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Arrow Global Group PLC   -  ARW   

Interim results for the six months to 30 June 2019

Released 07:00 08-Aug-2019

RNS Number : 3237I
Arrow Global Group PLC
08 August 2019
 

8 August 2019

Arrow Global Group PLC

Results for the six months ended 30 June 2019

 

Continued strong cashflow, further cost savings identified and continued focus on fund management business strategy to accelerate move to capital-light model

 

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 six months ended 30 June 2019.

 

Key Highlights

 

·     £165.6 million of portfolio purchases in Investment Business (IB) (H1 2018: £146.3 million)

·     Further strengthening in IB returns - net IRRs increased to 18.0% (H1 2018: 16%) and 10- year gross money multiple (GMM) increased to 1.9x (H1 2018: 1.8x)

·     Gross Asset Management and Servicing (AMS) income increased 14.4% to £68.3 million - 34.1% of gross Group income (H1 2018: 32.2%), with current AUM of £52.0 billion

·     Free cashflow grew 28.1% to £115.3 million (H1 2018: £90.0 million)

·     Cost review completed - minimum £20 million of cost run-rate savings expected to be delivered by the end of 2020 with an estimated cost to achieve of £20 million, supporting simplification, enhanced efficiency and flexibility in AMS operations

·     Development of fund management business capabilities to further enhance growth and margins in AMS gathering pace with the formation of AGG Capital Management Limited and hiring of Andrew Grimditch as its CFO

·     Leverage reduced to 3.6x (H1 2018: 4.0x) - continue to target 3.0x-3.5x range by year-end

 

Group financial highlights
 

30 June
2019

30 June
2018

Change
%

Core collections (£m)

202.1

178.0

13.5

Total income (£m)

177.7

166.9

6.5

Third party AMS income (£m)

45.6

41.4

10.1

Profit before tax (£m)

32.5

10.7

203.7

Underlying profit before tax (£m)

35.6

35.3

0.8

Basic EPS (p)

12.6

4.9

157.1

Leverage (x)

3.6

4.0

(0.4x)

84-month ERC (£m)

1,746.0

1,624.8

7.5

120-month ERC (£m)

2,076.8

1,947.9

6.6

 

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

"These are a strong set of results reflecting the strength, breadth and quality of the Group's business. All key financial metrics have improved on last year. We have continued to generate asset purchases across our markets at attractive expected returns.

Our AMS business continues to gather momentum, with further margin expansion enhancing our capital generation. We are now moving to establish broader third-party fund management business capabilities through the formation of AGG Capital Management Limited, which we believe has the potential to transform our business model.

In order to ensure maximum efficiency and flexibility within our operations, we have undertaken a group-wide cost review, which is now being implemented. This will support the delivery of our strategic objectives and improve operating leverage over time.

Strong cash generation remains an important characteristic of our business allowing us to invest for future growth, pay dividends and de-lever.  We remain confident in our ability to finish the year within our target leverage range of 3.0x-3.5x and to deliver on our broader medium-term financial objectives."  

A presentation for analysts will be held at 0930 (UK time) at the offices of FTI Consulting.

Webcast Details:

Webcast link: https://bit.ly/2NVRYKJ

Conference call details:

Number: +44 131 460 1196
Meeting ID: 541 590 432
(Global numbers: https://bit.ly/31llImf)

Notes:

A glossary of terms can be found on pages 37 to 41. 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:

Arrow Global Group PLC

 

Duncan Browne, Head of Investor Relations

 

+44 (0) 7925 643 385

Dbrowne@arrowglobal.net

FTI Consulting

 

Neil Doyle

Tom Blackwell

Laura Ewart

+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 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.

 

Interim management report

for the six months to 30 June 2019       

Important note:

Both IFRS and cash metrics, alongside alternative performance measures are important in understanding the key drivers of the business and are part of target measures used in the calculation of senior management's variable remuneration. Full reconciliations between these positions have been presented in the 'Additional Information' section of this report. The commentary on the following pages refers to a combination of these measures to aid understanding of the business performance for the period.

All of the following statements relate to the underlying performance of the business unless otherwise stated.

Asset Management and Servicing (AMS) - accelerating specialist fund management business capabilities

The Company began as a principal investor in impaired credit, using powerful data assets and underwriting skills to achieve returns above its cost of capital. Over the last five years, the Company has established market-leading positions in five European countries, with platforms covering the full range of target asset classes, including high-margin niches with limited alternative service providers.  This now enables us to access around half of a two trillion-euro market across Europe.

The establishment of this platform has created the opportunity to earn fee revenue from the provision of services to third-party capital providers. As we noted at our Capital Markets Day in November 2018, we will now look to expand our AMS business through establishing specialist fund management business capabilities and widening the range of capital managed on a discretionary basis.  Our success at co-investing into deals and servicing the assets on behalf of ourselves and our third-party capital partners provides a track record which is attractive to investment managers looking to access our specialist and high-return asset classes.

Continued AMS Revenue Growth from the existing business

Gross AMS revenues from our current servicing activities and fund management business grew 14.4% to £68.3m and accounts for 34.1% of gross Group revenue supported by contributions from our Norfin, Europa Investimenti and Parr Credit acquisitions.  As noted at Q1, we have taken a proactive approach to assessing which contracts from some of these newer businesses we wish to maintain and those we will seek to exit. 

In addition, we had previously planned to raise new funds locally through our Portuguese and Italian platforms that would have been accretive to revenue in 2019.  However, due to the accelerated focus on our fund management business strategy at a Group level, we have delayed this process.  This has resulted in a short term in year drag to our anticipated AMS revenues.  We remain optimistic about the future third-party capital volumes we can push through the fund management business strategy.

Nevertheless, margins in the AMS business have increased to 23% at H1 2019 compared to 19% in H1 2018, partly driven by the contribution from Norfin's higher margin fund management business revenue.  Margin expansion is a long-term trend we anticipate will continue as we succeed in executing on our fund management business strategy. H1 2019 saw particularly strong revenues including certain items such as due diligence fees that are not expected to repeat in H2 2019. Therefore, we expect the AMS margin to moderate slightly across the remainder of 2019.  We remain firmly on track to hit, if not exceed, our medium-term AMS margin guidance.

Investment business - returns continuing to strengthen

 

Portfolio investments - higher returns

In line with our strategy to only invest when attractive returns are available, we deliberately scaled back purchases in Q1 as we predicted pricing would improve and investment returns would increase as the year progressed. 

This approach was successful, with H1 IRRs achieved of 18% (H1 2018: 16%).  A key driver of this increase has been the particularly attractive investment opportunities arising from our recent acquisitions. Norfin, in Portugal, and Europa Investimenti, in Italy, have given us the ability to value and service attractive asset classes in the real estate and corporate bankruptcy sectors. They require specific forensic expertise to underwrite, making them harder for statistical investors to price accurately. They are therefore subject to less auction competition and exhibit higher returns - making them extremely long-term accretive to the Company's shareholders.  These assets are frequently secured, resulting in ultimate returns that are more predictable but that can exhibit less front-loaded cashflow profiles when compared to an unsecured credit card book in the UK.  As such, whilst the profile of these investments will have some in-year earnings impact, they are wholly consistent with our strategy to maximise long-term value for shareholders. Over time, we would also expect the majority of these assets to be highly attractive to our capital partners, rather than necessarily sitting on the Group's balance sheet.

Core collections - cash generation continuing to improve

 

Collections performance was strong in the period, with core collections increasing by 13.5% to £202.1 million (H1 2018: £178.0 million). This reflected the increase in our portfolio asset base and good performance of the back book, especially in Portugal.  At 104%, collections remain ahead of the underwriting ERC forecast and reflect our continued cumulative collections outperformance across geographies and asset classes.  

The increase in collections drove an increase in adjusted EBITDA of 21.2% to £144.1 million (H1 2018: £118.9 million). The reconciliation for the period of profit after tax to the cash result, including a reconciliation to adjusted EBITDA, is provided in the 'Additional Information' section of this report. Adjusted EBITDA is a key driver of the cash result and allows us to monitor the operating performance and cash flow generation of the Group.

Cash generated by core collections is subsequently accounted as revenue under IFRS, where a proportion is allocated to amortising the asset on the balance sheet and the rest recognised as revenue.  Amortisation has increased by a greater amount than collections period on period. This is primarily driven by two factors; a decrease in revaluation gains period on period meaning total income from portfolios grew at a slower pace than cash collections, and also due to the collections on a portfolio restructure completed in Q1 2019 being 100% offset in amortisation.

Investment business income increased

 

Total income from portfolio investments increased by 5.1% to £131.9 million (H1 2018: £125.5 million), following continued strong collections performance.  This is after impairment gains of £15.7m (H1 2018: £23.3m) and fair value gains of £21.1m (H1 2018: £6.1m) - both driven by the normal process of including expected cash flows that have moved from beyond the 84-month ERC balance sheet recognition period to within it, as well as revaluations upwards of portfolio assets due to expected future collections outperformance. Impairment gains were lower than the prior year comparative, which included the benefit of strong revaluation gains driven by the initial impact of rolling out our decision science expertise across the Group at this time.

Cost to collect improving

 

Cost to collect has reduced to £54.0m from £59.9m in the prior period, due to the continued effect of secured assets, which have a greater upfront cost to collect but a lower lifetime cost to collect, and the increased efficiencies driven by the One Arrow investment programme. This is despite an increase in overall collections and the flow through impact of purchasing servicing platforms that have a higher proportional cost to collect. Collection costs often rise commensurately with the greater collections activity frequently seen in the second half of the year, meaning collections costs in the second half will be higher than in the first half. However, in line with the medium-term guidance provided at our capital markets day, we expect the collections activity cost ratio to reduce over time.

Overheads and results of cost review

M&A activity, investment in Italy and the build-out of central functions has resulted in an increase in statutory overhead costs to £64.7 million (H1 2018: £54.7 million).

As we set out at our full year results in February, with the build out of our servicing platform largely complete, we believed there was an opportunity for us to realise significant cost savings.  This arises from our ability to simplify, remove duplication, streamline support functions, harness the benefits of our efficiency investments and improve the procurement process across the Group. Our cost review is now complete and we have commenced execution of the programme that is expected to result in over £20 million of run-rate cost savings by the end of 2020. We estimate that this will entail a cost to achieve of approximately £20 million, the majority of which we anticipate incurring in H2 2019.

The benefits of this programme will largely accrue in our AMS businesses and will support an acceleration of our guidance of mid-20s EBITDA margins.  This is an essential component of pivoting our business model to a more capital-light strategy and will support earnings as this occurs. In addition, investment in our central functions is now largely complete.

Alongside the expected cost saving, this stronger alignment of costs with capital allocation will see us create significant operating leverage in our platform. In particular, this will enhance our ability to generate efficient scale through the deployment of third-party capital, thereby driving a positive 'JAWS' between revenues and costs.

 

 

Finance costs

Finance costs, which include charges relating to deferred payments on business acquisitions, were £26.5 million (H1 2018: £22.8 million). The increase was primarily driven by deferred consideration treatment and lease accounting treatment under IFRS.

Underlying profit before tax

Underlying profit before tax marginally increased in the period, principally driven by lower levels of revaluations than those experienced in H1 2018. In addition, overheads increased following M&A activity but were largely offset by increased AMS and IB revenues. Statutory profit before tax increased 203.7% to £32.5 million (H1 2018: £10.7 million), primarily as a result of lower financing costs in H1 2019, with the H1 2018 result impacted by the costs of bond refinancing.

Underlying Tax

 

The underlying tax charge of £8.5 million represents an effective tax rate of 24.0% (H1 2018: 19.5%) on underlying profit before tax. The effective tax rate has increased period on period as increasingly more profits are generated in European tax jurisdictions where tax rates are higher than the UK. The statutory tax charge of £8.2 million has increased from £2.2 million, representing a 25.1% effective tax rate, in line with the increase in statutory profit, and also the same European tax jurisdiction mix impact.

Strong returns and dividends

 

The underlying LTM ROE is 32.7%, little changed from 33.5% at H1 2018 and remains well above our target of mid-20s underlying ROE.

Basic EPS is 12.6p compared to 4.9p in H1 2018, with the increase largely due to the growth in statutory net income, while underlying basic EPS has decreased 13.5% to 14.1p (H1 2018: 16.3p) on higher tax charges in the period, along with NCI participation in underlying profit after tax for the period.

The Group will pay a 4.4p interim dividend, an increase of 10% from the H1 2018 interim dividend of 4.0p. This is in line with the Group's policy to pay 50% of the previous year's final dividend.

Strengthened balance sheet

Funding and net debt

On 26 February 2019, the Group extended the maturity date of its £285m revolving credit facility to 4 January 2024 with no change in margin. In addition, on 30 April 2019, the Group completed a securitisation of loan portfolios under which a £100 million commitment has been made available to the Group, with an asset backed securitisation structure at LIBOR + 3.1% per annum. The initial drawdown under the facility was £75.0 million and, as at 30 June 2019, the outstanding borrowing was £74.3 million. The facility has a revolving commitment period for two years until May 2021 with an option to extend for a further year, after which there is an amortisation period of three years.  

The Group's secured net debt position at the period end was £1,148.4 million (FY 2018: £1,089.2 million). Secured net debt to adjusted EBITDA was 3.6 times (FY 2018: 3.7 times). The Group is committed to reducing the leverage ratio by year end to 3.5 times or below and operating thereafter within our target range of 3.0 times to 3.5 times.

As at 30 June 2019, the Group had headroom of £170.0 million, comprising £77.7 million cash at bank, £66.6 million headroom under the Group's revolving credit facility and £25.7 million under the Group's asset backed securitisation facility. Apart from the amortisation under the asset backed securitisation facility, the Group has no maturities until 4 January 2024.

The Group's weighted average cost of debt is 3.7% and the average debt facility maturity is 5.5 years. This means that since its IPO, the Group has more than halved its cost of debt while focusing on long duration debt for added balance sheet stability.

 

Continuing to move towards a self-funded model

 

Alongside continued growth in the AMS business and our cost reduction programme, our aim is that within the five-year guidance period, the business will generate enough cash to support our portfolio purchases, fund the dividend and reduce net debt. Under this scenario, while earnings growth will not be as high as recent years, we are optimistic we can transform the operating model to increase the quality of those earnings and believe that our fund management business strategy will be a key contributing factor.

Summary and outlook

Performance in the first half is in line with our expectations and plans. Delivery against our strategic goals of increasing revenues from our capital-light Asset Management and Servicing business, reducing leverage and growing dividends is on track, while the development of the fund management business is running ahead of plan.  We have announced our simplification programme today, which is already underway. Detailed plans are in place that we believe mitigate the risks involved in execution.

We have strong visibility on our Investment Business pipeline in the second half of the year and continue to view the asset pricing environment as increasingly attractive; evidenced by the two-percentage point increase in underwriting net IRRs over the last twelve months. We remain fully committed to the medium-term targets we laid out in 2018.

 

 

Principal risks and uncertainties

In our annual report we provided a summary of the principal key risk areas that could impact on the Group. We provide the following update against a number of these.

Successful agreement of the asset backed securitisation facility has improved the Group's liquidity whilst increases in capital-light asset management income, has served to enhance the Group's overall funding position. Risks associated with ongoing diversification of assets, including greater volumes of secured debt and real estate, are well-balanced via geographic diversification and the associated AMS income opportunities.  Overall, the volume and quality of the debt purchase market remains strong, with focus on maximising opportunities in Italy and Portugal, whilst operating within the overall capital allocation structure set out to support the Group's strategy.  Whilst pricing pressure is evident in certain parts of the market, the portfolio diversification and our ability to transact off-market enables these risks to be managed effectively.

Whilst Brexit uncertainty is ongoing, broader macro-economic factors and potential impact on the investment attractiveness of the UK remain under watch. However, we do not anticipate material adverse consequences solely due to Brexit. Ongoing dialogue with our regulators and relevant trade bodies enables a close watch in all of our markets and enables us to be better prepared for any regulatory or legislative changes.  As expected, the degree of regulatory engagement and oversight is increasing across the markets in which we operate, with many following the UK's lead in terms of fair customer treatment. In line with our purpose to build better financial futures, we wholly support these measures and are able to leverage existing internal expertise and good practice to support each of our businesses in building positive and proactive approaches to customer treatments. Progress continues across our Operational Resilience agenda, including Cyber Risk and Data Governance, further embedding operating standards in a consistent manner across the Group to mitigate and react effectively to these industry-wide themes. Our cost review has highlighted opportunities for further operational efficiency and improved technology infrastructure, and we continue to monitor the risk of business disruption by ensuring governance and oversight support these initiatives.

Also supporting our strategic plan, the Group continues to embed the One Arrow risk framework including appropriate levels of investment in people and infrastructure to support this on an ongoing basis across all three lines of defence. The accompanying governance processes ensure risk management oversight from both the executive management team and the Board.

The establishment of specialist fund management business capabilities by the Group marks an important development in our fund management business strategy.  As with any initiative of this kind, the process of full implementation involves a series of component steps and requires significant transaction management and coordination, including the coordination of legal, regulatory and other resources relevant to the establishment of a regulated activity. Whilst we believe this process is progressing well, it is necessarily dependent on a range of factors, and subject to a range of risks, such as those emanating from change within the legal and regulatory framework that applies to capital partnering structures.

 

Related party transactions

 

Related party transactions are disclosed in note 13 to the condensed consolidated financial statements.

Going concern

 

As stated in note 2 to the condensed consolidated financial statements, the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than twelve months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements.

 

Directors' responsibilities statement in respect of the interim results

 

We confirm that to the best of our knowledge:

The condensed set of consolidated financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

 

The interim management report includes a fair review of the information required by:

 

DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

 

DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Name

Function

 

Jonathan Bloomer

Non-executive Chairman

Lee Rochford

Group chief executive officer

Paul Cooper

Group chief financial officer

Lan Tu

Non-executive director

Maria Luís Albuquerque

Non-executive director

Andrew Fisher

Non-executive director and senior independent director

Ian Cornish (resigned 30 April 2019)

Non-executive director and senior independent director

The interim results were approved on 8 August 2019 by the board of directors and are signed on its behalf by:

 

Paul Cooper
Group chief financial officer

 

 

Independent Review Report to Arrow Global Group PLC

Conclusion
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 which comprises the condensed consolidated statement of profit or loss and other comprehensive income, condensed consolidated statement of financial position, condensed consolidated statement of changes in equity, condensed consolidated statement of cash flows and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
The impact of uncertainties due to the UK exiting the European Union on our review

Uncertainties related to the effects of Brexit are relevant to understanding our review of the condensed financial statements. Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. An interim review cannot be expected to predict the unknowable factors or all possible future implications for a Company and this is particularly the case in relation to Brexit.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Independent Review Report to Arrow Global Group PLC

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

 

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

 

Alexander Simpson

for and on behalf of KPMG LLP

Chartered Accountants

One St Peter's Square

Manchester

M2 3AE

8 August 2019

 

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

 

For the period ended 30 June 2019

 

 

Unaudited
period ended
30 June 2019

 

Unaudited

period ended
30 June 2018

 

 

£000

 

£000

Continuing operations

Note

 

 

 

Income from portfolio investments

 

95,007

 

96,143

Fair value gains on portfolio investments at FVTPL

 

21,124

 

6,108

Impairment gains on portfolio investments at amortised cost

 

15,721

 

23,281

Total income from portfolio investments

11

131,852

 

125,532

Income from asset management and servicing

 

45,639

 

41,352

Other Income

 

202

 

-

Total income

 

177,693

 

166,884

Operating expenses:

 

 

 

 

Collection activity costs

 

(54,017)

 

(59,940)

Other operating expenses

9

(64,653)

 

(54,745)

Total operating expenses

 

(118,670)

 

(114,685)

Operating profit

 

59,023

 

52,199

Net finance costs

 

(26,510)

 

(22,794)

Refinancing costs

 

-

 

(18,658)

Profit before tax

 

32,513

 

10,747

Taxation charge

8

(8,169)

 

(2,234)

Profit after tax

 

24,344

 

8,513

 

 

 

 

 

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

 

(633)

 

(451)

Movement on the hedging reserve

 

(57)

 

(375)

Total comprehensive income for the period

 

23,654

 

7,687

 

 

 

 

 

Profit attributable to:

 

 

 

 

Owners of the Company

 

22,104

 

8,481

Non-controlling interest

 

2,240

 

32

 

 

24,344

 

8,513

 

 

 

 

 

Basic EPS (p)

6

12.6

 

4.9

Diluted EPS (p)

6

12.2

 

4.7

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2019

 

 

Unaudited

30 June

 2019

 

Audited

31 December

2018

 

Unaudited

30 June

 2018

Assets

Note

£000

 

£000

 

£000

Cash and cash equivalents

 

77,748

 

92,001

 

34,741

Trade and other receivables

 

105,251

 

94,206

 

68,177

Portfolio investments - amortised cost

11

954,583

 

869,056

 

853,149

Portfolio investments - FVTPL

11

164,441

 

217,974

 

173,363

Portfolio investments - real estate inventories

11

47,925

 

-

 

-

Property, plant and equipment

 

29,150

 

7,761

 

9,248

Other intangible assets

 

41,904

 

44,264

 

42,865

Deferred tax asset

 

8,092

 

8,113

 

7,338

Goodwill

10

276,948

 

262,679

 

173,589

Total assets

 

1,706,042

 

1,596,054

 

1,362,470

Liabilities

 

 

 

 

 

 

Bank overdrafts

14

2,284

 

2,696

 

1,329

Revolving credit facility

14

214,338

 

242,121

 

108,239

Derivative liability

 

810

 

502

 

2,273

Trade and other payables

12

253,589

 

197,657

 

124,290

Current tax liability

 

10,901

 

7,915

 

3,466

Other borrowings

14

3,575

 

11,635

 

17,163

Asset-backed loans

14

72,651

 

-

 

-

Senior secured notes

14

925,016

 

926,340

 

915,669

Deferred tax liability

 

16,115

 

14,930

 

16,365

Total liabilities

 

1,499,279

 

1,403,796

 

1,188,794

Equity

 

 

 

 

 

 

Share capital

 

1,763

 

1,763

 

1,763

Share premium

 

347,436

 

347,436

 

347,436

Retained earnings

 

124,116

 

116,589

 

100,393

Hedging reserve

 

(641)

 

(584)

 

(718)

Other reserves

 

(274,180)

 

(273,547)

 

(275,360)

Total equity attributable to shareholders

 

198,494

 

191,657

 

173,514

Non-controlling interest

 

8,269

 

601

 

162

Total equity

 

206,763

 

192,258

 

173,676

Total equity and liabilities

 

1,706,042

 

1,596,054

 

1,362,470

Note - the balance sheet has been presented on a reducing liquidity basis, and prior periods have been represented accordingly on this basis.

The interim results were approved on 8 August 2019 by the board of directors and are signed on its behalf by:

 

Paul Cooper       Group chief financial officer       

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the period ended 30 June 2019

 

Ordinary
shares

Share

Premium

Retained

Earnings

Hedging

Reserve

Own share reserve

Translation

Reserve

Merger

Reserve

Total

Non-controlling interest

Total

 

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Balance at 1 January 2018

1,753

347,436

118,710

(343)

(3,291)

7,844

(276,961)

195,148

173

195,321

Impact of adopting IFRS 15

 

-

(231)

-

-

-

-

(231)

 

(231)

Impact of adopting IFRS 9

-

-

(14,000)

-

-

-

-

(14,000)

-

(14,000)

Balance post IFRS adjustments at 1 January 2018

1,753

347,436

104,479

(343)

(3,291)

7,844

(276,961)

180,917

173

181,090

Profit for the period

-

-

8,481

-

-

-

-

8,481

32

8,513

Exchange differences

-

-

-

-

-

(451)

-

(451)

-

(451)

Net fair value gains  on cash flow hedges

-

-

-

(473)

-

-

-

(473)

-

(473)

Tax on hedged items

-

-

-

98

-

-

-

98

-

98

Total comprehensive income for the period

-

-

8,481

(375)

-

(451)

-

7,655

32

7,687

Shares issued in the period

10

-

-

-

-

-

-

10

-

10

Repurchase of own shares

-

-

-

-

(2,501)

-

-

(2,501)

-

(2,501)

Share-based payments

-

-

1,589

-

-

-

-

1,589

-

1,589

Dividend paid

-

-

(14,156)

-

-

-

-

(14,156)

-

(14,156)

Dividend paid by NCI

-

-

-

-

-

-

-

-

(43)

(43)

Balance at 30 June 2018 (unaudited)

1,763

347,436

100,393

(718)

(5,792)

7,393

(276,961)

173,514

162

173,676

IFRS 15 opening adjustment

-

-

32

-

-

-

-

32

-

32

Profit/(loss) for the period

-

-

21,488

-

-

-

-

21,488

(32)

21,456

Exchange differences

-

-

-

-

-

3,023

-

3,023

-

3,023

Recycled to profit after tax

-

-

-

-

-

(1,202)

-

(1,202)

-

(1,202)

Net fair value losses on cash flow hedges

-

-

-

182

-

-

-

182

-

182

Tax on hedged items

-

-

-

(48)

-

-

-

(48)

-

(48)

Total comprehensive income/(loss) for the period

-

-

21,488

134

-

1,821

-

23,443

(32)

23,411

Repurchase of own shares

-

-

-

-

(8)

-

-

(8)

-

(8)

Share-based payments

-

-

1,678

-

-

-

-

1,678

-

1,678

Dividend paid

-

-

(7,002)

-

-

-

-

(7,002)

-

(7,002)

Non-controlling interest on acquisition

-

-

-

-

-

-

-

-

471

471

Balance at 31 December 2018

1,763

347,436

116,589

(584)

(5,800)

9,214

(276,961)

191,657

601

192,258

Impact of adopting IFRS 16

-

-

(947)

-

-

-

-

(947)

-

(947)

Balance post IFRS adjustments at 1 January 2019

1,763

347,436

115,642

(584)

(5,800)

9,214

(276,961)

190,710

601

191,311

Profit for the period

-

-

22,104

-

-

-

-

22,104

2,240

24,344

Exchange differences

-

-

-

-

-

(633)

-

(633)

-

(633)

Net fair value gains on cash flow hedges

-

-

-

(74)

-

-

-

(74)

-

(74)

Tax on hedged items

-

-

-

17

-

-

-

17

-

17

Total comprehensive income for the period

-

-

22,104

(57)

-

(633)

-

21,414

2,240

23,654

Non-controlling interest at acquisition

-

-

-

-

-

-

-

-

5,428

5,428

Share-based payments

-

-

1,528

-

-

-

-

1,528

-

1,528

Dividend paid

-

-

(15,158)

-

-

-

-

(15,158)

-

(15,158)

Balance at 30 June 2019 (unaudited)

1,763

347,436

124,116

(641)

(5,800)

8,581

(276,961)

198,494

8,269

206,763

                       
 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the period ended 30 June 2019

 

 

Unaudited period ended

30 June 2019

 

Unaudited period ended

30 June 2018

 

Note

£000

 

£000

 

 

 

 

 

Net cash used in operating activities

16

(21,939)

 

(39,331)

Investing activities

 

 

 

 

Purchase of property, plant and equipment

 

(35)

 

(472)

Purchase of intangible assets

 

(3,146)

 

(4,881)

Proceeds from disposal of intangible assets

 

4

 

-

Acquisition of subsidiary, net of cash acquired

15

(2,850)

 

(12,995)

Acquisition of subsidiary, deferred consideration

 

(7,689)

 

(10,712)

Net cash used in investing activities

 

(13,716)

 

(29,060)

Financing activities

 

 

 

 

Repayment of RCF and other borrowings

 

(35,229)

 

(37,858)

Proceeds from ABS issuance

 

74,312

 

-

Proceeds from senior notes (net of fees)

 

(173)

 

345,847

Redemption of senior notes

 

-

 

(203,467)

Early redemption of senior notes costs

 

-

 

(13,623)

Repayment of interest on senior notes

 

(17,938)

 

(18,142)

Other interest paid

 

(4,226)

 

(2,682)

Bank interest received

 

14

 

6

Increase in non-controlling interest

 

5,428

 

-

Repurchase of own shares

 

-

 

(2,501)

Issued share capital

 

-

 

10

Settlement of deferred consideration interest

 

-

 

(257)

Net cash flow generated by financing activities

 

22,188

 

67,333

Net increase in cash and cash equivalents

 

(13,467)

 

(1,058)

Cash and cash equivalents at beginning of period

 

92,001

 

35,943

Effect of exchange rates on cash and cash equivalents

 

(786)

 

(144)

Cash and cash equivalents at end of period

 

77,748

 

34,741

 

 

 

Notes to the condensed consolidated interim financial statements

1.         General Information

The Company is incorporated in England and Wales. These condensed consolidated interim financial statements (interim financial statements) of the Company as at and for the six months ended 30 June 2019 comprise the Company and its subsidiaries (together referred to as "the Group"). The Group's principal activity is to identify, acquire and manage secured and unsecured defaulted and non-core loan portfolios and real estate assets from financial institutions, such as banks and credit card companies, as well as retail chains, student loans, motor credit, telecommunications firms and utility companies. In addition, the Group enters into contractual servicing agreements with other third parties to collect upon the receivables, to administer and disburse the proceeds of the receivables.

2.         Basis of preparation

These interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. They do not include all 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 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 Guidance and Transparency Rules of the Financial Conduct Authority, the interim financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated annual report for the year ended 31 December 2018, other than that this is the first set of the Group's financial statements where IFRS 16 has been applied. Changes to significant accounting policies are described in note 3.

The comparative figures for the financial year ended 31 December 2018 are not the complete version of the Company's statutory accounts for that financial year. The consolidated financial statements of the Group as at and 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 or online at www.arrowglobalir.net. Those accounts have been reported on by the Company's auditor and delivered to the registrar of companies. The report of the auditor:

(i)    was unqualified;

(ii)   did not include a reference to any matters to which the auditor 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 interim 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 value of portfolio investment assets and certain liability balances.

These interim financial statements were approved by the board of directors on 8 August 2019.

Going concern

The directors have undertaken a thorough review of forecast cash flow models and scenarios for a period in excess of twelve months from the date of approval of these accounts. Following this review, and in the light of current cash headroom of £170.0 million (comprising current cash balances plus total facility headroom), no bond maturities until 2024 and information available about future risks and uncertainties, they have concluded that it is appropriate to prepare the Group interim financial statements on a going concern basis.

 

Notes to the condensed consolidated interim financial statements (continued)

3.         Adoption of new standards

On the 1 January 2019 the Group adopted IFRS 16. This resulted in some changes to key accounting policies that are described in detail below.

3.1          IFRS 16 'Leases'

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.

As lessee, under IFRS 16, in respect of leased properties previously accounted for as operating leases the Group now recognises a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use. Assets and liabilities arising from a lease are initially measured on a present value basis. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the Group's incremental borrowing rate. Lease payments are allocated between the liability and finance cost.

The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Payments associated with leases with a lease term of twelve months or less and leases of low-value assets are recognised as an expense in profit or loss on a straight-line basis.

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.

3.2          Standards not yet effective

A number of other new standards and amendments to standards are effective for annual periods beginning after 1 January 2020 and earlier application is permitted; however, the Group has not early adopted them in preparing these condensed consolidated financial statements.

4.         Accounting policies, critical accounting judgements and estimates

In applying the Group's accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

In preparing the interim financial statements, the accounting policies, areas of judgement, estimation and assumption were the same as those applied in the consolidated financial statements of the Group as at and for the year ended 31 December 2018, other than for those mentioned in note 3 above. In particular, significant judgement is required in the use of estimates and assumptions in the valuation of the portfolio assets.

 

 

 

4.1       Portfolio investments - real estate

The Group now holds a number of material real estate portfolio investments, which are being held for either immediate sale, or being developed with a view to sell immediately once such development work is completed. As such, the Group has assessed it should account for such investments under 'IAS 2 - Inventories'.

Under IAS 2, these investments are held at their original cost, plus any subsequent capital expenditure, and are not subject to revaluations on a periodic basis. Such assets will be assessed for impairment at each reporting date, but any gain on these investments will not be recognised until they are sold and derecognised from the balance sheet. 

 

 

 

 

 Notes to the condensed consolidated interim financial statements (continued)

 

 

5.            Segmental reporting

 

Period ended 30 June 2019

 

InvestmentBusiness

Asset management and servicing Business

Group Functions

Intra segment elimination

Adjusting items

 

Total
period ended
30 June 2019

 

£000

£000

£000

£000

 

 

£000

Total income

131,852

68,338

202

(22,699)

-

 

177,693

Collection activity costs

(45,030)

(31,686)

-

22,699

-

 

(54,017)

Gross margin

86,822

36,652

202

-

-

 

123,676

Gross margin %

66%

54%

 

 

 

 

70%

Other operating expenses excluding depreciation, amortisation and forex

(12,694)

(21,263)

(17,481)

-

(3,076)

 

(54,514)

EBITDA

74,128

15,389

(17,279)

-

(3,076)

 

69,162

EBITDA margin %

56%

23%

-

-

-

 

-

Depreciation, amortisation and forex

-

-

(10,139)

-

-

 

(10,139)

Operating profit

74,128

15,389

(27,418)

-

(3,076)

 

59,023

Net finance costs

-

-

(26,510)

-

-

 

(26,510)

Profit before tax

74,128

15,389

(53,928)

-

(3,076)

 

32,513

 

 

 

 

 

 

 

 

 

Period ended 30 June 2018

 

InvestmentBusiness

Asset management and servicing Business

Group Functions

Intra segment elimination

Adjusting items

 

Total
period ended
30 June 2019

 

£000

£000

£000

£000

 

 

£000

Total income

125,532

59,693

-

(18,341)

-

 

166,884

Collection activity costs

(47,834)

(29,759)

-

18,341

(688)

 

(59,940)

Gross margin

77,698

29,934

-

-

(688)

 

106,944

Gross margin %

62%

50%

 

 

 

 

64%

Other operating expenses excluding depreciation, amortisation and forex

(7,960)

(18,720)

(16,242)

-

(5,224)

 

(48,146)

EBITDA

69,738

11,214

(16,242)

-

(5,912)

 

58,798

EBITDA margin %

56%

19%

 

 

 

 

 

Depreciation, amortisation and forex

-

-

(6,599)

-

-

 

(6,599)

Operating profit

69,738

11,214

(22,841)

-

(5,912)

 

52,199

Net finance costs

-

-

(22,794)

-

-

 

(22,794)

Refinancing costs

-

-

-

-

(18,658)

 

(18,658)

Profit before tax

69,738

11,214

(45,635)

-

(24,570)

 

10,747

 

Other operating expense inclusive of depreciation, amortisation and forex totals £64,653,000 (H1 2018: £54,745,000). See page 33 for further detail of adjusting items as part of the reconciliation of reported to underlying results.
 

Notes to the condensed consolidated interim financial statements (continued)

6.            Earnings per share

 

Period ended

30 June 2019

 

Period ended

30 June 2018

 

£000

 

£000

Basic and diluted earnings per share

 

 

 

Profit for the period attributable to equity shareholders

22,104

 

8,481

 

 

 

 

Weighted average ordinary shares

175,545

 

174,811

Potential exercise of share options

5,684

 

4,015

Weighted average ordinary shares (diluted)

181,229

 

178,826

 

 

 

 

Basic earnings per share (p)

12.6

 

4.9

Diluted earnings per share (p)

12.2

 

4.7

 

7.         Dividend

A dividend of £15,157,809.11 has been paid on 12 July 2019, being the 2018 final dividend of 8.7p per share approved by the shareholders at the 2019 annual general meeting. This amount was included as a liability on the balance sheet in these interim results.

The 2019 interim dividend will be 4.4p per share (H1 2018: 4.0p), being 50% of the 2018 final dividend, in accordance with our policy. The dividend is payable on 11 October 2019 to shareholders who are on the register as at 6 September 2019. The ex-dividend date is 5 September 2019. Shareholders will again have the opportunity to elect to reinvest their cash dividend and purchase existing shares in the Company through a dividend reinvestment plan, with an election date of 20 September 2019. The interim dividend has not been recognised as a liability in these financial statements.

8.         Tax

The Group's effective consolidated tax rate for the six months ended 30 June 2019 was 25.1% (30 June 2018: 20.8%). The current period effective tax rate is reflective of the applicable corporate tax rate for the full financial year.

 

 

Notes to the condensed consolidated interim financial statements (continued)

9.         Other operating expenses

 

Period ended

30 June 2019

 

Period ended

30 June 2018

 

£000

 

£000

Staff costs

29,161

 

24,064

Other staff related costs

4,917

 

3,385

Premises

2,050

 

3,644

IT

6,733

 

5,452

Depreciation and amortisation

9,753

 

6,625

Net foreign exchange losses/(gains)

386

 

(26)

Other operating expenses

11,653

 

11,601

 

64,653

 

54,745

10.       Goodwill

Cost

£000

At 30 June 2018

175,898

Goodwill on acquisition of subsidiary

86,940

Exchange rate differences

2,150

At 31 December 2018

264,988

Goodwill on acquisition of subsidiaries

15,001

Exchange rate differences

(732)

At 30 June 2019

279,257

Impairment:

 

At 30 June 2018, 31 December 2018 and 30 June 2019

2,309

Net book value:

 

At 30 June 2019

276,948

At 31 December 2018

262,679

At 30 June 2018

173,589

The goodwill on acquisition of subsidiaries in the current period relates to £14,519,000 from the acquisition of Drydens Limited ("Drydens"). For more details on the Drydens acquisition see note 15. The remaining movement relates to prior period acquisitions.

 

 

 

 

Notes to the condensed consolidated interim financial statements (continued)

11.       Portfolio investments

The movements in portfolios investments were as follows:

 

Period ended 30 June 2019

 

Amortised cost

 

FVTPL

 

Real Estate

Inventories

 

Total

 

£000

 

£000

 

£000

 

£000

As at the period brought forward

869,056

 

217,974

 

-

 

1,087,030

Portfolios purchased during the period

129,527

 

11,139

 

24,918

 

165,584

Transfer between categories

22,897

 

(44,021)

 

21,124

 

-

Collections in the period

(161,800)

 

(40,339)

 

-

 

(202,139)

Income from portfolio investments at amortised cost

95,007

 

-

 

-

 

95,007

Fair value gain on portfolios at FVTPL

-

 

21,124

 

-

 

21,124

Net impairment gain

15,721

 

-

 

-

 

15,721

Exchange and other movements

(2,664)

 

(1,436)

 

1,883

 

(2,217)

Portfolio restructure

(13,161)

 

-

 

-

 

(13,161)

As at the period end

954,583

 

164,441

 

47,925

 

1,166,949

 

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 delevered position, and hence change the nature of the holding whist extinguishing related liabilities.

Year ended 31 December 2018

 

Amortised cost

 

FVTPL

 

Real Estate

Inventories

 

Total

 

£000

 

£000

 

£000

 

£000

As at the period brought forward

920,578

 

30,889

 

-

 

951,467

Impact of adopting IFRS 9 at 1 January 2018

(93,734)

 

76,734

 

-

 

(17,000)

Brought forward after impact of IFRS 9 opening adjustment

826,844

 

107,623

 

-

 

934,467

Portfolios purchased during the period

169,514

 

93,836

 

-

 

263,350

Portfolio additions from acquired entities

3,339

 

8,514

 

-

 

11,853

Collections in the period

(387,699)

 

(23,889)

 

-

 

(411,588)

Income from portfolio investments

188,862

 

5,070

 

-

 

193,932

Fair value gain on portfolios at FVTPL

-

 

24,745

 

-

 

24,745

Net impairment gain

50,727

 

-

 

-

 

50,727

Exchange and other movements

17,469

 

2,075

 

-

 

19,544

As at the period end

 

217,974

 

-

 

1,087,030

 

 

 

Notes to the condensed consolidated interim financial statements (continued)

 

Period ended 30 June 2018                                                   

 

Amortised cost

 

FVTPL

 

Real Estate

Inventories

 

Total

 

£000

 

£000

 

£000

 

£000

As at the period brought forward

920,578

 

30,889

 

-

 

951,467

Impact of adopting IFRS 9 at 1 January 2018

(93,734)

 

76,734

 

-

 

(17,000)

Brought forward after impact of IFRS 9 opening adjustment

826,844

 

107,623

 

-

 

934,467

Portfolios purchased during the period

81,628

 

64,678

 

-

 

146,306

Collections in the period

(172,944)

 

(5,066)

 

-

 

(178,010)

Income from portfolio investments at amortised cost

96,143

 

-

 

-

 

96,143

Fair value gain on portfolios at FVTPL

-

 

6,108

 

-

 

6,108

Net impairment gain

23,281

 

-

 

-

 

23,281

Exchange and other movements

(1,803)

 

20

 

-

 

(1,783)

As at the period end

 

173,363

 

-

 

1,026,512

 

The estimated future cash flows generated by portfolio investments are the key estimates/judgements in these financial statements. Flexing the expected future gross cash flows by -1/+1% would impact the closing carrying value of the portfolio investments as at 30 June 2019 by £11,208,000 (31 December 2018: £10,870,000, 30 June 2018: £9,407,000). Note that this sensitivity applies only to 'Amortised Cost' and 'FVTPL' portfolio investments, as this is not a critical estimate for  Real Estate portfolio assets.

12.       Trade and other payables

 

 

30 June

2019

 

31 December

2018

 

30 June

2018

 

 

£000

 

£000

 

£000

Trade payables

17,683

 

27,806

 

16,943

Deferred consideration on acquisition of subsidiaries

57,461

 

59,922

 

16,508

Deferred consideration on portfolio investments

40,092

 

12,031

 

37,179

Taxation and social security

219

 

163

 

239

Dividends payable

15,158

 

-

 

14,156

Other liabilities and accruals

96,972

 

97,735

 

39,265

Lease Liability

26,004

 

-

 

-

 

253,589

 

197,657

 

124,290

Total payables

 

 

 

 

 

Amount due for payment within 12 months

176,713

 

145,181

 

101,906

Amount due for payment after 12 months

76,876

 

52,476

 

22,384

 

253,589

 

197,657

 

124,290

The directors consider that the carrying amounts of the current trade and other payables approximate to their fair value on the basis that the balances are short term in nature. The non-current deferred consideration has also been calculated at fair value.

 

Notes to the condensed consolidated interim financial statements (continued)

 

13.       Related party transactions

Key management are defined as permanent members of the executive committee. Compensation paid in relation to the financial period was as follows:

 

30 June

 2019

 

31 December

2018

 

30 June

2018

Remuneration

£000

 

£000

 

£000

Salaries and performance related bonus

1,199

 

3,836

 

1,152

Pension-related benefits

108

 

214

 

103

 

1,307

 

4,050

 

1,255

Executive committee members in the period 7 members (2018: 7 members).

During the period there were no related party transactions, with the exception of those eliminated on consolidation, other than discussed above.

14.       Borrowings and facilities

 

30 June

2019

 

31 December

2018

 

30 June

2018

Secured borrowing at amortised cost

£000

 

£000

 

£000

Senior secured notes (net of transaction fees of £13.9m, 31 December 2018: £14.8m, 30 June 2018: £15.8m)

919,530

 

920,798

 

910,140

Revolving credit facility (net of transaction fees of £4.1m, 31 December 2018: £3.5m, 30 June 2018: £3.5m)

214,338

 

242,121

 

108,239

Asset backed loan (net of transaction fees of £1.7m)

72,651

 

-

 

-

Senior secured notes interest

5,486

 

5,542

 

5,529

Bank overdrafts

2,284

 

2,696

 

1,329

Finance lease

-

 

-

 

1,753

Other borrowings

3,575

 

11,635

 

15,410

 

1,217,864

 

1,182,792

 

1,042,400

Total borrowings

 

 

 

 

 

Amount due for settlement within 12 months

232,586

 

259,045

 

132,260

Amount due for settlement after 12 months

985,278

 

923,747

 

910,140

 

1,217,864

 

1,182,792

 

1,042,400

 

Asset Backed Securitisation

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

Revolving credit facility

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

 

 

Notes to the condensed consolidated interim financial statements (continued)

15.       Acquisitions of subsidiary undertakings

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. The total undiscounted consideration for the acquisition is £11,115,000 including deferred and contingent consideration.

Contingent consideration is payable at various times within two years from completion of the transaction upon the satisfaction of three mutually exclusive conditions which are based upon the business achieving certain targets around future volumes and the successful migration of Group account.

Effect of the acquisition

The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below:

 

Total

 

£000

Property, plant and equipment

954

Customer intangible

688

Deferred tax asset

146

Cash and cash equivalents

15

Trade and other receivables

1,983

Trade and other payables

(723)

Deferred tax liability

(131)

Current tax liability

(277)

Provisions

(59)

Lease liability

(760)

Loan liability

(6,122)

Total identifiable net liabilities

(4,286)

Goodwill on acquisition         

14,519

 

10,233

 

 

Consideration:

 

Cash

2,865

Deferred consideration

3,106

Contingent consideration

4,262

 

10,233

Cash impact of acquisition in the period:

 

Cash consideration

2,865

Cash and cash equivalents acquired

(15)

 

2,850

An intangible asset of £688,000 has been recognised at acquisition, being the fair value after appropriate discounting, of expected cash flows arising from existing customer relationships.

Goodwill of £14,519,000 was created as a result of this acquisition. The primary reason for the acquisition was to broaden the Group's range of servicing capabilities in the UK.

Notes to the condensed consolidated interim financial statements (continued)

15.       Acquisitions of subsidiary undertakings (continued)

In the period from acquisition to 30 June 2019, Drydens contributed income of £1,343,000 and profit after tax contribution of £400,000 to the consolidated results for the period. If the acquisition had occurred on 1 January 2019, Group total income would have been higher by an estimated £1,167,000 and profit after tax would have been lower by an estimated £24,381.

16.       Notes to the cash flow statement

 

 

Period ended

30 June

2019

 

Period ended

30 June

2018

Cash flows from operating activities

£000

 

£000

Profit before tax

32,513

 

10,747

Adjusted for:

 

 

 

Collections in the period

202,139

 

178,010

Income from portfolio investments

(95,007)

 

(96,143)

Fair value gain on portfolios

(21,124)

 

(6,108)

Net impairment gain

(15,721)

 

(23,281)

Depreciation and amortisation

9,753

 

6,625

Interest payable

26,510

 

41,452

Foreign exchange losses/(gains)

386

 

(26)

Equity settled share-based payment expenses

1,528

 

1,589

Operating cash flows before movement in working capital

140,977

 

112,865

Increase in other receivables

(10,515)

 

(8,893)

Increase in trade and other payables

16,711

 

8,210

Cash generated by operations

147,173

 

112,182

Income taxes and overseas taxation payable

(3,528)

 

(5,207)

Net cash flow from operating activities before purchases of loan portfolios

143,645

 

106,975

Purchases of portfolio investments

(165,584)

 

(146,306)

Net cash used in operating activities

(21,939)

 

(39,331)

17.       Share based payments

The following awards were made in 2019.

 

Share incentive plan scheme (SIP)

In 2019, the Company offered to all UK employees the opportunity to participate in the SIP, where the Company gives the participating employees one matching share for each partnership share acquired on behalf of the employee using the participating employees' gross salaries. The shares vest at the end of three years on a rolling basis as they are purchased, with employees required to stay in employment for the vesting period to receive the shares.

 

 

 

Notes to the condensed consolidated interim financial statements (continued)

 

Long-term incentive plan (LTIP)

In 2019, nil-cost share options and conditional awards were granted to eligible employees based on a maximum of 200% of base salary. The LTIP awards vest at the end of three years, subject to the achievement of performance conditions. On the same date, tax qualifying options were granted as part of the LTIP awards ("CSOP options") to eligible UK employees.

 

Each CSOP option is subject to the same performance targets as apply to the nil-cost option part of the awards. If a CSOP option is exercised at a gain, the number of shares that may be delivered under the above associated nil-cost option under the LTIP will be reduced at exercise by the same value to ensure that the total pre-tax value of the original LTIP award delivered to the participant is not increased by the grant of the CSOP option.

 

The 2019 awards do not include the right to receive a dividend equivalent.

 

2019 LTIP criteria

 

For each eligible employee, 50% of the LTIP awards are subject to ROE criteria and vests as follows:

Performance condition

Percentage vesting

Less than 24% average ROE over the three performance years

0%

24% average ROE over the three performance years (threshold performance)

25%

30% average ROE over the three performance years (maximum performance)

100%

Between 24% and 30% average ROE over the three performance years

Between the threshold performance and maximum performance on a straight-line basis

 

For each eligible employee, 25% of the LTIP awards are subject to shareholder return criteria, being share price growth plus the value of dividend. The Group is compared against the FTSE 350 index, with the LTIP awards vesting as follows:

Performance condition

Percentage vesting

Below median ranking

0%

Median ranking (top 50%) (threshold performance)

25%

Upper quartile ranking (top 25%) (maximum performance)

100%

Between top 50% and top 25% ranking

Between the threshold performance and maximum performance on a straight-line basis

 

For each eligible employee, 25% of the LTIP awards are subject to FCF performance conditions and vests as follows:

Performance condition

Percentage vesting

Below £715 million cumulative FCF over the three performance years

0%

£715 million cumulative FCF over the three performance years (threshold performance)

25%

£757 million cumulative FCF over the three performance years (maximum performance)

100%

Between £715 million and £757 million cumulative FCF over the three performance years

Between the threshold performance and maximum performance on a straight-line basis

 

Notes to the condensed consolidated interim financial statements (continued)

17.       Share based payments (continued)

Restricted share award and deferred bonus share awards

A restricted share award was made in May 2019, which vests on 10 May 2021. Deferred share bonus awards were made in March 2019 to current directors and non-executive directors, which vest on 26 March 2022. All are subject to continuity of employment.

 

Grant information for the period

The terms and conditions of the grants during the period are as follows:

 

Method of settlement accounting

Number of instruments

Vesting period

Contractual life of options

Grant date/employees entitled

 

 

 

 

Equity settled award - LTIP

Equity

2,107,612

3 years

20 June 2022

Equity settled award - restricted

Equity

359,934

2 years

10 May 2021

Equity settled award - SIP

Equity

55,255

3 years rolling

May - June 2022

Equity settled award - Deferred

Equity

132,737

3 years

26 March 2022

 

The weighted average fair value of options granted during the period was £2.15. The majority of options granted to date are nil cost options.

 

Grant information for the period (continued)

The fair value of equity settled share-based payments has been estimated as at date of grant using the Monte Carlo model.

The inputs to the models used to determine the valuations fell within the following ranges:

 

Grant date

20 June

2019

10 May

2019

May

2019

26 March

2019

Expected life of options (years)

3

2

3

3

Share prices at date of grant

£2.31

£1.94

£2.04

£2.17

Expected share price volatility (%)

43.1%

43.9%

n/a

42.8%

Risk free interest rate (%)

0.5%

0.7%

n/a

0.7%

The total expenses recognised for the period arising from the above share-based payments are as follows:

 

 

 

 

30 June

2019

£000

Equity settled share-based payment expense spread across vesting period

 

1,528

Total equity settled share-based payment expense recognised in the statement of comprehensive income

1,528

 

The basis of measures used to measure executive remuneration can be seen in the Annual Report & Accounts 2018 on the Company website at www.arrowglobalir.net.

 

 

Notes to the condensed consolidated interim financial statements (continued)

18.       Financial instruments

Fair value estimation

The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other valuation techniques.

For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

Valuation models

The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements.

Financial instruments measured at fair value - fair value hierarchy

The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the balance sheet.

Level 2

30 June

2019

 

31 December

2018

 

30 June

2018

 

£000

 

£000

 

£000

Derivative assets:

 

 

 

 

 

Foreign currency contracts

-

 

294

 

9

Derivative liabilities:

 

 

 

 

 

Foreign currency contracts

(49)

 

-

 

(1,552)

Interest rate swaps

(761)

 

(796)

 

(730)

 

(810)

 

(502)

 

(2,273)

 

Level 3

 

 

 

 

 

Assets:

 

 

 

 

 

Portfolio investments

164,441

 

217,974

 

173,363

 

164,441

 

217,974

 

173,363

 

 

The fair value of derivative financial instruments has been calculated by discounting expected future cash flows using interest rate yield curves and forward foreign exchange rates prevailing at 30 June 2019.

 

The fair value of portfolio investments has been calculated using a discounted cash flow model. The three main influencing factors in calculating this are:

(i)            estimated future cash flows, derived from management forecasts

(ii)           the application of an appropriate exit multiple

(iii)          discounting using a rate appropriate to the investment and the anticipated rate of return

 

Notes to the condensed consolidated interim financial statements (continued)

18.       Financial instruments (continued)

Financial instruments not measured at fair value - fair value hierarchy not measured at fair value

The following table analyses financial instruments not measured at fair value at the reporting date, by the level in the fair value hierarchy into which the measurement is categorised. The amounts are based on the values recognised in the balance sheet. All of the Group's financial instruments not measured at fair value fall into hierarchy level 3.

Level 3

30 June

2019

 

31 December

 2018

 

30 June

2018

 

£000

 

£000

 

£000

Assets:

 

 

 

 

 

Portfolio investments

954,583

 

869,056

 

853,149

 

954,583

 

869,056

 

853,149

 

There have been no transfers in or out of any hierarchy level in the period. A reconciliation of the opening to closing balances for the period of the portfolio investments can be seen in note 11.

 

 

Book value

Fair Value

Book value

Fair Value

Book value

Fair Value

 

30 June

2019

30 June

2019

31 December

 2018

31 December

 2018

30 June

2018

30 June

2018

 

£000

£000

£000

£000

£000

£000

Financial Assets:

 

 

 

 

 

Portfolio investments (excluding inventories)

1,119,024

1,132,377

1,087,030

1,100,001

1,038,761

Cash and cash equivalents

77,748

77,748

92,001

92,001

34,741

Other receivables

105,251

105,251

94,206

94,206

68,177

68,177

 

1,302,023

1,315,376

1,273,237

1,286,208

1,129,430

1,141,679

               

 

 

Book value

Fair Value

Book value

Fair Value

Book value

Fair Value

 

30 June

2019

30 June

2019

31 December

 2018

31 December

 2018

30 June

2018

30 June

2018

 

£000

£000

£000

£000

£000

£000

Financial Liabilities:

 

 

 

 

 

Bank overdrafts

2,284

2,284

2,696

2,696

1,329

Revolving credit facility

214,338

214,338

242,121

242,121

108,239

Derivative liability

810

810

502

502

2,273

Trade and other payables

253,589

253,589

197,657

197,657

124,290

Current tax liability

10,901

10,901

7,915

7,915

3,466

Other borrowings

3,575

3,575

11,635

11,635

17,163

Asset-backed loans

72,651

74,312

-

-

-

Senior secured notes

925,016

909,483

926,340

864,835

879,596

 

1,483,164

1,469,292

1,388,866

1,327,361

1,172,429

1,136,356

               

Additional Information (Unaudited)

'Underlying profit' is considered               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 of reported to underlying costs

 

Period ended 30 June 2019

 

Period ended 30 June 2018

 

Reported

Adjustments

Underlying

 

Reported

Adjustments

Underlying

 

£000

£000

£000

 

£000

£000

£000

Continuing operations

 

 

 

 

 

 

 

Income

177,693

-

177,693

 

166,884

-

166,884

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Collection activity costs

(54,017)

-

(54,017)

 

(59,940)

688

(59,252)

Other operating expenses

(64,653)

3,076

(61,577)

 

(54,745)

5,224

(49,521)

Total operating expenses

(118,670)

3,076

(115,594)

 

(114,685)

5,912

(108,773)

Operating profit

59,023

3,076

62,099

 

52,199

5,912

58,111

Net finance costs

(26,510)

-

(26,510)

 

(41,452)

18,658

(22,794)

Underlying profit before tax

32,513

3,076

35,589

 

10,747

24,570

35,317

Taxation charge on underlying activities

(8,169)

(373)

(8,542)

 

(2,234)

(4,642)

(6,876)

Underlying profit after tax

24,344

2,703

27,047

 

8,513

19,928

28,441

Non-controlling interest

(2,240)

-

(2,240)

 

(32)

-

(32)

Underlying profit attributable to owners of the Company

22,104

2,703

24,807

 

8,481

19,928

28,409

 

 

 

 

 

 

 

 

Underlying Basic EPS (p)

 

 

14.1

 

 

 

16.3

Underlying effective tax rate

 

 

24.0%

 

 

 

19.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusting items in the period relate to business acquisition related costs of £1.5m, costs related to the expansion of the Group fund management business of £0.4m and other costs of £1.1 million related to the Group's simplification programme.

Prior period adjusting items relate to 'One Arrow' costs of £3.6 million and business acquisition and other costs of £2.3 million. Financing costs adjusting items in the prior period relate to costs associated with restructuring the Group's long-term financing.
 

Additional Information (Unaudited)

Portfolio investments

We provide a reconciliation between IFRS and cash measures. The table below looks at the movement in our purchased 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 IFRS results.

Further detail of how we assess performance through IFRS and cash measures can be seen in the strategic report of the Annual Report & Accounts 2018 on the Company website at www.arrowglobalir.net.

Movement in purchased portfolios under IFRS reconciled to cash ERC

 

IFRS

 

ERC 84-month

 

ERC 120-month

 

 

£000

 

£000

 

£000

 

Brought forward

1,087,030

 

1,634,786

 

1,972,130

ERC brought forward

Portfolios acquired during the period 1

165,584

 

293,747

 

318,146

ERC acquired during the period

Collections in the period 2

(202,139)

 

(202,139)

 

(202,139)

Collections in the period

Income from portfolio investments at amortised cost 3

95,007

 

-

 

-

 

Fair value gain on portfolio investments at FVTPL 4

21,124

 

-

 

-

 

Net impairment gain 5

15,721

 

-

 

-

 

Exchange and other movements

(2,217)

 

-

 

-

 

Restructure

(13,161)

 

-

 

-

 

 

 

 

19,607

 

(11,316)

ERC roll forward and reforecast 6

 

 

 

1,746,001

 

2,076,821

ERC carried forward

Effect of discounting 7

 

 

(579,052)

 

 

 

Total

1,166,949

 

1,166,949

 

 

 

               

 

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

2 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, collections, updated ERC forecast, disposals and any FX impacts. See 8 in the reconciliation of profit after tax to the cash result on page 35 for more detail on total income

4 Fair value gain on portfolio investments at FVTPL represents net increases to carrying values, discounted at the market EIR rate, of portfolio investments held at FVTPL as a result of reassessments to their estimated future cash flows

5 Net impairment gain 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 collections. It takes account of updated information on specific portfolios, the latest exchange rate and rolls forward the 84-month forecast collection period

7 Under IFRS, the carrying value of portfolio investments 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

 

 

 

Additional Information (Unaudited)

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

Reconciliation of profit after tax to the cash result

Income

Reported profit

Adjusting items 11

Underlying profit

Other items

Cash Result

 

 

£000

£000

£000

£000

£000

 

Income from portfolio investments

95,007

-

95,007

107,132

202,139

Collections in the period 2

Fair value gains portfolio investments at FVTPL

21,124

-

21,124

(21,124)

-

 

Impairment gains on portfolio investments at amortised cost

15,721

-

15,721

(15,721)

-

 

Income from asset management and servicing

45,639

-

45,639

-

45,639

Income from asset management and servicing

Other income

202

-

202

-

202

 

Total income 8

177,693

-

177,693

70,287

247,980

 

Total operating expenses

(118,670)

3,076

(115,594)

11,7409

(103,854)

Cash operating expenses

Operating profit

59,023

3,076

62,099

82,027

144,12612

 

Net financing costs

(26,510)

-

(26,510)

4,35910

(22,151)

 

Profit before tax

32,513

3,076

35,589

86,386

121,975

 

Taxation charge on ordinary activities

(8,169)

(373)

(8,542)

5,013

(3,529)

 

Profit after tax

24,344

2,703

27,047

91,399

118,446

 

 

 

 

 

 

(3,181)

Capital expenditure

 

 

 

 

 

(85,455)

Replacement rate 13

 

 

 

 

 

29,810

Cash result

8 Total income is largely derived from Income from portfolio investments as explained in 3 plus 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 purchase loan portfolios arising from collections which are not allocated to income. Amortisation plus income from purchase loan portfolios equates to core collections

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

10 Non-cash amortisation of fees and interest

11 The cash result is viewed on an underlying basis which excludes certain items. See reconciliation of underlying costs on page 33. These items have been excluded to provide a more comparable basis for assessing the Group's performance between financial periods

12 This is the adjusted 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 36 for detailed reconciliations of adjusted EBITDA

13 Replacement rate is the rate of portfolio investments purchases, at our target portfolio returns, required over the next 12 months to maintain the 84-month ERC as at 30 June 2019

 

 

 

Additional Information (Unaudited)

Adjusted EBITDA

Reconciliation of net cash flow to adjusted EBITDA

30 June

2019

£000

 

30 June

2018

£000

Net cash flow used in operating activities

(21,939)

 

(39,331)

Purchases of loan portfolios

165,584

 

146,306

Income taxes paid

3,528

 

5,207

Working capital adjustments

(6,196)

 

683

Amortisation of acquisition and bank facility fees

73

 

137

Adjusting items

3,076

 

5,912

Adjusted EBITDA

144,126

 

118,914

Reconciliation of core collections to adjusted EBITDA

 

 

 

Income from loan portfolios including revaluations

131,852

 

125,532

Portfolio amortisation

70,287

 

52,478

Core collections (includes proceeds from disposal of portfolio investments)

202,139

 

178,010

Other income

45,841

 

41,352

Operating expenses

(118,670)

 

(114,685)

Depreciation and amortisation

9,753

 

6,625

Foreign exchange losses/(gains)

386

 

(26)

Amortisation of acquisition and bank facility fees

73

 

137

Share based payments

1,528

 

1,589

Adjusting operating expenses

3,076

 

5,912

Adjusted EBITDA

144,126

 

118,914

Reconciliation of operating profit to adjusted EBITDA

 

 

 

Profit after tax

24,344

 

8,513

Underlying net finance costs

26,510

 

22,794

Taxation charge on ordinary activities

8,169

 

2,234

Adjusting finance costs

-

 

18,658

Operating profit

59,023

 

52,199

Portfolio amortisation

70,287

 

52,478

Depreciation and amortisation

9,753

 

6,625

Foreign exchange losses/(gains)

386

 

(26)

Amortisation of acquisition and bank facility fees

73

 

137

Share-based payments

1,528

 

1,589

Adjusting operating expenses

3,076

 

5,912

Adjusted EBITDA

144,126

 

118,914

 

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.

'Average net assets' is calculated as the average quarterly net assets from H1 2018 to H1 2019 as shown in the quarterly and half yearly statements.

'AMS' means asset management and servicing.

'Carried interest' is a share of the profits realised from a managed fund's investments after the hurdle rate has been reached.

'Cash interest cover' represents interest on senior secured notes, utilisation and non-utilisation revolving credit facility fees to adjusted EBITDA.

'Cash result' represents current cash generation on a sustainable (keeping balance sheet size constant) basis and is calculated as adjusted EBITDA less cash interest, income taxes and overseas taxation paid, purchase of property, plant and equipment, purchase of intangible assets and average replacement rate.

'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.

'Cost-to-collect ratio' is the ratio of collection activity costs to core 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.

'DSBP' means the Arrow Global deferred share bonus plan.

'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 84-month 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 earning 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).

'ERC Rollover' 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.

 

Glossary (continued)

'Existing Portfolios' or 'purchased loan portfolios' or 'portfolio investments' are on the Group's balance sheet and represent all debt and real estate portfolios that the Group owns at the relevant point in time. A portfolio comprises a group of customer accounts or other assets purchased in a single transaction.

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

'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 2018.

'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.

 

30 June

2019

 

£000

Third party AMS income

45,639

Intra-Group AMS income

22,699

Gross AMS income

68,338

 

'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.

 

30 June

2019

 

£000

Third party AMS income

45,639

Intra-Group AMS income

22,699

Gross AMS income

68,338

Investment Business income

131,852

Other income

202

Gross income

200,392

 

'Gross money multiple' means core 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.

'Headroom' is the undrawn amount of a borrowing facility

 

Glossary (continued)

'Hedging reserve' comprises the net cumulative fair value adjustments on the derivative contracts used in the Group's hedging activities which are deemed to be effective.

'H1' means half year being the first six months of the year.

'IFRS' means EU adopted international financial reporting standards.

'Income from asset management and servicing' includes commission income, debt collection, due diligence, real estate management and advisory fees.

'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.

'IPO' means initial public offering.

'IRR' means internal rate of return.

'JAWS' represents the rate at which income growth has exceeded expenses growth.

'Leverage' is secured net debt to LTM Adjusted EBITDA.

'Loan to Value ratio' or 'LTV ratio' represents the ratio of 84-month ERC to net debt.

'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 2018 and the consolidated interim financial data for H1 2019, and the subtraction of the consolidated interim financial data for H1 2018.

'Merger reserve' represents the reserve generated upon consolidation of the Group following the Group reconstruction as part of the IPO where Arrow Global became the parent Company.

'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.

'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 loan portfolios, 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 June 2019 is as follows:

 

 

 

 

 

Glossary (continued)

 

30 June

2019

 

31 December

2018

 

£000

 

£000

Cash and cash equivalents

(77,748)

 

(92,001)

Senior secured notes (pre-transaction fees net off)

933,399

 

935,567

Revolving credit facility (pre-transaction fees net off)

218,468

 

245,587

Asset-backed loans (pre-transaction fees net off)

74,312

 

-

Secured net debt

1,148,431

 

1,089,153

Deferred consideration - portfolio investments

40,092

 

12,031

Deferred consideration - business acquisitions

57,461

 

59,922

Senior secured notes interest

5,486

 

5,542

Bank overdrafts

2,284

 

2,696

Other borrowings

3,575

 

11,635

Net debt

1,257,329

 

1,180,979

 

'Off market' means those loan portfolios that were not acquired through a process involving a competitive bid or an auction like process.

'Own share reserve' comprises the cost of the Company's ordinary shares held by the Group. At 30 June 2019 the Group held 874,906 ordinary shares of 1p each (FY 2018: 1,030,766), held in an employee benefit trust. This represents 0.50% of the Company share capital at 30 June 2019 (FY 2018: 0.59%).

'Organic purchases of loan portfolios' means those purchased through the ordinary course of business, not through acquisition.

'Purchased loan portfolios' see 'existing portfolios'.

'Replacement rate' means the rate of purchases needed during the subsequent year to maintain the current level of ERC.

'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 H1 2018 to H1 2019 as shown in the quarterly and half year and full year statements. In the comparative period this is calculated as the average annual equity attributable.

'Run rate' means the financial performance of the business in the future, if current conditions are prevailing at the time.

'Secured loan to value' or 'secured LTV ratio' represents the ratio of 84-month ERC to Secured net debt.

'Secured net debt' 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 removing 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.

'SIP' means the Arrow Global all-employee share incentive plan.

Glossary (continued)

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

'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 period after tax 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 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 profit before tax' means profit for the period before tax adjusted for the effect of certain adjusting items. The Group presents underlying profit before tax because it excludes the effect of items which 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.

 


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 contact rns@lseg.com or visit www.rns.com.
 
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Interim results for the six months to 30 June 2019 - RNS