Results for the three months ended 31 March 2019

Arrow Global Group PLC

Results for the three months ended 31 March 2019

Strong cashflow generation, deleveraging and further funding diversification from first securitisation

Arrow Global Group PLC (the “Company”, and together with its subsidiaries the “Group”), a leading European investor and asset manager in secured and unsecured defaulted and non-core loan portfolios and real estate, announces its results for the three months ended 31 March 2019.

Key Highlights

·     Organic portfolio purchases of £56.4 million (Q1 2018: £79.9 million)

·     Core collections increased 22.7% to £105.5 million (Q1 2018: £86.0 million)

·     Third-party AMS income increased 21.7% to £23.0m (Q1 2018: 18.9 million)

·     Free cashflow grew 32.0% to £57.8 million (Q1 2018: £43.8 million)

·     Significant reduction in leverage ratio to 3.4x (Q1 2018: 4.0x)

·     Underlying profit before tax increased 14.1% to £16.2 million (Q1 2018: £14.2 million)

·     Underlying LTM ROE of 34.5%

·     Securitisation in April 2019 further diversifies funding structure

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

“Our strong focus on returns and an improving pricing environment means that we took the decision in the first quarter to purchase fewer portfolios, conserving investment firepower for later in the year. Our strong pipeline visibility means that we remain confident in achieving around £250.0 million of portfolio purchases at our target returns.

Arrow Global is a highly cash generative business and this is evident when purchases are scaled back, driving the three-point reduction in leverage from 3.7x at the full year to 3.4x at the end of Q1. While leverage is likely to modestly rise from here as purchases increase, before trending down again by year end, we remain confident that our target leverage range of 3.0x-3.5x is a sustainable level for the business.

The announcement today of our first securitisation of loan portfolios via a £100 million revolving commitment adds an important element of diversification to our funding structure at attractive cost and modest scale.

We are pleased with the investment returns we have achieved so far in Q1 and believe that the pricing environment will continue to improve. Cash generation will continue to be a major priority through a heavy focus on delivering strong returns and our cost efficiency agenda.”

Conference call details

There will be a conference call for analysts and investors at 0900 (UK time). Investors and analysts wishing to dial-in to the call can register using the following link:

http://bit.ly/2IZomJo

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 2018 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 three months ended 31 March 2019

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/(loss) and underlying profit

In the period to 31 March 2019, the other operating expenses adjustment primarily related to acquisition costs. In the period to 31 March 2018, the collection activity adjustment related to the One Arrow programme and the other operating expenses adjustment related to the One Arrow programme and costs incurred on acquisitions. See note 3 for details of the bond refinancing costs.

The non-controlling interest (NCI) relates to a co-investment in a portfolio where we have taken a majority share and hence consolidate the position and allocate the minority holding to the NCI.

Unaudited consolidated statement of financial position

As at 31 March 2019

Unaudited consolidated statement of changes in equity

For the three months ended 31 March 2019

Unaudited consolidated statement of cash flows

For the three months ended 31 March 2019

Notes

1.         Significant accounting policy updates

These financial statements are unaudited and do not include all of the information required for full 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 consolidated financial statements of the Group as at and for the year ended 31 December 2018.

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 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 2018, other than IFRS 16, which has been applied for the first time this year. Changes to significant accounting policies in 2019 have been disclosed below.

The consolidated financial statements of the Group for the year ended 31 December 2018 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.arrowglobalir.net.

IFRS 16 is effective from 1 January 2019 and the Group has adopted it from this date.

IFRS 16 replaces the previous standard IAS 17 ‘Leases’, bringing a number of leases on balance sheet, which were previously off balance sheet and accounted for as operating leases under IAS 17.

The Group is not required to restate comparatives on the initial adoption of IFRS 16, and has applied the modified retrospective approach. The Group has applied exemptions where appropriate for short-term leases of twelve months or less and low value assets to be expensed and has also applied ‘grandfathering’ to all IAS 17 judgements previously made. The incremental borrowing rates used to measure lease liabilities at initial application ranged between 4.2% and 7.2%.

The standard transition has led to a one-off opening 2019 reserves reduction of £0.9 million, a right-of-use asset disclosed in property, plant equipment of £23.8 million and a lease liability of £27.3 million and a release of lease accruals of £2.6 million, both disclosed in trade and other payables.

2.         Portfolio investments 

The movements in portfolio investments were as follows:

Classification of portfolio investments

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

3.         Borrowings

Revolving credit facility

On 26 February 2019, the maturity of the facility was extended to 4 January 2024 with no change in margin.

On 4 January 2018, the commitment 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 commitment under the revolving credit facility were increased from £255 million to £285 million.

Senior secured notes

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 £18.6 million incurred on the early redemption of the €230 million notes due 2023, of which £13.6 million was a cash cost related to the call premium. The remaining £5.0 million was due to a non-cash write-off of related transaction fees, relating to the 2023 notes.

4.         Post balance sheet events

Drydens Limited (“Drydens”)

On 8 April 2019, the Group acquired 100% of the share capital of Drydens. Drydens is a provider of legal services, the acquisition of which will broaden the Group’s UK range of servicing capabilities and skills across consumer and commercial litigation, probate and insolvency.

Asset backed security

On 30 April 2019, the Group completed a securitisation of loan portfolios at a £100 million revolving commitment, through an asset backed security funding structure at LIBOR + 3.1% per annum.

Additional Information

The adjusted EBITDA reconciliations for the periods ended 31 March 2019 and 31 March 2018 are shown below:

The table below reconciles the reported profit for the period to the free cash flow result. For completeness we also separate out other adjusting items.

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 collections for third parties and fee income received. The other items add back loan portfolio amortisation to get to core collections. Amortisation reflects a reduction in the statement of financial position carrying value of the portfolio investments arising from collections which are not allocated to income. Amortisation plus income from portfolio investments equates to core collections

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

³Non-cash amortisation of fees and interest

⁴The free cash flow result is viewed on an underlying basis which excludes certain items. These items have been excluded to provide a more comparable basis for assessing the Group’s performance between financial periods

⁵This is theadjusted EBITDA for the business, which is a key driver to the cash result. This measure allows us to monitor the operating performance of the Group. See page 12 for detailed reconciliations of adjusted EBITDA

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.

‘Cash income’represents core collections and income from 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 bureaux 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.

‘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).

‘Free cash flow’means Adjusted EBITDA after the effects of capital expenditure, financing and tax cash impacts and before the replacement rate.

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

‘Grandfathering’allows the application of IFRS 16 only to those contracts in which a lease was previously identified in accordance with IAS 17.

‘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 Investment Business and other income.

‘IFRS’means EU adopted international financial reporting standards.

‘Incremental borrowing rate’is the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right‑of‑use asset in a similar economic environment.

‘Leverage’is secured net debt to LTM Adjusted EBITDA.

‘LTM’means last twelve months and is calculated by the addition of the consolidated financial data for the year ended 31 December 2018 and the consolidated financial data for the three months to 31 March 2019 and the subtraction of the consolidated financial data for the three months to 31 March 2018.

‘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 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 is as follows:

‘NCI’means non-controlling interest.

‘Non-controlling interest’, also known as minority interest, is the portion of equity ownership in a subsidiary which is not attributable to the parent company, who has a controlling interest of greater than 50% but less than 100%, and consolidates the subsidiary’s results with its own.

‘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 Q1 2018 to Q1 2019 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 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.

END