in accordance with IFRS 9 from 1 January 2018.

The movements in portfolio investments were as follows:

* Inclusive of acquisition costs and portfolios acquired through acquisition of EI

2.         Portfolio investments(continued)

Classification of portfolio investments

The following table provides a breakdown of the categories of portfolio investments under IFRS 9.

3.         Borrowings

On 7 March 2018, Arrow Global Finance Plc issued €285 million floating rate senior secured notes due 2026 at a coupon of 3.75% over three-month EURIBOR and also issued a £100 million tap of its existing £220 million 5.125% fixed rate notes due 2024. As part of the transaction Arrow Global Finance Plc also redeemed its €230 million 4.75% over three-month EURIBOR floating rate senior secured notes.

In 2018, bond refinancing costs comprised £18,658,000 incurred on the early redemption of the €230 million notes due 2023, of which £13,623,000 was a cash cost related to the call premium. The remaining £5,035,000 was due to a non-cash write-off of related transaction fees, relating to the 2023 notes.

On 4 January 2018 the commitments under the revolving credit facility were increased from £215 million to £255 million. The maturity of the facility was extended to 2 January 2023 and the margin reduced to 2.5%.

On 1 November 2018 the commitments under the revolving credit facility were increased from £255 million to £285 million.

4.         Acquisition of subsidiary undertakings

Europa Investimenti S.p.A (“EI”)

On 13 September 2018, the Group acquired 100% of the share capital of EI. EI originates and manages Italian distressed debt investments. The acquisition builds on the 2017 acquisition of Zenith, and subsequent acquisition of Parr in 2018. These three acquisitions now give the Group Italian primary and special servicing capabilities that support the Group’s growth ambitions. The fair value of total consideration for the acquisition is €65,450,000 (£58,735,000) including deferred and contingent consideration. The provisional net assets acquired totalled €9,958,000 (£8,897,000).

The initial accounting for the acquisition has been determined provisionally because of the limited time available between the acquisition date and the preparation of these quarterly statements.

Additional Information

The adjusted EBITDA reconciliations for the periods ended 30 September 2018 and 30 September 2017 are shown below:

Glossary

‘Adjusted EBITDA’means profit for the period attributable to equity shareholders before interest, tax, depreciation, amortisation, foreign exchange gains or losses and adjusting items.

‘Adjusting items’are those items that by virtue of their size, nature or incidence (i.e. outside the normal operating activities of the Group) are not considered by the Board to be representative of the ongoing performance of the Group and are therefore excluded from underlying profit after tax.

‘AMS’means asset management and servicing.

‘Collection activity costs’represents the direct costs of 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 collections.

‘Core collections’or ‘core cash collections’mean cash collections on the Group’s existing portfolios including ordinary course portfolio sales and put backs.

‘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.

’84-month ERC’and‘120-month ERC’(together‘gross ERC’), mean the Group’s estimated remaining collections on portfolio investments over an 84-month or 120-month period, respectively, representing the expected future core collections on portfolio investments over an 84-month or 120-month period (calculated at the end of each month, based on the Group’s proprietary ERC forecasting model, as amended from time to time).

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

‘IFRS’means EU adopted international financial reporting standards.

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

‘LTIP’means the Arrow Global 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 2017 and the consolidated financial data for the nine months to 30 September 2018, and the subtraction of the consolidated financial data for the nine months to 30 September 2017.

 ‘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 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 for the period ended 30 September 2018 is as follows:

‘NCImeans non-controlling interest.

‘Off market’means those portfolio investments that were not acquired through a process involving a competitive bid or an auction like process.

‘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 Q3 2017 to Q3 2018 as shown in the quarterly, half year and full year statements. In the comparative period this is calculated as the average annual equity attributable.

‘Secured netdebt’means the sum of the outstanding principal amount of the senior secured notes, amounts outstanding under the revolving credit facility, less cash and cash equivalents. Secured net debt is presented because it indicates the level of secured debt after taking out the Group’s assets that can be used to pay down outstanding secured borrowings, and because it is a component of the incurrence tests in the senior secured notes.The breakdown of secured net debt for the period ended 30 September 2018 is shown in net debt above.

‘Underlying basic EPS’represents earnings per share based on underlying profit after tax, excluding any dilution of shares.

‘Underlying profit after tax’means profit for the year attributable to equity shareholders adjusted for the post-tax effect of certain adjusting items. The Group presents underlying profit after tax because it excludes the effect of items (and the related tax on such items) which are are not considered representative of the Group’s ongoing performance, on the Group’s profit or loss and forms the basis of its dividend policy.

 ‘Underlying ROE’represents the ratio of underlying profit for the period attributable to equity shareholders to average shareholder equity.

‘WACD’means weighted average cost of debt.

END