TIDMARW
RNS Number : 8950F
Arrow Global Group PLC
12 March 2020
12 March 2020
Arrow Global Group PLC
Full Year Results for the twelve months ended 31 December
2019
Record free cashflow generation, reduced leverage and EUR838.0
million fund launch
Arrow Global Group PLC (the "Company" or the "Group"), announces
its full year results for the 12 months ended 31 December 2019.
Key Highlights
-- Record GBP303.7 million investment volumes at a consistent 17.0% net IRR
-- Gross Asset Management and Servicing (AMS) income up 5.9% to
GBP140.1 million - 36.4% of gross total income (FY 2018: 32.9%)
-- Free cashflow up 13.3% to GBP261.4 million (FY 2018: GBP230.7 million)
-- Profit before tax increased 28.3% to GBP51.3m (FY 2018: GBP40.0m)
-- Full year dividend up 3.1% to 13.1p (2018: 12.7p)
-- Leverage reduced to 3.4x (FY 2018: 3.7x) - within target range and continuing to reduce
-- Underlying ROE of 29.5% (FY 2018: 34.8%) - continues to remain above mid-20s percent target
-- Fund Management Business launched with EUR838.0 million in
initial Funds Under Management (FUM) - continue to target EUR2.0
billion of FUM by the end of 2020
Commenting on today's results, Lee Rochford, Group chief
executive officer of Arrow Global, said:
"The business performed well against its key operating metrics
in 2019, with returns in the Investment Business remaining strong
and improving margins in our Asset Management and Servicing
business leading to a 28.3% increase in profit before tax to
GBP51.3 million. This helped increase free cashflow generation by
13.3% to GBP261.4 million, allowing us to increase the dividend for
the seventh year in a row and finish 2019 within our new lower
leverage range of 3.0x-3.5x."
"We are excited by Arrow's future prospects and continue to see
enormous opportunity to generate strong returns in our chosen
markets. The launch of our Fund Management business is
transformational for the Group, allowing us to capture more of this
opportunity while also growing our capital light earnings. Our
initial fundraise of EUR838.0 million was a milestone in our
evolution to become a fully integrated alternative asset manager.
We believe we can scale this business significantly over time and
are continuing to target total Funds Under Management (FUM)of
EUR2.0 billion by the end of 2020."
Group financial highlights 31 December 31 December Change
2019 2018
------------------------------- ------------ ------------ -------
Core cash collections (GBPm) 442.3 411.6 7.5%
Third party AMS income (GBPm) 94.4 91.7 2.9%
Underlying profit before tax
(GBPm) 78.1 82.4 (5.2%)
Basic EPS (p) 20.0 17.0 17.6%
84-month ERC (GBPm) 1,817.9 1,634.8 11.2%
120-month ERC (GBPm) 2,035.4 1,972.1 3.2%
The scheduled presentation at the offices of JP Morgan has been
cancelled.
Due to the ongoing Coronavirus situation, Arrow Global's results
will now be available remotely via webcast and audio conference
call only at 9.30am UK time. The details for these are included
below. Please note the call number has changed.
Q&A
A Q&A function will be available via both the conference
call and the webcast. If you wish to ask a question via the
webcast, you will be able to email your question directly to the
company dbrowne@arrowglobal.net. Questions asked via the conference
call line will be addressed directly to company management over the
phone line.
Webcast link: https://bit.ly/36JpMPl
Conference call details:
Dial-in details: +44 (0)330 336 9105
Meeting ID: 6314554
Notes:
A glossary of terms can be found at the end of the document.
More details explaining the business can be found 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 +44 (0)20 3727 1141 arrowglobal@fticonsulting.com
Tom Blackwell
Laura Ewart
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.
Group chief executive officer's review
Continuing to deliver against key operating metrics
The business performed well against its key operating metrics in
2019. Collections and returns in the Investment business remained
strong and investment volumes were at record levels of GBP303.7
million. Revenues and margins in our Asset Management and Servicing
business (AMS) also grew and margins have already reached our
medium-term target of mid-20s percent. This solid operational
performance helped increase our free cash flow generation by 13.3%
to GBP261.4 million, continuing to allow us to strike the right
balance between allocating capital to invest for future growth,
paying dividends and deleveraging. We finished the year within our
new lower leverage range of 3.0x-3.5x net debt to adjusted EBITDA
and continue to target the lower end of this range over time.
Profit before tax increased 28.3% to GBP51.3 million and it is
proposed that shareholders receive dividend per share growth of
3.1% to 13.1p - the seventh consecutive year of progressive
dividend delivery.
Executing the strategic pivot to a more capital light model
It has been a pivotal year for Arrow as we continue to focus on
the business's shift to a more capital light alternative asset
management model. Our vision is to be 'The Innovative and Valued
Partner in Credit and Asset Management' and to build an alternative
investment business that appeals to investors looking access high
yielding assets. We have a long track record of investing our own,
and our clients', capital into the assets we specialise in and have
consistently grown the number of assets we service. The next
logical step was to build a Fund Management business where we could
invest third-party capital at scale, alongside Arrow's balance
sheet on a discretionary basis into our large market opportunity.
In December, we announced that we had raised an initial EUR838.0
million of total Fund Management capital commitments from a diverse
range of investors, by both geography and investment style,
signalling the first significant step on this journey. We have been
hugely encouraged by the amount of investor demand we have
encountered and are targeting EUR2.0 billion of total funds under
management (FUM) by the end of 2020. When viewed in the context of
our five-year targets, the growth of our Fund Management business
reinforces the execution of a successful capital light strategy.
This will see us drive gross AMS revenues, which include internal
AMS revenues, from the current 36.4% of gross total revenues to
towards 50.0%, as well as sustain gross AMS EBITDA margins of at
least mid-20s percent, in line with our medium-term targets.
Restructuring the Group to accommodate the integrated asset
management model
The Group is already well positioned to manage third-party
funds, with many of the required personnel already in place. As a
result, we have performed a predominantly internal restructuring
process to ensure the Group is positioned to drive the capital
light Fund Management strategy. Zach Lewy, our founder, will run
the Fund Management business as its chief executive officer, while
also remaining chief investment officer of the Group. Oliver
Stratton, our Group chief commercial officer, will ensure that we
deploy the most effective collections strategies and that our
client relationships are well managed. Dave Sutherland, our Group
chief operating officer will continue to manage the pan-European
operations of the Group. Below the Group executive committee level,
we have developed a streamlined reporting structure where senior
members of the business with strong industry experience, are
leading their respective origination, underwriting, analytics and
servicing teams on a country basis. This has been implemented
alongside the development of a robust Group-wide governance
structure that ensures close alignment between Arrow and the Fund
Management business.
A business model built to take advantage of the significant
market opportunity
We have been extremely successful in putting in place the
building blocks for our Fund Management vision. In recent years, we
have positioned ourselves to capture the massive market opportunity
we have by building two interdependent business lines - IB and AMS.
They serve our wide client franchise and provide each other with
off-market deals. We have carefully created this platform by
acquiring twelve servicing businesses that enable us to target, and
invest in, high margin niches in attractive markets. It is a highly
efficient platform that gives us relevance, pricing power and
off-market deal flow and I am particularly proud that over 70.0% of
our deals were off-market in 2019 - a true testament to our
differentiated business model and quite unique in financial
services. The 'One Arrow' investment programme ensured that we
successfully integrated these businesses, instilling the right
culture, oversight, capability and resourcing at the centre
necessary to turn our acquisitions into a single pan-European
business capable of operating at scale.
Building a differentiated Fund Management business to capture
more value
We are confident that we have a unique and compelling market
offering for our Fund Management business. Importantly, we do not
compete head-on with the large Global and European debt funds that
are the most prolific purchasers of assets in this space. Given we
originate more niche assets outside of these investors' very large
target deal size and concentrated approach, many of these
institutions like to co-invest with us on assets that we originate
and are our clients. Furthermore, few institutional fund investors
have our local presence. The combination of our local, in-market
origination teams and our centralised structuring and investment
team, combined with regulated, specialist servicing platforms on
the ground, means we can originate smaller deals away from
competitive auctions at higher returns. When combined with the
significant market opportunity offered by our platform, there is
clear demand from alternative asset investors to commit capital to
our investment strategies.
The impact of rapidly building a Fund Management business and
pivoting towards a more capital light model
I'm extremely proud of the transformation the business has
undergone in 2019 and the long-term value creation a more capital
light model will bring is significant. Executing this pivot has not
just involved raising a fund but building of an entirely new
business line, at the same time as reconfiguring the rest of the
business to support it. As we are still a relatively small
business, we have had to prioritise building the Fund Management
business over other activities that might have been more accretive
to earnings in the short-term, sacrificing that short-term
performance for the larger long-term prize. The demand placed on
the wider Arrow team in order to achieve this in such a short time
has demanded an enormous amount of dedication over and above their
day-to-day roles. For this extra effort, I extend my sincere thanks
to everyone at Arrow who has been involved.
Arrow's Environmental, Social and Governance (ESG) programme
We recognise that to be successful in the long-term we need to
have the right approach in place that ensures that we continue to
operate ethically, give back to local communities and help to
safeguard the environment for future generations. In 2019, Arrow
embarked formally on its ESG journey, forming a dedicated ESG
working Group led by our chief operating officer, Dave Sutherland.
We are committed to enhancing our ESG performance and are
developing a structured roadmap defining our key areas of focus and
development. While we already report a set of "Key ESG factors",
our roadmap intends to build on this platform, pinpointing specific
areas of focus to deliver against internal and external
expectations. Arrow's operations are intertwined with stakeholders
across the financial services industry. We are therefore extremely
focused on ensuring best practice across the entire range of the
company's activities. At the consumer level, this means placing
strong emphasis on customer treatment and outcomes. We are
committed to working closely with relevant regulatory bodies,
including the FCA, to ensure that we continue to deliver best
practice and favourable customer outcomes.
Focus on risk management
We have built a robust business that has a strong
counter-cyclical element to it and that can generate returns
despite weaker economic environments. Execution is key and we are
aware of the importance of delivering against our targets and
building a Fund Management business that supports capital light
revenue growth and deleveraging over the long-term. Regulation is
clearly something we focus on and we look to maintain strong
relationships with all the regulatory authorities in our countries
of operation. While changes in regulation cannot be predicted with
certainty, we have been careful to move into markets that we
consider have more mature regulatory frameworks. We are also
experts in managing our business to ensure the right customer
outcomes and to deliver our goal of building better financial
futures for all our stakeholders.
No impact from Coronavirus to date but active ongoing monitoring
of the situation
We are closely monitoring the developing Coronavirus situation
and it is currently too soon to say what impact this will have on
the global economy and how long it may last. Our immediate focus is
on the health and welfare of our colleagues, as well as ensuring
continuity of service for our customers and clients. We have fully
instituted our response plans and, at this stage, there has been no
detrimental impact on our business. This includes Italy where, in
February, collections were running ahead of target. Prudent
management of our resources remains a priority and we are taking a
cautious view of capital deployment and risk-adjusted pricing in
the short term. With over 70% of our deals transacted off-market,
we are in a good position to carefully evaluate the risks of any
portfolio we underwrite and have flexibility around the timing of
investments. Prior experience of operating during a downturn means
we expect any impact on cashflows that we do see to be largely
timing related rather than due to any ultimate loss. The benefit of
having materially reduced our individual transaction sizes in
recent years is that we are not over-exposed to any specific
portfolio under-performing.
No material impact from Brexit
We continue to monitor the ongoing Brexit situation closely for
any impact it may have on the Group's operations. As the majority
of our revenues are in Euros and not Sterling, we remain relatively
well insulated from any sudden foreign exchange impact related to
the UK's departure from the European Union.
A message for the entire Arrow team
Businesses are only as good as their employees and I believe we
have built a great team at Arrow. The external recognition we have
received this year is testament to this. Our Portuguese servicing
business, Whitestar, won 'Best Asset Management Service Provider
Portugal 2019', as well as the 'Top Employer Portugal 2020'
certification by the Top Employers Institute. Moreover, the Group
was shortlisted for three awards at the 2019 Credit Strategy
awards. A personal highlight for me has also been travelling round
the business as part of our 'smart story' roadshow, celebrating the
successes of local teams and outlining the exciting journey the
Group is embarking on as it transforms into an alternative asset
manager.
Outlook
Arrow remains well positioned to react robustly to the
fast-moving macro-economic environment in 2020. Our prudence in
refinancing the balance sheet in recent years means we have long
liabilities with no debt maturing before 2024. When combined with
nearly EUR1 billion of freshly raised capital committed to our Fund
Management business and ready to deploy, we remain optimistic for
the business's prospects. We continue to target EUR2.0 billion of
total FUM and welcome the significant operational and funding
flexibility this provides moving forward. The market we operate in
is large and becoming increasingly more active as European
financial institutions are encouraged to deleverage and transfer
assets off their balance sheets and into the capital markets. Our
strong origination operation allows us to target the most
attractive niches within this asset flow and that continues to
translate into the strong returns that are attractive to both us
and our fund investors. When I look further ahead over the next
three years, I remain confident in our ability to continue to grow
our FUM, deploy these funds at attractive IRRs and charge
predictable Fund Management and AMS fees for our services.
Successfully executing this will mean that the Group's transition
to a more capital light business model will continue to accelerate,
supporting the key elements of our five-year targets - to double
AMS revenues, reduce leverage, increase cost efficiencies and grow
returns to shareholders.
Lee Rochford
Group chief executive officer
12 March 2020
Group chief financial officer's review
I joined Arrow in the second half of 2019, and I am excited to
be part of the business at such an interesting time as it
transitions towards an increasingly capital light model. It was a
key year for the Group, as we exerted significant time and resource
into executing this pivot, culminating in a successful initial fund
raise of third-party capital at notable scale.
Overview
On a statutory basis, profit before tax increased by 28.3% to
GBP51.3 million (2018: GBP40.0 million), principally driven by the
considerably lower level of refinancing charges. There were a
number of adjusting items in relation to the launch of Arrow's Fund
Management business and strategic simplification programmes
throughout the year. It is not anticipated that any significant
adjusting items will be incurred in 2020 in relation to these
activities. Underlying profit before tax reduced 5.2% to GBP78.1
million (2018: GBP82.4 million), primarily driven by lower
impairment gains.
As we highlighted at the Interim and Q3 results, we are
executing our strategic shift much faster, and at much greater
scale, than initially guided at our Capital Markets Day in November
2018, where we set out the Group's five-year strategy. This
accelerated speed of execution has meant that we have delayed or
cancelled smaller scale strategies in both the Investment business
and Asset Management and Servicing business (AMS), which would have
yielded greater near-term EPS growth. Instead, we sacrificed these
more immediate earnings streams to focus our time and resource on
raising discretionary funds at scale at the Group level to
accelerate towards our goal to become a fully integrated asset
management business. We believe that rapid delivery against this
objective will create significant shareholder value. Our strong
investment track record appeals to investors seeking attractive
yield and in December 2019, we announced a successful inaugural
fund raise of EUR838.0 million of total capital commitments, with a
target to manage EUR2.0 billion of funds under management (FUM) by
the end of 2020.
Strong cash generation
One of the key performance metrics for the business is free cash
flow generation. Arrow has an excellent track record of generating
high levels of free cash flow and 2019 saw this increase by 13.3%
to a record GBP261.4 million (2018: GBP230.7 million). This was
driven by a 7.5% increase in core cash collections to GBP442.3
million (2018: GBP411.6 million) from the Investment business and a
2.9% increase in capital light third-party servicing revenues from
the Asset Management and Servicing business to GBP94.4 million
(2018: GBP91.7 million). The increase resulted in a 12.2%
improvement in adjusted EBITDA to GBP330.0 million (2018: GBP294.0
million). The reconciliation for the year of profit after tax to
the cash result, including a reconciliation to adjusted EBITDA, is
provided in the additional information section. Adjusted EBITDA is
a key indicator for the business's cash flow and allows the Group
to monitor the operating performance, cash flow generation and
leverage of the Group.
Investment business
Record investment volumes at consistent returns
Throughout 2019, the pricing environment and quantum of
opportunities within our markets remained attractive, resulting in
higher purchase volumes than previously guided.
In 2019, Arrow committed to investing a record GBP303.7 million
in new portfolios, with GBP62.9 million of this payment deferred to
2020 (2018: GBP263.4 million purchased, with GBP12.0 million
deferred). This meant we were able to prudently manage annual
leverage in 2019, while also ensuring a robust flow of Investment
business revenue into 2020, despite likely reduced balance sheet
investment volumes due to the co-invest structure with the Fund
Management business. This should help to support earnings while the
business transitions to a more capital light model. Despite these
record volumes, our returns remained stable at a 17.0% Net IRR and
the average deal size onto our own balance sheet reduced by 41.8%
to GBP3.9 million (2018: GBP6.7 million), further reducing our
future concentration risk. The size of our portfolio investment,
combined with the co-investment we receive from institutional fund
clients, allowed us to continue to grow the funds under management
on our servicing platform. This provides both increased Asset
Management and Servicing revenues and future purchase opportunities
for Arrow's Investment business and Fund Management business as the
co-investment owners of those portfolios look to sell into the
secondary market. Arrow is extremely well positioned to purchase
these portfolios in bilateral trades at attractive returns given
our experience of servicing them. The Group continues to take a
prudent approach to its underwriting, targeting Net IRRs in the
mid-teens.
Core cash collections - record performance with a changing shape
expected over time
Core cash collections from our purchased portfolio asset base
increased to GBP442.3 million (2018: GBP411.6 million), reflecting
continued strong operational performance. Core cash collections
continue to cumulatively outperform our underwriting expectations.
As at 31 December 2019, we have cumulatively collected 104% of our
initial underwriting expectation on all portfolios, consistent with
the position as at 31 December 2018 reflecting our continued
underwriting discipline. The Group continues to purchase an
increasing proportion of secured assets, including real estate
assets - as highlighted by the move at the 2019 Interim results to
independently disclose real estate assets on our balance sheet
given their growing materiality. Cash collections from unsecured
assets - Arrow's original asset class - tend to be recognised on a
more consistent basis quarter to quarter. Increasing cash
collections from secured assets - where cash collections are more
frequently realised at one point in time, rather than collected
gradually over time - will result in greater quarterly variability
of cash collections. The advantage of the secured collections
profile is that the payback on these assets is generally faster
than unsecured, but the timing can move between quarters. We
therefore continue to encourage the market not to look at the
Group's collections profile on a quarterly basis when performance
is better reflected on an annualised basis.
Income - lower levels of revaluations
While core cash collections in the Investment business increased
by 7.5%, Investment business income decreased by 9.1% to GBP244.8
million (2018: GBP269.4 million). This was principally driven by a
significant reduction in upwards revaluations of portfolios held on
the balance sheet, along with increased amortisation as cash from
secured and real estate assets was realised at a faster rate.
Revaluations in 2018 had seen a positive impact from specific
litigation work that was undertaken on the back book to drive cash
collections from unpaying accounts. Lower levels of revaluations
led to a 75.0% reduction in non-cash impairment gains to GBP12.7
million (2018: GBP50.7 million).
Arrow's Fund further evolves the purchase model and
accounting
Arrow's new Fund is targeting FUM of EUR2.0 billion by the end
of 2020. This includes a 24.9% commitment from Arrow and will form
the majority of Arrow's future ordinary course of investment
volume.
Moving forward, Arrow will continue to originate and underwrite
assets before offering them to the Fund.
If the Fund decides to invest in the asset then Arrow will
co-invest capital up to 24.9% of the transaction. This means the
Group will likely invest its own balance sheet at a reduced rate in
2020 and onwards compared to recent years, depending on total Fund
investment. Over time, this structure also means that an increasing
proportion of our assets will be accounted for under fair value,
rather than at amortised cost, simplifying our accounting.
Asset Management and Servicing business
Revenue and margins continue to improve
The Group's capital light AMS income has grown significantly in
recent years and gross revenues increased by 5.9% to GBP140.1
million (2018: GBP132.3 million), constituting 36.4% of total Group
revenue. Margins also improved by 3.7ppts. to 23.9%, in line with
our 2023 target to grow EBITDA margins in the AMS business to the
mid-twenties percent. Third-party fees (excluding internal fees for
servicing the Investment business) increased 2.9% to GBP94.4
million (2018: GBP91.7 million). Our execution of the pivot to
becoming more capital light by building a Fund Management business
faster, and at greater scale, than originally planned had an impact
on AMS revenue in 2019. Under the original strategy, smaller and
faster to execute fund raises were envisaged at the local level in
our Norfin and Sagitta businesses in Portugal and Italy, which
would have driven AMS fees. More capital intensive strategies had
also been assumed in the business plans relating to a number of the
servicing businesses that also would have driven nearer term EPS
accretion (but also leverage). While this has created a short-term
headwind to AMS revenues, the opportunities and benefits that a
scaled pan-European Fund Management business offers significantly
outweigh this.
The Fund Management business will accelerate the growth and
achievement of targets
The launch of Arrow's Fund Management business will continue to
fuel the growth we have seen in our AMS business, providing
scalable opportunities to grow capital light AMS revenues by
offering AMS services to the Fund. Revenue from Fund Management
activities will be incorporated in the AMS segment until it becomes
large enough to be a separately reported segment. During 2020, the
Group plans to present a Fund Management seminar to assist the
market in modelling the impact of the Fund Management business on
Arrow's performance in the coming years.
The financial benefits of raising this Fund are numerous,
including:
-- The accelerated achievement of five-year targets
-- New capital light earnings streams from market standard
management fees and performance fees payable to Arrow as manager of
the Fund, resulting in further improvements in the quantum and
quality of earnings in the medium-term
-- A reduction in leverage due to lower absolute levels of Arrow
balance sheet investment compared to recent periods as a result of
the co-invest structure with the Fund
-- Increased future flexibility around Arrow's capital structure
-- A scalable opportunity to grow capital light AMS activities
by offering AMS services to the Fund
-- Continued attractive returns on capital from Arrow's
co-investment alongside the Fund in portfolios
Costs
Focus on efficiency
The collection activity cost ratio improved by 4.1 ppts. to
24.8% (2018: 28.9%) as the Group continued to extract efficiencies
within our servicing businesses and reduced the number of lower
margin servicing contracts ahead of the expected volume relating to
the Fund Management business.
Group overheads reduced from GBP136.0 million to GBP123.9
million. This reduction was primarily driven by the release of
provisions held against the payment of deferred consideration
against recent business acquisitions. This collectively totalled
GBP21.1 million and the release is primarily driven by the
accelerated strategic shift towards a capital light business
comprising a larger Group level Fund Management offering. Under the
previous strategy, management teams were incentivised on projects
that no longer form part of the current strategy and their
remuneration has been realigned to the Group's Fund Management
strategy. Cash overheads remained broadly flat at GBP97.2 million
(2018: GBP95.0 million).
Total adjusting items related to costs came in at GBP26.8
million, GBP3.8 million higher than guided. The cost of
implementing the efficiency programme announced at the Interim
results - representing an investment of GBP20.0 million to extract
GBP20.0 million of run rate costs - was GBP15.2 million. Benefits
for the programme have been reforecast at around GBP17.0 million,
representing better returns on the investment than originally
planned. The changes are due principally to higher than anticipated
new business volumes in the UK. The UK business is already running
at the improved efficiency levels we are targeting. Start-up costs
relating to the launch of our Fund Management business were
GBP10.1m as the size and scale of the launch of the business
exceeded expectations. The remaining GBP1.5 million relates to the
costs associated with the acquisition of Drydens.
All further spend on efficiency savings will be absorbed within
business as usual cost, with no further adjusting items relating to
this anticipated in 2020.
Finance costs and Tax
Net interest charges of GBP54.5 million were lower by 18.4% than
2018 as no bond refinancing costs were incurred during 2019.
Underlying net interest charges of GBP54.5 million were up 13.2% on
2018 as a function of the unwind of the discount rate on deferred
consideration, higher facility balances in the period and the
impact of the adoption of IFRS 16 lease accounting.
The tax charge of GBP14.0 million represents an effective tax
rate of 27.3% (2018: 25.1%) on profit before tax. The effective tax
rate on underlying profit is 23.2% (2018: 22.2%) and has increased
as we continue to generate a greater amount of the Group's profit
from non-UK jurisdictions, which have outperformed our business
plan, but which have tax rates in excess of the UK.
Robust balance sheet
Leverage continues to reduce
The Group continues to have significant liquidity headroom, with
headroom as at 31 December 2019 of GBP153.0 million and no debt
facilities maturing until 2024. This means that the Group's
weighted average duration of its borrowing facilities is 4.8 years
- longer than its weighted average asset life - representing a
strong position for a financial services business.
On 30 April 2019, the Group further strengthened and diversified
its funding structure by completing a securitisation of loan
portfolios with a GBP100.0 million revolving commitment through an
asset backed security funding structure at LIBOR + 3.1% per annum.
Following this, Arrow's weighted average cost of debt has reduced
to 3.7% (2018: 3.9%).
The Group's secured net debt position at the period end was
GBP1,134.2 million (2018: GBP1,089.2 million) with the increase
mainly relating to further portfolio purchases in the year.
Leverage reduced to 3.4x (2018: 3.7x) as a result of the continued
strong cash generation from the Investment and AMS businesses. We
continue to target the lower end of the 3.0x-3.5x leverage range in
the medium-term.
As part of the insourcing of litigation operations on 8 April
2019, the Group acquired Drydens Limited, a provider of legal
services, broadening Arrow's UK range of servicing capabilities and
skills across consumer and commercial litigation, probate and
insolvency. The goodwill on acquisition of Drydens Limited amounted
to GBP14.5 million.
Strong returns for shareholders
Statutory return on equity (ROE) was 17.9% (2018: 16.3%) and was
impacted by the adjusting items in the period. Underlying ROE, one
of the key performance metrics for the Group is 29.5% (2018: 34.8%)
and continues to be well in excess of our mid-20s percent
through-the-cycle target. Basic EPS is GBP0.20p (2018: GBP0.17p)
with the increase largely relating to the lower levels of adjusting
items incurred during the year.
Underlying basic EPS reduced by 10.8% to GBP0.33p (2018:
GBP0.37p), impacted by the shift in operational focus referred to
above, as well as higher finance costs, a higher tax rate and a
one-off non-controlling interest charge.
The Group's dividend policy is to deliver a pay-out ratio of at
least 35.0% of underlying profit after tax, reflecting our
confidence that the shift towards a capital light business model
will increase the scope to return capital to shareholders in the
future. The Group proposes to pay an 8.7p final dividend,
increasing the total declared and proposed dividends for the year
to 13.1p (2018: 12.7p), representing an increase of 3.1% on
2018.
Summary and outlook
The Group has continued to deliver against its priorities in
2019 in what was a pivotal year for the Group's business model. Key
operating metrics across the Group performed well and we achieved
record free cashflow generation and record investment volumes while
also maintaining returns at a consistently attractive level.
In the wider market, the geographic and asset class
diversification of the Group means that we continue to find
attractive investment opportunities exhibiting returns
significantly in excess of our cost of capital. We remain vigilant
for early signs of economic distress, particularly regarding
COVID-19 and Brexit. However, economic dislocation potentially
presents higher return purchasing opportunities and our back book
has historically remained robust during distressed scenarios.
The launch of our Fund Management business is transformational
for the Group as we continue to transition towards a more capital
light integrated asset management model. While profitability was
impacted by the speed of the pivot towards this model, and the time
and resource that absorbed during the year, it leaves us in a very
strong position moving forward. Increased cash generation will
continue to enable us to deleverage, while access to such a large
pool of third-party capital reduces our dependence on the bond
market. While initial start-up costs mean the business will not
contribute materially to the Group's profit in 2020, it will begin
to do so from 2021 onwards. We will update the market on the
economics of the business and its accelerated impact on Arrow's
five-year targets later in 2020.
Matt Hotson
Group chief financial officer
12 March, 2020
Financial statements
Consolidated statement of profit or loss and other comprehensive
income
For the year ended 31 December 2019
Note 2019 2018
GBP000 GBP000
--------------------------------------------------- ---- --------- ---------
Income from portfolio investments at amortised
cost 12 199,094 193,932
Fair value gain on portfolio investments at FVTPL 12 32,397 24,745
Impairment gains on portfolio investments 12 12,714 50,727
Income from real estate inventories 12 561 -
--------------------------------------------------- ---- --------- ---------
Total income from portfolio investments 244,766 269,404
Income from asset management and servicing 94,360 91,661
Profit from sale of property - 731
Other income 392 -
--------------------------------------------------- ---- --------- ---------
Total income 339,518 361,796
--------------------------------------------------- ---- --------- ---------
Operating expenses:
Collection activity costs 5 (109,798) (119,041)
Other operating expenses 5 (123,902) (135,972)
--------------------------------------------------- ---- --------- ---------
Total operating expenses (233,700) (255,013)
--------------------------------------------------- ---- --------- ---------
Operating profit 105,818 106,783
Finance income 61 76
Finance costs 4 (54,559) (66,868)
--------------------------------------------------- ---- --------- ---------
Profit before tax 51,320 39,991
Taxation charge on ordinary activities 6 (14,033) (10,022)
--------------------------------------------------- ---- --------- ---------
Profit after tax 37,287 29,969
--------------------------------------------------- ---- --------- ---------
Other comprehensive income:
Items that are or may be reclassified subsequently
to profit or loss:
FX translation difference arising on revaluation
of foreign operations (7,077) 1,370
Movement on hedging reserve 161 (241)
--------------------------------------------------- ---- --------- ---------
Total comprehensive income 30,371 31,098
--------------------------------------------------- ---- --------- ---------
Profit after tax attributable to:
Owners of the Company 35,223 29,969
Non-controlling interest 2,064 -
--------------------------------------------------- ---- --------- ---------
37,287 29,969
--------------------------------------------------- ---- --------- ---------
Comprehensive income attributable to:
Owners of the Company 28,307 31,098
Non-controlling interest 2,064 -
--------------------------------------------------- ---- --------- ---------
30,371 31,098
--------------------------------------------------- ---- --------- ---------
Basic EPS (GBP) 7 0.20 0.17
Diluted EPS (GBP) 7 0.19 0.17
--------------------------------------------------- ---- --------- ---------
Consolidated and statement of financial position
As at 31 December 2019
Note Group Group
2019 2018
GBP000 GBP000
------------------------------------------------ ---- --------- ---------
Assets
Cash and cash equivalents 88,765 92,001
Trade and other receivables 75,094 94,206
Portfolio investments - amortised cost 12 932,199 869,056
Portfolio investments - FVTPL 12 169,799 217,974
Portfolio investments - real estate inventories 12 61,626 -
Property, plant and equipment 24,521 7,761
Intangible assets 38,159 44,264
Deferred tax asset 10,759 8,113
Investment in subsidiary undertakings - -
Goodwill 8 267,700 262,679
------------------------------------------------ ---- --------- ---------
Total assets 1,668,622 1,596,054
------------------------------------------------ ---- --------- ---------
Liabilities
Bank overdrafts 13 1,386 2,696
Revolving credit facility 13 230,963 242,121
Derivative liability 509 502
Trade and other payables 9 223,001 197,657
Current tax liability 7,645 7,915
Other borrowings 13 3,672 11,635
Asset-backed loans 13 84,077 -
Senior secured notes 13 897,875 926,340
Deferred tax liability 17,637 14,930
------------------------------------------------ ---- --------- ---------
Total liabilities 1,466,765 1,403,796
------------------------------------------------ ---- --------- ---------
Equity
Share capital 1,769 1,763
Share premium 347,436 347,436
Retained earnings 129,240 116,589
Hedging reserve (423) (584)
Other reserves (280,630) (273,547)
------------------------------------------------ ---- --------- ---------
Total equity attributable to shareholders 197,392 191,657
------------------------------------------------ ---- --------- ---------
Non-controlling interest 4,465 601
------------------------------------------------ ---- --------- ---------
Total equity 201,857 192,258
------------------------------------------------ ---- --------- ---------
Total equity and liabilities 1,668,622 1,596,054
------------------------------------------------ ---- --------- ---------
Note - the balance sheet has been re-presented on a reducing
liquidity basis and portfolio investments have been split out into
their constituent parts. Prior periods have been re-presented
accordingly on this basis.
Consolidated and statement of changes in equity
For the year ended 31 December 2019
Group Own Non-
Ordinary Share Retained Hedging share Translation Merger controlling
shares premium earnings reserve reserve reserve reserve Total interest Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------- -------- ------- -------- ------- ------- ----------- --------- -------- ----------- --------
Balance at 1
January 2018 1,753 347,436 104,511 (343) (3,291) 7,844 (276,961) 180,949 173 181,122
Profit after tax - - 29,969 - - - - 29,969 - 29,969
Exchange
differences - - - - - 2,572 - 2,572 - 2,572
Recycled to
profit after
tax - - - - - (1,202) - (1,202) - (1,202)
Net fair value
losses - cash
flow hedges - - - (291) - - - (291) - (291)
Tax on hedged
items - - - 50 - - - 50 - 50
---------------- -------- ------- -------- ------- ------- ----------- --------- -------- ----------- --------
Total
comprehensive
income for the
year - - 29,969 (241) - 1,370 - 31,098 - 31,098
Share-based
payments net of
tax - - 3,267 - - - - 3,267 - 3,267
Shares issued 10 - - - - - - 10 - 10
Repurchase of
own shares - - - - (2,509) - - (2,509) - (2,509)
Dividend paid - - (21,158) - - - - (21,158) - (21,158)
Dividend paid by
NCI - - - - - - - - (43) (43)
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 after tax - - 35,223 - - - - 35,223 2,064 37,287
Exchange
differences - - - - - (7,077) - (7,077) - (7,077)
Recycled to
income
statement net
of tax - - - 7 - - - 7 - 7
Net fair value
gains - cash
flow hedges - - - 187 - - - 187 - 187
Tax on hedged
items - - - (33) - - - (33) - (33)
---------------- -------- ------- -------- ------- ------- ----------- --------- -------- ----------- --------
Total
comprehensive
income for the
year - - 35,223 161 - (7,077) - 28,307 2,064 30,371
Shares issued 6 - - - - - - 6 - 6
Repurchase of
own shares - - - - (6) - - (6) - (6)
Share-based
payments net of
tax - - 1,437 - - - - 1,437 - 1,437
Dividend paid - - (23,062) - - - - (23,062) - (23,062)
Non-controlling
interest on
acquisition - - - - - - - - 1,800 1,800
---------------- -------- ------- -------- ------- ------- ----------- --------- -------- ----------- --------
Balance at 31
December 2019 1,769 347,436 129,240 (423) (5,806) 2,137 (276,961) 197,392 4,465 201,857
---------------- -------- ------- -------- ------- ------- ----------- --------- -------- ----------- --------
Consolidated and statement of cash flows
For the year ended 31 December 2019
Note Group Group
2019 2018
GBP000 GBP000
------------------------------------------------------------------------------ ---- -------- ---------
Net cash generated/(used in) by operating activities 15 20,516 (19,021)
------------------------------------------------------------------------------ ---- -------- ---------
Investing activities
Purchase of property, plant and equipment (1,269) (2,367)
Purchase of intangible assets (11,830) (11,077)
Proceeds from disposal of intangible assets and property, plant and equipment 18 3,759
Acquisition of subsidiaries, net of cash acquired (2,850) (57,022)
Movements in deferred consideration related to subsidiary acquisitions (12,004) (11,612)
------------------------------------------------------------------------------ ---- -------- ---------
Net cash used in investing activities (27,935) (78,319)
------------------------------------------------------------------------------ ---- -------- ---------
Financing activities
Movements in other banking facilities (7,499) 90,621
Proceeds from senior notes (net of fees) - 345,847
Redemption of senior notes - (203,467)
Early repayment of bond - (13,623)
Proceeds from ABS issuing 85,604 -
Increase in non-controlling interest on acquisition 1,800 471
Repayment of interest on senior notes (35,870) (36,522)
Repurchase of own shares (6) (2,509)
Issue of share capital 6 10
Bank interest received 61 76
Bank and other similar fees paid (8,452) (6,248)
Finance lease payments (5,061) -
Payment of dividends (23,062) (21,201)
Payment of deferred interest - (257)
------------------------------------------------------------------------------ ---- -------- ---------
Net cash flow generated by/(used in) financing activities 7,521 153,198
------------------------------------------------------------------------------ ---- -------- ---------
Net increase/(decrease) in cash and cash equivalents 102 55,858
------------------------------------------------------------------------------ ---- -------- ---------
Cash and cash equivalents at beginning of year 92,001 35,943
Effect of exchange rates on cash and cash equivalents (3,338) 200
------------------------------------------------------------------------------ ---- -------- ---------
Cash and cash equivalents at end of year 88,765 92,001
------------------------------------------------------------------------------ ---- -------- ---------
1. Statutory information
This document does not constitute the Group's statutory accounts
for the years ended 31 December 2018 or 31 December 2019 but is
derived from those accounts. Statutory accounts for 31 December
2018 have been delivered to the Registrar of Companies, and those
for 2019 will be delivered to the Registrar of Companies following
the Group's annual general meeting.
The auditor has reported on the 2018 and 2019 accounts; their
reports were (i) unqualified, (ii) did not include a reference to
any matters to which the auditors drew attention by way of emphasis
without qualifying their report and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act
2006.
The financial statements of the Group have been prepared under
the historical cost convention. The accounting policies are the
same as those that will be disclosed in the annual report and
accounts for the year ended 31 December 2019. The financial
information included in this preliminary announcement is based on
the Group's annual report and accounts for the year ended 31
December 2019, which are prepared in accordance with International
Financial Reporting Standards (IFRSs) and in accordance with IFRSs
adopted by the European Union. The annual report and accounts for
the year ended 31 December 2019 will be posted to shareholders in
March 2020. The annual general meeting will take place on 2 June
2020.
2. General information
Arrow Global Group Plc is a company incorporated in England and
Wales and is the ultimate parent company of the Group. The address
of the registered office is presented on the inside back cover. The
financial statements are presented in Pounds Sterling, which is the
Company's functional currency. All amounts have been rounded to the
nearest thousand except when otherwise indicated.
The Group's principal activity is to identify, acquire and
manage secured and unsecured defaulted and non-core loan portfolios
and real estate from, and on behalf of financial institutions such
as banks, institutional investors and credit card companies.
The Group's financial statements for the year ended 31 December
2019 have been prepared in accordance with IFRS as adopted for use
in the EU, and therefore comply with Article 4 of the EU IFRS
Regulation. The accounting policies have been applied consistently
in the current and prior periods, except for the impact of new
accounting standards.
As permitted by section 408 of the Companies Act 2006, a
separate income statement and related notes of the Company have not
been presented in this annual report and accounts.
3. Segmental reporting
The Group reports under three separate reportable segments.
Segmental information has been provided in line with what is
reviewed on a regular basis by the chief operating decision maker
(CODM), which is the board of directors collectively, as defined in
IFRS 8. The principal business categories are as follows:
Investment Business All portfolio investments that the Group owns, and
the income and costs associated with them
------------------- -----------------------------------------------------------
Asset Management Income and costs associated with managing debt portfolios
and Servicing on behalf of the Group
Business and external servicers. Our Fund Management business
is reported under this segment.
------------------- -----------------------------------------------------------
Group functions Costs not directly associated with either the Investment
or Asset Management and Servicing Business, but relevant
to overall oversight and control of the Group's activities
------------------- -----------------------------------------------------------
These segments represent how the Group manages the wider
business, and the organisational structure is aligned to these
segments. Therefore, this has been deemed to be the appropriate
level of disaggregation to provide information to the CODM. Further
granularity, such as type of AMS contract, or type of IB portfolio,
is not how the business is managed or organised, and hence such
further detail has not been presented to the CODM, or in the
segmental disclosures.
The intra-segment elimination column below removes charges made
from the Asset Management and Servicing Business segment to the
Investment Business segment on behalf of the Group for servicing
and collection of the Group's portfolio investments. The
intra-segment charge is calculated on equivalent commercial terms
to charging third parties. For further information on adjusting
items, please see the additional information section.
2019 Investment Asset Group Intra- Adjusting Total
Business Management functions segment items year ended
GBP000 and Servicing GBP000 elimination 31 December
Business GBP000 2019
GBP000 GBP000
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
Total income 244,766 140,054 392 (45,694) - 339,518
Collection activity costs (92,682) (62,495) (315) 45,694 - (109,798)
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
Gross margin 152,084 77,559 77 - - 229,720
Gross margin % 62.1% 55.4%
Other operating expenses excluding
depreciation, amortisation and
forex (24,339) (44,155) (9,166) - (26,789) (104,449)
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
EBITDA 127,745 33,404 (9,089) - (26,789) 125,271
EBITDA margin % 52.2% 23.9%
Depreciation, amortisation and
forex - - (19,453) - - (19,453)
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
Operating profit 127,745 33,404 (28,542) - (26,789) 105,818
Net finance costs - - (54,498) - - (54,498)
Refinancing costs - - - - - -
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
Profit before tax 127,745 33,404 (83,040) - (26,789) 51,320
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
2018 Investment Asset Group Intra- Adjusting Total
Business Management functions segment items year ended
GBP000 and Servicing GBP000 elimination 31 December
Business GBP000 2018
GBP000 GBP000
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
Total income 269,404 132,306 731 (40,645) - 361,796
Collection activity costs (94,617) (63,989) - 40,645 (1,080) (119,041)
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
Gross margin 174,787 68,317 731 - (1,080) 242,755
Gross margin % 64.9% 51.6%
Other operating expenses excluding
depreciation, amortisation and
forex (20,715) (41,613) (36,733) - (22,676) (121,737)
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
EBITDA 154,072 26,704 (36,002) - (23,756) 121,018
EBITDA margin % 57.2% 20.2%
Depreciation, amortisation and
forex - - (14,235) - - (14,235)
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
Operating profit 154,072 26,704 (50,237) - (23,756) 106,783
Net finance costs - - (48,134) - - (48,134)
Refinancing costs - - - - (18,658) (18,658)
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
Profit before tax 154,072 26,704 (98,371) - (42,414) 39,991
----------------------------------- ---------- -------------- ---------- ------------ --------- ------------
Total income includes income from portfolio investments, asset
management and servicing and other income.
2019 UK and Portugal Italy Netherlands Intra-Group Total
Geographical information Ireland GBP000 GBP000 GBP000 trading GBP000
GBP000 GBP000
------------------------------- -------- -------- ------- ----------- ----------- -------
Total Income 134,066 100,722 84,077 66,347 (45,694) 339,518
Income from AMS contracts with
customers 35,261 34,201 34,632 35,960 (45,694) 94,360
Non-current assets 114,110 74,535 82,226 59,509 - 330,380
------------------------------- -------- -------- ------- ----------- ----------- -------
2018 UK and Portugal Italy Netherlands Intra-Group Total
Geographical information Ireland GBP000 GBP000 GBP000 trading GBP000
GBP000 GBP000
------------------------------- -------- -------- ------- ----------- ----------- -------
Total Income 139,990 117,971 64,712 79,768 (40,645) 361,796
Income from AMS contracts with
customers 30,593 27,153 30,041 44,519 (40,645) 91,661
Non-current assets 82,419 69,686 77,927 84,672 - 314,704
------------------------------- -------- -------- ------- ----------- ----------- -------
Income from contracts with customers has been disaggregated on a
geographical basis, as a similar set of services are provided to
customers across the geographies, and therefore this was deemed to
be the most appropriate level of disaggregation for this
disclosure.
Non-current assets are assets with a useful life of more than
one year with the exception of deferred tax which has been
excluded.
Gross AMS income includes commission income, debt collection,
due diligence, real estate management, advisory fees and
intra-Group income for these services.
2019 2018
GBP000 GBP000
-------------------------------- ------- -------
Third-party AMS Business income 94,360 91,661
Intra-Group AMS income 45,694 40,645
-------------------------------- ------- -------
Gross AMS income 140,054 132,306
Investment Business Income 244,766 269,404
Other income 392 731
-------------------------------- ------- -------
Gross income 385,212 402,441
-------------------------------- ------- -------
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.
4. Finance costs
2019 2018
GBP000 GBP000
------------------------------------------------------------ ------- -------
Interest and similar charges on bank loans 8,028 7,168
Interest and similar charges on senior secured notes 38,232 37,458
Interest and similar charges on asset backed securitisation 2,509 -
Interest rate swap and forward exchange contract hedge
costs 515 1,568
Lease liability interest 1,395 -
Other interest 3,880 2,016
Bond refinancing costs - 18,658
------------------------------------------------------------ ------- -------
Total finance costs 54,559 66,868
------------------------------------------------------------ ------- -------
In 2018, bond refinancing costs comprised GBP18,658,000 incurred
on the early redemption of the EUR230 million notes due 2023, of
which GBP13,623,000 was a cash cost related to the call premium.
The remaining GBP5,035,000 was due to a non-cash write-off of
related transaction fees, in connection with the 2023 Notes.
5. Collection activity costs, other operating expenses and staff
costs
Collection activity costs Note 2019 2018
GBP000 GBP000
-------------------------------- ---- ------- -------
External collection costs 31,490 40,417
Staff costs 5.b 42,789 41,100
Direct temp labour 4,807 5,347
Direct operating costs 15,057 13,876
Legal disbursements 14,416 15,348
Other collection activity costs 1,239 2,953
-------------------------------- ---- ------- -------
Total collection activity costs 109,798 119,041
-------------------------------- ---- ------- -------
Other operating expenses Note 2019 2018
GBP000 GBP000
--------------------------------------- ---- -------- -------
Staff costs 5.b 56,142 53,346
Other staff related costs 11,591 8,625
Premises 5,401 8,242
IT 13,830 11,520
Depreciation and amortisation 18,435 14,235
Write off of PPE and intangible assets 6,377 -
Net foreign exchange losses/(gains) 1,018 (2)
Acquisition related expenses 1,457 14,717
Deferred consideration release (21,119) -
Other operating expenses 30,770 25,289
--------------------------------------- ---- -------- -------
Total other operating expenses 123,902 135,972
--------------------------------------- ---- -------- -------
In 2019, GBP8,817,000 of the other staff-related costs relates
to temporary labour, recruitment and training (2018:
GBP7,537,000).
b. Staff costs
2019 2018
GBP000 GBP000
---------------------------- ------- -------
Wages, bonuses and salaries 77,698 73,749
Pension costs 2,833 2,595
Social security costs 12,576 10,126
Share-based payments 1,437 3,267
Staff restructuring 4,387 4,709
---------------------------- ------- -------
98,931 94,446
---------------------------- ------- -------
6. Taxation
The Group's activities are predominantly UK based. The analysis
below therefore uses the UK rate of corporation tax.
a. Amounts recognised in profit and loss 2019 2018
GBP000 GBP000
-------------------------------------------------- ------- -------
Current tax expense
Tax charge at standard UK corporation tax rate 14,152 13,328
Changes in estimate related to prior years 1 (849)
-------------------------------------------------- ------- -------
Total current tax expense 14,153 12,479
-------------------------------------------------- ------- -------
Deferred tax expense
Origination and reversal of temporary differences (1,332) (2,373)
Adjustment in relation to prior years 2,421 (84)
Recognition of previously unrecognised tax losses (1,209) -
-------------------------------------------------- ------- -------
Total deferred tax expense (120) (2,457)
-------------------------------------------------- ------- -------
Total income tax expense 14,033 10,022
-------------------------------------------------- ------- -------
The differences in the effective tax rate for the period and the
standard rate of corporation tax in the UK at 19% (2018: 19%) are
as follows:
b. Reconciliation of effective tax rate 2019 2018
GBP000 GBP000
------------------------------------------------------------------------------------ --------------------- ---------
Profit before tax 51,320 39,991
Tax charge at standard UK corporation tax rate 9,751 7,598
Effect of tax rates in foreign jurisdictions 2,052 2,606
Expenses not deductible for tax purposes (358) 768
Changes in corporate tax rates in the year (1,209) (17)
Movements in unrecognised deferred tax 1,376 -
Changes in estimate relating to prior years 2,421 (933)
------------------------------------------------------------------------------------ --------------------- ---------
Total income tax expense 14,033 10,022
------------------------------------------------------------------------------------ --------------------- ---------
2019 2018
---------------------------------- ------- --------------------- ------- ------- --------------------- -------
c. Amounts recognised in OCI Before Tax (expense)/benefit Net of Before Tax (expense)/benefit Net of
tax GBP000 tax tax GBP000 tax
GBP000 GBP000 GBP000 GBP000
---------------------------------- ------- --------------------- ------- ------- --------------------- -------
Items that are/may be reclassified
to profit or loss
Movement in hedging reserve:
Effective portion of changes
in fair value 187 (33) 154 (291) 50 (241)
Net amount reclassified to profit
or loss 7 - 7 - - -
---------------------------------- ------- --------------------- ------- ------- --------------------- -------
194 (33) 161 (291) 50 (241)
---------------------------------- ------- --------------------- ------- ------- --------------------- -------
The rate of UK corporation tax, as enacted under previous
Finance Acts, was expected to reduce to 17% from 1 April 2020.
Although the UK Government has announced its intention to pass
revised legislation under which the rate would remain at 19%, no
legislation has been introduced at the balance sheet date and
therefore deferred tax balances in relation to the UK have been
calculated using a rate of 17%.
In December 2019, a new corporate tax law was enacted in the
Netherlands. Consequently, as of 1 January 2020, the corporate tax
rate in the Netherlands will be reduced from 25% to 21.7%. This
change resulted in a gain of EUR1,147,000 related to the
remeasurement of deferred tax assets and liabilities of the Group's
Dutch subsidiaries, being recognised during the year ended 31
December 2019.
Deferred tax
The Group has not recognised a deferred tax asset in respect of
GBP2,560,000 (2018: GBP859,000) of tax losses carried forward, due
to uncertainties over the future utilisation of the losses,
including the future profitability of the relevant subsidiaries.
These losses may be available for offset against future profits and
have no expiry date. There are no unrecognised deferred tax
liabilities.
Tax impact of the UK giving notice to withdraw from the EU
Given that the UK has now exited the EU (at 31 January 2020),
the Group has considered the impact of Brexit from a tax
perspective. The UK is in a transition period until 31 December
2020, during which time all EU directives will continue to be in
force. As such, no impact to the Group's tax position is expected
in 2020.
It is too soon to know what the arrangements may be with the EU
from 1 January 2021 onwards, however the Group does not expect
there to be any significant impact from a tax perspective.
Uncertainty over income tax treatments
The current tax liability of GBP7,645,000 represents the amount
of income taxes payable in respect of current and prior year
periods, including a provision in relation to uncertain tax
positions.
As for most multinationals, the current tax environment is
creating increasing levels of uncertainty and the Group is
potentially subject to tax audits in many jurisdictions. By their
nature, these are often complex and could take a significant period
of time to be agreed with the tax authorities. The Group estimates
and accrues taxes that will ultimately be payable when reviews or
audits by tax authorities of tax returns are completed. The levels
of risk arising from tax audits may change as a result of
legislative change, tax authority guidance or practice and
correspondence with the tax authorities during a specific audit. It
is not possible to quantify the impact that such future
developments may have on the tax positions taken in the financial
statements.
7. Earnings per share (EPS)
2019 2018
GBP000 GBP000
---------------------------------------------- ------- -------
Profit after tax attributable to shareholders 35,223 29,969
Weighted average ordinary shares 175,859 174,939
Potential exercise of share options 4,942 4,515
---------------------------------------------- ------- -------
Weighted average ordinary shares (diluted) 180,801 179,454
---------------------------------------------- ------- -------
Basic earnings per share (GBP) 0.20 0.17
---------------------------------------------- ------- -------
Diluted earnings per share (GBP) 0.19 0.17
---------------------------------------------- ------- -------
Refer to table of alternative performance measures in the
'additional information' section for details of underlying earnings
per share.
8. Goodwill
GBP000
------------------------------------------------------------- --------
Cost
At 1 January 2018 155,088
Additions 107,984
Exchange rate differences 1,916
------------------------------------------------------------- --------
At 31 December 2018 264,988
------------------------------------------------------------- --------
Additions 14,519
Adjustment of the discounted value of deferred consideration
paid for EI 462
Modification to Drydens' opening balance sheets' fair value
post-acquisition 693
Exchange rate differences (10,653)
------------------------------------------------------------- --------
At 31 December 2019 270,009
------------------------------------------------------------- --------
Amortisation and impairment
------------------------------------------------------------- --------
At 31 December 2018 and 31 December 2019 2,309
------------------------------------------------------------- --------
Net book value
------------------------------------------------------------- --------
At 31 December 2019 267,700
------------------------------------------------------------- --------
At 31 December 2018 262,679
------------------------------------------------------------- --------
The following table provides a breakdown of goodwill acquired
during the current and prior year:
GBP000
--------------------------------------------------------------------- -------
Goodwill on acquisition
At 1 January 2018 155,088
Parr Credit s.r.l. 22,533
Europa Investimenti S.p.A (EI) 48,219
Norfin Investimentos S.A. (Norfin) 31,335
Bergen Capital Management Limited (Bergen) 5,164
Modification to EI opening balance sheet fair value post-acquisition 733
Exchange rate differences 1,916
--------------------------------------------------------------------- -------
At 31 December 2018 264,988
--------------------------------------------------------------------- -------
Drydens Limited (Drydens) 14,519
--------------------------------------------------------------------- -------
Exchange rate differences and goodwill adjustments (9,498)
--------------------------------------------------------------------- -------
At 31 December 2019 270,009
--------------------------------------------------------------------- -------
Goodwill acquired in a business combination is allocated, at
acquisition, to the CGUs that are expected to benefit from that
business combination. The carrying amount of goodwill has been
allocated to four aggregated CGUs on the basis that these represent
the lowest level at which goodwill is monitored for internal
management purposes and are not larger than the single operating
segment defined under IFRS 8 (Operating Segments).
Goodwill CGU allocation
In relation to goodwill, the four CGUs identified are UK and
Ireland, comprising all Group companies acquired in the Capquest
acquisition, Arrow Global Receivables Management Limited, Mars
Capital, Bergen and Drydens; Portugal, comprising of all the Group
companies acquired in the Whitestar, Gesphone, Redrock and Norfin
acquisitions; Benelux, comprising all the Group companies acquired
in the Vesting acquisition; and Italy, comprising Zenith, Parr
Credit and Europa Investimenti S.p.A. The UK and Ireland, Portugal,
Benelux, and Italy CGUs, represent the cash flows generated
principally from collections on acquired portfolio investments and
management and servicing of third-party debt.
Given the structure and operating model of the Group, it has
been deemed appropriate to combine a number of CGUs for impairment
testing purposes. This is in line with the Group's stated strategy
of providing a range of services in each geographic region in which
the Group operates and represents the lowest level at which the
Group's resources and assets are allocated internally.
The discount rate was a post-tax rate based on the yield of
average European 10-year government bonds, adjusted for a risk
premium to reflect both the increased risk of investing in equities
generally and the systemic risk of the specific CGU.
Five years of cash flows were included in the discounted cash
flow model. A long-term growth rate into perpetuity has been
determined as the lower of the nominal GDP rates for the countries
in which the CGU operates and the long-term compound annual profit
before taxes, depreciation and amortisation growth rate estimated
by management.
Budgeted profit before taxes, depreciation and amortisation were
based on expectations of future outcomes taking into account past
experience, adjusted for the anticipated revenue growth. Revenue
growth was projected taking into account the average growth levels
experienced over the past five years and the estimated growth for
the next five years.
The key assumptions described above may change as economic and
market conditions change. The Group estimates that likely possible
changes in these assumptions would not cause the recoverable amount
of any CGU to decline below the carrying amount.
The Group's goodwill balance has been assessed and no part of
the overall balance is deemed to be deductible for tax
purposes.
For the purposes of impairment testing, goodwill is allocated to
the Group's CGUs as follows:
2019 2018
GBP000 GBP000
--------------- ------- -------
UK and Ireland 79,476 64,312
Portugal 69,156 73,061
Benelux 40,824 43,132
Italy 78,244 82,174
--------------- ------- -------
267,700 262,679
--------------- ------- -------
An impairment review was carried out at 31 December 2019 that
resulted in no impairment to goodwill. The goodwill was assessed to
be appropriately stated. The Group tests goodwill annually for
impairment, or more frequently if there are indications that
goodwill might be impaired. The recoverable amount of the CGUs is
determined as the higher of fair value, less cost to sell and value
in use. The key assumptions for the value in use calculations were
as follows:
2019 2018
----------------------- ---------------------------------- ----------------------------------
UK and Portugal Benelux Italy UK and Portugal Benelux Italy
Ireland Ireland
----------------------- -------- -------- ------- ----- -------- -------- ------- -----
Discount rate % 8.6% 9.0% 8.2% 9.0% 8.5% 8.9% 8.2% 8.9%
Growth rate used
to
extrapolate forecasts 2.0% 2.2% 2.0% 1.7% 2.0% 2.2% 2.0% 1.7%
----------------------- -------- -------- ------- ----- -------- -------- ------- -----
Discount rates
Management estimates discount rates using post-tax rates that
reflect current market assessments of the time value of money and
the risks specific to the CGUs. Post-tax rates are used alongside
post-tax cash flows, as the post-tax discount rate is more readily
derived from observable market information. Any potential
differences between post-tax discount rates and cash flows and the
pre-tax method under IAS 36 have been considered, and no material
differences between approaches have been identified.
The starting point for determining the discount rates for each
CGU was to use the Group's weighted average cost of capital (WACC)
and adjust this for specific factors for each of the CGUs to derive
a market participant's rate. The factors took into account the
risks inherent in each of the CGUs; such as currency, regulatory,
and economic risks and the different operations in the CGUs were
also considered.
The Group prepares cash flow forecasts derived from the most
recent financial budgets approved by management for the next five
years and extrapolates cash flows into perpetuity. The forecasts
assume growth rates in collection activity which in turn drive
forecast collections and cost figures. These assumptions are in
keeping with the directors' expectations of future growth.
Appropriate tax rates are applied to the cash flow forecasts for
each CGU. The analysis has been prepared using post-tax cash flows
and discount rates, as post-tax discount rates can be more readily
derived from observable market data. The Group is satisfied that
this is materially equal to performing the analysis on pre-tax cash
flows and discount rates.
The Group has conducted a sensitivity analysis on the impairment
test of the CGU's carrying value. The CGUs would become impaired
based on a net post-tax cash flow reduction set out below, or based
on an increase in the discount rate noted below:
A cash A discount
flow rate
reduction increase
of of
--------------- ---------- ----------
UK and Ireland 58% 11%
Portugal 41% 5%
Benelux 23% 2%
Italy 59% 8%
--------------- ---------- ----------
9. Trade and other payables
Current 2019 2018
GBP000 GBP000
------------------------------------------------------ ------- -------
Trade payables 15,635 24,133
Deferred consideration on acquisition of subsidiaries 11,332 11,119
Deferred consideration on portfolio investments 62,944 12,031
Taxation and social security 356 163
Due to subsidiary undertaking - -
Accruals 35,006 53,954
Other liabilities 19,495 43,781
Lease liability 5,312 -
------------------------------------------------------ ------- -------
150,080 145,181
------------------------------------------------------ ------- -------
Non-current
Trade payables 15,278 3,673
Deferred consideration on acquisition of subsidiaries 19,040 48,803
Other liabilities 20,411 -
Lease liability 18,192 -
------------------------------------------------------ ------- -------
72,921 52,476
------------------------------------------------------ ------- -------
Total trade and other payables 223,001 197,657
------------------------------------------------------ ------- -------
Deferred consideration on acquisition of subsidiaries has
reduced as amounts were repaid in the period, alongside
remeasurements of deferred contingent consideration liabilities in
the period which reduced their value. Deferred consideration on
portfolio investments have increased in the period as significantly
more portfolio acquisitions had an element of deferred
consideration outstanding at 31 December 2019 than 31 December
2018.
10. Dividends
The following dividends were recognised as distributions to
owners during the year ended 31 December 2019:
2019 2018
GBP000 GBP000
---------------------------------------------------------- ------- -------
Interim dividend 2019: 4.4p per ordinary share (2018:
4.0p) 7,751 7,002
Final dividend 2018: 8.7p per ordinary share (2017: 8.1p) 15,311 14,156
---------------------------------------------------------- ------- -------
23,062 21,158
---------------------------------------------------------- ------- -------
The 2019 interim dividend was declared at 50% of the 2018 final
dividend. A final dividend for 2019 has been proposed of 8.7p,
bringing the total dividend for the year to 13.1p being 40% of
underlying profit after tax. The proposed final dividend is subject
to approval at the annual general meeting and has, therefore, not
been included as a liability in these financial statements.
The ex-dividend date for the final dividend is 11 June 2020,
with a record date of 12 June 2020 and a payment date of 17 July
2020. Shareholders will 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 26
June 2020. The dividend has not been recognised as a liability and
there are no tax consequences.
11. Related party transactions
Related party balances as at each year end were as follows:
Key management Total
personnel GBP000
GBP000
-------------------------------- -------------- -------
As at 31 December 2019 and 2018:
Trade - -
-------------------------------- -------------- -------
- -
-------------------------------- -------------- -------
Summary of transactions
Key management, defined as permanent members of the board plus
all non-executive directors, were awarded the following
compensation for the financial year:
Remuneration 2019 2018
GBP000 GBP000
--------------------------------------- ------- -------
Salaries and performance-related bonus 1,628 2,057
Pension-related benefits 110 128
Share based payments (306) 426
--------------------------------------- ------- -------
1,432 2,611
--------------------------------------- ------- -------
The number of key management during the year was 6 (2018:
7).
12. Portfolio investments
Split of portfolio investments by period:
2019 2018
GBP000 GBP000
------------------------------------- --------- ---------
Expected falling due after one year 916,123 841,890
Expected falling due within one year 247,501 245,140
------------------------------------- --------- ---------
Total 1,163,624 1,087,030
------------------------------------- --------- ---------
The Group recognises income from portfolios investments in
accordance with IFRS 9 from 1 January 2018.
The movements in portfolio investments were as follows:
As at 31 December 2019
Financial
instruments
----------------------------------------------- ------------ -------- ------------ ---------
Amortised FVTPL Real estate Total
cost GBP000 inventories GBP000
GBP000 GBP000
----------------------------------------------- ------------ -------- ------------ ---------
As at the year brought forward 869,056 217,974 - 1,087,030
Portfolios purchased during the year 248,470 30,052 25,165 303,687
Transfer between categories 11,483 (55,262) 43,779 -
Collections in the year (390,734) (48,034) (3,543) (442,311)
Income from portfolio investments at amortised
cost 199,094 - - 199,094
Fair value gain on portfolio investments
at FVTPL - 32,397 - 32,397
Income from portfolio investments - real
estate inventories - - 561 561
Net impairment gain 12,720 - (6) 12,714
Exchange and other movements (4,729) (7,328) (4,330) (16,387)
Portfolio restructure (13,161) - - (13,161)
----------------------------------------------- ------------ -------- ------------ ---------
As at the year end 932,199 169,799 61,626 1,163,624
----------------------------------------------- ------------ -------- ------------ ---------
Transfer between categories represents positions where the Group
has originally held one type of instrument relating to a portfolio,
and subsequently increased or changed its interest in the
portfolio, leading to the requirement to consolidate the underlying
structure onto the Group's balance sheet. This leads to a change in
the classification of the portfolio investment held. The 'portfolio
restructure' represents the restructure of a leveraged structured
deal to move to a de-levered position, and hence change the nature
of the holding whilst extinguishing related liabilities. Note that
for real estate inventories, which are not financial instruments,
the collections figure above is analogous to total sales of
inventories, and the net of collections and income from portfolio
investments - real estate inventories, is analogous to cost of
sales of inventories. Sales of inventories are accounted for as
revenue under IFRS 15, as they are not financial instruments, but
are presented alongside the other portfolio investments for ease of
reference.
As at 31 December 2018
Financial
instruments
----------------------------------------------- ------------ -------- ------------ ---------
Amortised FVTPL Real estate Total
cost GBP000 inventories GBP000
GBP000 GBP000
----------------------------------------------- ------------ -------- ------------ ---------
As at the year 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 adopting
IFRS 9 opening adjustment 826,844 107,623 - 934,467
Portfolios purchased during the year 169,514 93,836 - 263,350
Portfolio additions from acquired entities 3,339 8,514 - 11,853
Collections in the year (387,699) (23,889) - (411,588)
Income from portfolio investments at amortised
cost 188,862 5,070 - 193,932
Fair value gain on portfolio investments
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 year end 869,056 217,974 - 1,087,030
----------------------------------------------- ------------ -------- ------------ ---------
The impact of IFRS 9 shown above is pre-tax. The post-tax impact
is GBP14,000,000. The closing IFRS 9 position has not been shown in
the table above, as post-implementation the impact of IFRS 9 is
subsumed within the net impairment gain, and within income from
portfolio investments at amortised cost.
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 31 December 2019 by GBP11,020,000 (31 December
2018: GBP10,870,000). 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.
13. Borrowings and facilities
2019 2018
GBP000 GBP000
--------------------------------------------------------------- --------- ---------
Senior secured notes net of transaction fees of GBP 12,780,000
(2018: GBP14,769,000) 897,875 926,340
Revolving credit facility net of transaction fees of
GBP3,720,000 (2018: GBP3,466,000) 230,963 242,121
ABS Loan net of transaction fees of GBP1,658,000 (2018:
GBPnil) 84,077 -
Bank overdrafts 1,386 2,696
Other borrowings - Non-recourse facility 3,672 11,635
--------------------------------------------------------------- --------- ---------
1,217,973 1,182,792
--------------------------------------------------------------- --------- ---------
Total borrowings:
Amount due for settlement within 12 months 257,500 259,045
Amount due for settlement after 12 months 960,473 923,747
--------------------------------------------------------------- --------- ---------
Senior secured notes
On 7 March 2018, Arrow Global Finance Plc issued EUR285 million
floating rate senior secured notes due 2026 (the '2026 Notes') at a
coupon of 3.75% over three-month EURIBOR and also issued a GBP100
million tap of its existing GBP220 million 5.125% fixed rate notes
due 2024. As part of the transaction Arrow Global Finance Plc also
redeemed its EUR230 million 4.75% over three-month EURIBOR floating
rate senior secured notes.
The proceeds were used to fund the purchase price for the
acquisition of Parr Credit, partially repay drawings under the
revolving credit facility and to fund transaction costs and the
redemption of the 2023 notes.
In 2018, bond refinancing costs comprised GBP18,658,000 incurred
on the early redemption of the EUR230 million notes due 2023, of
which GBP13,623,000 was a cash cost related to the call premium.
The remaining GBP5,035,000 was due to a non-cash write-off of
related transactions fees, relating to the 2023 notes.
The Euro senior notes and Sterling senior notes are secured by
substantially all of the assets of the Group.
Revolving credit facility
On 4 January 2018 the commitments under the revolving credit
facility were increased from GBP215 million to GBP255 million. The
maturity of the facility was extended to 2 January 2023 and the
margin reduced to 2.5%.
On 1 November 2018 the commitments under the revolving credit
facility were increased from GBP255 million to GBP285 million.
On 26 February 2019, the revolving credit facility was extended
to 2024, with no change in margin.
Asset backed securitisation
On 30 April 2019, the Group entered into a GBP100 million
non-recourse committed asset backed securitisation facility with an
advance rate of 55% of 84-month ERC. On the same date, the Group
sold GBP137 million of ERC into AGL Fleetwood Limited, a wholly
owned Arrow Global Group subsidiary, and borrowed an initial amount
of GBP75 million non-recourse funding at Libor plus 3.1% under the
facility.
On 31 July 2019, the Group sold a further GBP44 million of ERC
into AGL Fleetwood Limited and subsequently borrowed an additional
GBP25 million non-recourse funding on the same terms under the
facility. The facility has a five year term comprising an initial
two year revolving period followed by a three year amortising
period with an option to extend by one year, subject to lender
consent.
14. Acquisition of subsidiary undertaking
Current year acquisitions
a. Drydens Limited (Drydens)
On 8 April 2019, the Group acquired 100% of the share capital of
Drydens. Drydens is a provider of legal services, the acquisition
of which will broaden the Group's UK range of servicing
capabilities and skills across consumer and commercial litigation,
probate and insolvency. The total undiscounted consideration for
the acquisition is GBP11,115,000 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 accounts. The targets for contingent
consideration are not linked to the post-acquisition employment
status of the sellers, and is not considered to be a
post-employment benefit arrangement with the former owners.
Of the GBP4,262,000 contingent consideration the gross
undiscounted amounts are made up as follows;
Up to GBP2,000,000 is contingent upon the successful migration
of Arrow accounts. The payment range could be anywhere between GBP0
and GBP2,000,000 with the final amount to be agreed upon in April
2020.
Up to GBP2,000,000 is contingent upon the performance of Arrow
placed accounts against the jointly agreed business plan. The
payment range could be anywhere between GBP0 and GBP2,000,000 with
the final amount to be agreed upon in April 2021.
GBP1,000,000 is contingent upon winning Proceeds of Crime Act
servicing deal from the UK Government before 8 April 2020. If the
deal is not won the payment is forfeited .
Effect of the acquisition
The fair values of the identifiable assets acquired and
liabilities assumed are as set out in the table below. Acquisition
related costs are expensed in the profit and loss in the reporting
period:
Total
GBP000
------------------------------------------ -------
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 GBP688,000 has been recognised at
acquisition, being the fair value after appropriate discounting, of
expected cash flows arising from existing customer relationships.
The gross contractual outstanding amounts of 'trade and other
receivables' was materially equal to their carrying amount, with no
material balances not expected to be collected upon.
Goodwill of GBP14,519,000 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.
In the period from acquisition to 31 December 2019, Drydens
contributed income of GBP3,650,000 and profit after tax
contribution of GBP1,165,000 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 GBP1,167,000
and profit after tax would have been lower by an estimated
GBP24,000.
15. Notes to the statement of cash flows
Group Group Company Company
2019 2018 2019 2018
GBP000 GBP000 GBP000 GBP000
------------------------------------------------ --------- --------- ------- ---------
Profit after tax 37,287 29,969 11,897 154,298
Adjusted for:
Collections in the year 442,311 411,588 - -
Income from portfolio investments (199,655) (193,932) - -
Fair value gain on portfolios (32,397) (24,745) - -
Net impairment gain (12,714) (50,727) - -
Deferred consideration release (21,119) - - -
Depreciation and amortisation 18,435 14,235 - -
Loss/(profit) on write off and disposal of
property, plant and equipment 1,419 (731) - -
Loss on write off and disposal of intangible
assets 5,766 508 - -
Net interest payable 53,103 66,792 - -
Lease liability interest 1,395 - - -
Foreign exchange gains 1,018 (2) - -
Equity settled share-based payment expenses 1,437 3,267 - -
Tax expense 14,033 10,022 - -
------------------------------------------------ --------- --------- ------- ---------
Operating cash flows before movement in working
capital 310,319 266,244 11,897 154,298
Decrease/(increase) in other receivables 15,800 (28,132) 26 (91)
Decrease/(increase) in amounts due to/from
subsidiary undertakings - - 10,858 (130,029)
Increase/(decrease) in trade and other payables 12,120 15,645 291 198
------------------------------------------------ --------- --------- ------- ---------
Cash generated by operations 338,239 253,757 23,072 24,376
Income taxes and overseas taxation paid (14,036) (9,428) - (720)
------------------------------------------------ --------- --------- ------- ---------
Net cash flow from operating activities before
purchases of portfolio investments 324,203 244,329 23,072 23,656
Purchase of portfolio investments (303,687) (263,350) - -
------------------------------------------------ --------- --------- ------- ---------
Net cash generated/(used in) by operating
activities 20,516 (19,021) 23,072 23,656
------------------------------------------------ --------- --------- ------- ---------
Additional information (unaudited)
'Underlying profit after tax' is considered to be a key measure
in understanding the Group's ongoing financial performance.
Adjusting items are those items, as determined by management,
that 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 after tax. Judgement has
been applied in determining which items are considered as
'adjusting' for the purpose of this metric.
31 December 31 December
2019 2018
----------------------------------------------
Reported Adjustments Underlying Reported Adjustments Underlying
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
Continuing operations
Income 339,518 - 339,518 361,796 - 361,796
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
Operating expenses
Collection activity costs (109,798) - (109,798) (119,041) 1,080 (117,961)
Other operating expenses (123,902) 26,789 (97,113) (135,972) 22,676 (113,296)
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
Total operating expenses (233,700) 26,789 (206,911) (255,013) 23,756 (231,257)
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
Operating profit 105,818 26,789 132,607 106,783 23,756 130,539
Finance income 61 - 61 76 - 76
Finance costs (54,559) - (54,559) (66,868) 18,658 (48,210)
Share of profit in associates - - - - - -
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
Underlying profit before tax 51,320 26,789 78,109 39,991 42,414 82,405
Taxation charge on underlying
activities (14,033) (4,056) (18,089) (10,022) (8,275) (18,297)
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
Underlying profit after tax before
non-controlling interest 37,287 22,733 60,020 29,969 34,139 64,108
Non-controlling interest (2,064) - (2,064) - - -
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
Underlying profit after tax 35,223 22,733 57,956 29,969 34,139 64,108
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
Underlying Basic EPS (GBP) 0.33 0.37
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
Underlying tax rate 23.2% 22.2%
----------------------------------- ----------- ----------- ---------- --------- ----------- ----------
2019 adjusting items
Of the GBP26,789,000 adjusting items total in 2019,
GBP15,220,000 relates to the Group's strategic simplification
programmes, GBP10,112,000 relates to the expansion of the Group's
Fund Management business, and GBP1,457,000 relates to costs
incurred to facilitate the acquisition of Drydens Limited.
The Group's simplification programmes are considered to be
adjusting items, as they comprise a series of actions which have
incurred costs in the current period, which are not expected to
recur in future periods. As such, they are not considered as part
of the underlying performance of the Group. Of the GBP15,220,000 of
spend related to the Group's strategic simplification
programmes:
-- GBP6,398,000 relates to the accelerated write-off and
decommissioning of IT-related intangible assets
-- GBP3,459,000 relates to the costs of exiting employees from
certain functions across the Group, including staff
restructuring
-- GBP2,641,000 relates to the costs of exiting particular sites
and small businesses lines across the Group
-- GBP1,567,000 relates to employee costs (including allocations
of existing employees' costs) of executing and delivering the
programme
-- GBP1,155,000 relates to third-party advisory costs and other
costs of delivering the programme
The costs incurred in the expansion of the Group's Fund
Management business are considered to be adjusting items, as a lot
of this activity is being undertaken for the first time in the
period, but is not expected to recur in future periods. As such,
this expenditure is not considered representative of the underlying
performance of the Group. Of the GBP10,112,000 of spend related to
the expansion of the Group's Fund Management business:
-- GBP6,897,000 relates to third-party advisory fees and sundry materials costs
-- GBP3,215,000 relates to employee costs (including allocations
of existing employees' costs) of working on this project
2018 adjusting items
Collection activity cost adjusting items relate to 'One Arrow'
costs incurred during 2018.
Of the GBP42,414,000 adjusting items total in 2018,
GBP18,658,000 related to bond refinancing costs, GBP14,717,000 were
acquisition related costs, and GBP9,039,000 related to 'One Arrow'
costs.
Of the GBP18,658,000 related to bond refinancing costs:
-- GBP13,623,000 cost related to the call premium, and
-- GBP5,035,000 due to a non-cash write-off of related
transaction fees, in connection with the 2023 Notes.
Of the GBP14,717,000 acquisition related costs:
-- GBP3,068,000 related to acquisitions in the current year, and
-- GBP11,649,000 related to contingent consideration payments on
previous periods' acquisitions.
The remaining GBP9,039,000 related to 'One Arrow', which was a
Group-wide programme which began in 2017 and came to an end in
2018, and included the development of a revised governance
structure, office consolidations and IT/change investment across
the Group. Given the aggregate size and nature of this Group-wide
transformation programme, these costs have been presented as profit
adjusting items as they are considered to warrant separate
presentation. The Group expects this will drive longer term
benefits into future periods.
IFRS to cash result reconciliations
We provide two reconciliations between reported IFRS profit and
cash measures. The first looks at the movement in our portfolio
investments compared to the movements in the ERC - the gross cash
value of the portfolio before it is discounted to present value for
inclusion in the reported results. The second reconciles the
reported profit for the year to the cash result. For completeness
we also separate out other adjusting items. A number of the terms
referred to in this section are defined in the glossary.
As part of the Group's Investment Business, we acquire
portfolios and turn these into regular, predictable and long-term
cash flows. This predominantly involves high volumes of low value
collections from customers, and therefore we use analytical models
to estimate cash flows we expect at an individual account level.
The output of these account level forecasts is aggregated to a
portfolio and then into the Group's total ERC.
When we purchase portfolio investments, we recognise them in the
statement of financial position at the purchase price in accordance
with IFRS. In terms of the equivalent cash measure, we add the
portfolio ERC to the Group ERC at the point of purchase. We quote
both 84-month and 120-month ERC forecasts as key performance
measures for the business.
Collections from portfolios can extend beyond 15 years; however,
we only include 84 months of cash flow in assessing the majority of
our portfolio investments. As we progress through the months of
each year, we roll forward the ERC forecast, meaning we always have
84 months of expected cash flow from our portfolios recognised on
the statement of financial position.
Due to the nature of our business, actual collections on
portfolio investments will not perform exactly as initially
forecast and, each half year, we review performance against
collections experience and update the ERC forecast where
appropriate. This updated cash flow forecast, discounted at the
applicable rate is the year-end carrying value of the portfolio
investments. This movement of the portfolio investments is
reflected as revenue in the income statement. The size of the
portfolio asset, associated ERC and cash collections in the year
are therefore all key drivers to the result we report.
As we collect on our portfolios, the statement of financial
position value, ERC and income we receive decreases over time.
Based upon our target returns that we expect to invest at, we are
able to calculate a replacement rate, or maintenance capex, being
the amount we need to invest to hold the Group's total portfolio
value constant. During a year, if we invest higher than the
replacement rate at target returns, the income from debt purchase
grows. The replacement rate is a key driver to the cash result the
business generates.
Movement in portfolio investments under IFRS reconciled to cash
ERC
Total portfolio investments IFRS ERC ERC
GBP000 84-month 120-month
GBP000 GBP000
---------------------------------------- --------- --------- ---------- --------------------
Brought forward 1,087,030 1,634,786 1,972,130 ERC brought forward
Portfolios acquired during the ERC acquired during
year (1) 303,687 479,783 513,766 the year
Collections in the
Collections in the year (2) (442,311) (442,311) (442,311) year
Income from portfolio investments
at amortised cost (3) 199,094 - -
Fair value gain on portfolio
investments at FVTPL (4) 32,397 - -
Net impairment gain (5) 12,714 - -
Net income from real estate inventories 561 - -
Restructure (13,161) - -
Exchange and other movements (16,387) _ _
ERC roll forward and
145,682 (8,164) reforecast (6)
---------------------------------------- --------- --------- ---------- --------------------
1,817,940 2,035,421 ERC carried forward
---------------------------------------- --------- --------- ---------- --------------------
Effect of discounting (7) (654,316)
---------------------------------------- --------- --------- ---------- --------------------
Carried forward 31 December 2019 1,163,624 1,163,624
---------------------------------------- --------- --------- ---------- --------------------
1. Portfolios acquired in the year are added to the statement of
financial position carrying value of portfolio investments at their
initial purchase price. The undiscounted forecast of estimated
remaining 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.
4. Fair value gain on portfolio investments at FVTPL represents
net increases to carrying values, discounted to calculate the
market interest rate of portfolio investments held at FVTPL as a
result of reassessments to their estimated future cash flows.
5. Net impairment 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 and 120-month forecast
collection period.
7. Under IFRS, the carrying value of portfolio investments
primarily includes 84-months of discounted cash flows, however we
expect to see cash flows beyond this period and report a 120-month
ERC also, as is customary for the industry.
Reconciliation of profit after tax to the cash result
Reported Adjusting Underlying Other Cash
profit items profit items Result
GBP000 (4) after GBP000 GBP000
GBP000 tax
GBP000
--------------------------- --------- --------- ---------- -------- --------- -------------------------
Income from portfolio Collections in the
investments 199,655 - 199,655 242,656 442,311 period
Fair value gains portfolio
investments at FVTPL 32,397 - 32,397 (32,397) -
Net impairment gains 12,714 - 12,714 (12,714) -
Income from Asset
Management Income from Asset
and Servicing 94,360 - 94,360 - 94,360 Management and Servicing
Other income 392 - 392 - 392
--------------------------- --------- --------- ---------- -------- --------- -------------------------
Total income (1) 339,518 - 339,518 197,545 537,063
(102)
Total operating expenses (233,700) 26,789 (206,911) (2) (207,013) Cash operating expenses
--------------------------- --------- --------- ---------- -------- --------- -------------------------
Operating profit 105,818 26,789 132,607 197,443 330,050 Adjusted EBITDA (5)
12,936
Net financing costs (54,498) - (54,498) (3) (41,562)
--------------------------- --------- --------- ---------- -------- --------- -------------------------
Profit before tax 51,320 26,789 78,109 210,379 288,488
Taxation charge on
ordinary activities (14,033) (4,056) (18,089) 4,053 (14,036)
--------------------------- --------- --------- ---------- -------- --------- -------------------------
Profit after tax 37,287 22,733 60,020 214,432 274,452
--------------------------- --------- --------- ---------- -------- --------- -------------------------
(13,099) Capital expenditure
--------------------------- --------- --------- ---------- -------- --------- -------------------------
261,353 Free Cash Flow (7)
(176,064) Replacement rate (6)
--------------------------- --------- --------- ---------- -------- --------- -------------------------
85,289 Cash result (4)
--------------------------- --------- --------- ---------- -------- --------- -------------------------
1. Total income is largely derived from income from portfolio
investments as explained in 3 above, plus income from asset
management and servicing being commission on collections for
third-parties and fee income received. The non-cash items add back
loan portfolio amortisation to get to core collections.
Amortisation reflects a reduction in the statement of financial
position carrying value of the portfolio investments arising from
collections, which are not allocated to income. Amortisation plus
income from portfolio investments equates to core collections
2. Includes non-cash items including depreciation and
amortisation, share-based payment charges and FX
3. Non-cash amortisation of fees and interest
4. The cash result is viewed on an underlying basis which
excludes certain items. These items have been excluded to provide a
more comparable basis for assessing the Group's performance between
financial periods.
5. Adjusted EBITDA is a key driver to the cash result. This
measure allows us to monitor the operating performance of the
Group. See additional information provided for detailed
reconciliations of adjusted EBITDA
6. Replacement rate is the rate of portfolio investments
purchases, at our target portfolio returns, required during the
next 12 months to maintain the 84-month ERC as at 31 December
2019
7. Free cash flow is the adjusted EBITDA after the effect of
capital expenditure and working capital movements
Reconciliation of net cash flow to adjusted EBITDA 31 December 31 December
2019 2018
GBP000 GBP000
-------------------------------------------------------- ----------- -----------
Net cash flow used in operating activities 20,516 (19,021)
Purchases of portfolio investments 303,687 263,350
Purchase price adjustment relating to prior year - -
Income taxes paid 14,036 9,428
Working capital adjustments (27,920) 12,487
Amortisation of acquisition and bank facility fee 127 273
Proceeds from sale of property - 3,759
Dividends and income from associates - -
Write off and disposal of intangible asset and property
plant and equipment (7,185) -
Acquisition costs - 14,717
'One Arrow' costs - 9,039
Adjusting items 26,789 -
-------------------------------------------------------- ----------- -----------
Adjusted EBITDA 330,050 294,032
-------------------------------------------------------- ----------- -----------
Reconciliation of core collections to adjusted EBITDA
Income from portfolio investments including fair
value and impairment gains 244,766 269,404
Portfolio amortisation 197,545 142,184
-------------------------------------------------------- ----------- -----------
Core collections (includes proceeds from disposal
of portfolio investments) 442,311 411,588
-------------------------------------------------------- ----------- -----------
Other income 94,752 91,661
Operating expenses (233,700) (255,013)
Depreciation and amortisation 18,435 14,235
Foreign exchange (gains)/losses 1,018 (2)
Amortisation of acquisition and bank facility fees 127 273
Proceeds from sale of property - 3,759
Deferred consideration release (21,119) -
Disposal of intangible asset - 508
Share-based payments 1,437 3,267
Acquisition costs - 14,717
'One Arrow' costs - 9,039
Adjusting items 26,789 -
-------------------------------------------------------- ----------- -----------
Adjusted EBITDA 330,050 294,032
-------------------------------------------------------- ----------- -----------
Reconciliation of operating profit to adjusted EBITDA
Profit after tax for the year 37,287 29,969
Underlying finance income and costs 54,498 48,134
Taxation charge on ordinary activities 14,033 10,022
Share of profit on associate - -
Gain on sale of associate - -
Adjusting finance costs - 18,658
-------------------------------------------------------- ----------- -----------
Operating profit 105,818 106,783
-------------------------------------------------------- ----------- -----------
Portfolio amortisation 197,545 142,184
Depreciation and amortisation 18,435 14,235
Foreign exchange gains 1,018 (2)
Profit on sale of property - (731)
Amortisation of acquisition and bank facility fees 127 273
Proceeds from sale of property - 3,759
Share-based payments 1,437 3,267
Disposal of intangible asset - 508
Deferred consideration release (21,119) -
Acquisition costs - 14,717
'One Arrow' costs - 9,039
Adjusting items 26,789 -
-------------------------------------------------------- ----------- -----------
Adjusted EBITDA 330,050 294,032
-------------------------------------------------------- ----------- -----------
Glossary of Key Performance Indicators (KPIs)
A description of the Group's KPIs relating to clients, financial
position and performance is set out in the 'additional information'
section.
The Group's KPIs are used throughout this document to help
explain the performance of the business. This glossary sets out why
each of these KPIs are important to the Group.
84-month ERC
The 84-month ERC means the Group's estimated remaining
collections on portfolio investments (of all classifications) over
the next 84-months, representing the expected future core
collections on portfolio investments during this period. The
expected future collections are calculated at the end of each
month, based on the Group's proprietary ERC forecasting model, as
amended from time to time. The 84-month ERC is particularly
important for the Group as it shows the forecast cash inflows over
the same period that is used to calculate the future cash flows of
the Group's portfolio investments.
120-month ERC
The 120-month ERC means the Group's estimated remaining
collections on portfolio investments (of all classifications) over
the next 120-months, representing the expected future core
collections on portfolio investments during this period. The
expected future collections are calculated at the end of each
month, based on the Group's proprietary ERC forecasting model, as
amended from time to time. The 120-month ERC is an important metric
for the Group as in some cases the collection profile of a
particular portfolio can extend beyond 84-months, and as such, the
120-month ERC gives a more holistic view of potential remaining
collections from the Group's portfolio investments.
Leverage ratio
The Group's leverage ratio is calculated by dividing the secured
net debt outstanding at the end of the period by the LTM (12
months' rolling average) Adjusted EBITDA. The leverage ratio
presented in the Annual report and Accounts is calculated on the
same basis as the financial covenant stipulated within the Group's
revolving credit facility provided by a syndicate of banks. As at
31 December 2019, the actual leverage was 3.4 times against the
bank covenant of 4.4 times and a management target of between 3.0
to 3.5 times.
Funds under management (FUM)
The funds under management figure for the Group represents the
current gross discretionary capital that the Group is responsible
for managing in some capacity, including any of its own capital
which it has committed to invest alongside third parties. FUM is an
important metric used to understand the scale of the Group's Fund
Management business and how this compares to others in the
market.
Net IRR
The net Internal Rate of Return (Net IRR) is calculated by
taking the cumulative expected returns from a portfolio investment
(or group of portfolio investments) and discounting these at a rate
that makes the net present value of such returns equal to the price
paid for the investments(s). This is an important metric for the
business as it is a measure of the returns which are being
generated by investing the Group's own capital into new purchases
in the period.
Glossary of alternative performance measures
APM Definition Why is the measure used?
---------------------------------- -------------------------------------- --------------------------------------
Adjusted EBITDA The Adjusted EBITDA figure represents Adjusted EBITDA is an approximate
the Group's earnings before interest, measure of the underlying cash EBITDA
tax, depreciation of the Group. In addition,
and amortisation, adjusted for any the leverage ratio of the Group is
non-cash income or expense items. Any calculated as the ratio of secured net
impact on EBITDA debt to Adjusted
of 'adjusting items' (see below for EBITDA. This makes the Adjusted EBITDA
definition) is also removed for the figure a key component of this metric,
purposes of calculating which also features
adjusted EBITDA. in the Group's banking covenant
measures.
---------------------------------- -------------------------------------- --------------------------------------
Adjusting items Adjusting items are those items that Adjusting items are used to calculate
by virtue of their size, nature or various 'underlying' metrics, to
incidence (i.e. outside provide information
the normal operating activities of the about the performance of the Group
Group) are not considered by the Board without the impact of such items
to be representative included.
of the ongoing performance of the
Group and are therefore excluded from
underlying profit
after tax.
---------------------------------- -------------------------------------- --------------------------------------
Cash result The cash result represents current The cash result provides a measure of
cash generation on a sustainable basis how much cash the Group generates
and is calculated across the reporting
as Adjusted EBITDA less cash interest, period which it can utilise on a
income taxes and overseas taxation discretionary basis, whilst
paid, purchase of maintaining the size of its current
property, plant and equipment, investment portfolio.
purchase of intangible assets and
average replacement rate.
---------------------------------- -------------------------------------- --------------------------------------
Core collections/collections Core collections or collections Core collections is a key metric as it
represent cash collections on the represents the Group's most
Group's existing portfolio significant cash inflow.
investments including ordinary course It is also a key component of adjusted
portfolio sales and put-backs. EBITDA which is used to calculate the
Group's leverage
position.
---------------------------------- -------------------------------------- --------------------------------------
Leverage Leverage is calculated as secured net The leverage metric provides an
debt over Adjusted EBITDA. indication of the level of
indebtedness of the Group, relative
to its underlying cash earnings.
---------------------------------- -------------------------------------- --------------------------------------
Underlying profit before/after tax Underlying profit before/after tax The Group presents underlying profit
means profit for the period after tax before/after tax because it excludes
adjusted for the the effect of items
pre-tax/post-tax effect of certain which are not considered
adjusting items, as defined above, as representative of the Group's ongoing
well as adjustments performance, on the Group's
to remove profits due to profit or loss for a period.
non-controlling interests.
---------------------------------- -------------------------------------- --------------------------------------
Underlying return on equity Underlying return on equity represents Underlying return on equity provides a
the ratio of underlying profit after measure of the underlying returns
tax, to average generated by the
shareholder equity over a 12-month Group on the average shareholder
period. capital deployed in the period.
---------------------------------- -------------------------------------- --------------------------------------
Underlying basic EPS Underlying basic EPS represents Underlying basic EPS provides a metric
earnings per share based on underlying of underlying profit after tax on a
profit after tax, excluding per-share basis,
any dilution of shares. which is a consideration in the
valuation of individual shares,
amongst other items.
---------------------------------- -------------------------------------- --------------------------------------
Glossary of terms
'AMS' Income from Asset Management and Servicing (AMS)
contracts. The Group recognises revenue when it satisfies a
performance obligation related to a service it has undertaken to
provide to a customer.
'APM' means alternative performance measure.
'Average net assets' is calculated as the average quarterly net
assets from 2018 to 2019 as shown in the quarterly and half yearly
statements. In comparative periods this was calculated as the
average annual net assets.
'CGU' means cash-generating unit.
'Collection activity costs' represent the direct costs of
collections related to the Group's portfolio investments, such as
salaries, commissions paid to third-party outsourced providers,
credit bureau data costs and legal costs associated with
collections.
'Cost income ratio' see 'total cost-to-income ratio'.
'Cost-to-collect ratio' is collection activity costs over total
income.
'Creditors' means financial institutions or other initial credit
providers to consumers, certain of which entities choose to sell
paying accounts or non-paying accounts receivables related to debt
purchasers (such as the Group).
'CSA' means Credit Services Association.
'Customers' means consumers whose unsecured loan obligation is
owed to the Group as a result of a portfolio purchase made by the
Group.
'Defaulted debt' means a debt where a customer has breached the
repayment terms governing that debt such that it is unlikely to be
paid. Under the Consumer Credit Act 1974 there are specific legal
obligations which require a customer to be sent the relevant
statutory default notice(s) after which the customer's agreement
may ultimately be terminated. Other types of debts may also be
defined as defaulted in the event that they remain unpaid for a
period of 90 days or more, if there is not an acceptable
arrangement in place to bring the account back up to date, in which
case the creditor or lender may reasonably believe that the
relationship has broken down. Under the Data Protection Act 1990 it
is a requirement that any organisation seeking to register a
default with a credit reference agency must also send a notice of
intention to file a default, this notice is very similar in nature
to that required under the Consumer Credit Act both of which give
the debtor 28 days to bring the account back up to date before
action is taken.
'Diluted EPS' means the earnings per share whereby the number of
shares is adjusted for the effects of potential dilutive ordinary
shares, options and LTIPs.
'DSBP' means the Arrow deferred share bonus plan.
'EBITDA' means earnings before interest, taxation, depreciation
and amortisation.
'EBT' means employee benefit trust.
'ECL' means expected credit losses.
'EIR' means effective interest rate (which is based on the loan
portfolio's gross internal rate of return) calculated using the
loan portfolio purchase price and forecast gross ERC at the date of
purchase. On acquisition, there is a short period that is required
to determine the EIR, due to the complexity of the portfolios
acquired.
'EPS' means earnings per share.
'ERC roll forward' relates to additional cash flows from rolling
the asset life on all portfolios to seven years from the date of
ERC, including the impact of any foreign exchange movement and the
impact of reforecast in the period.
'FCA' means the Financial Conduct Authority.
'Free cash flow' or 'FCF' means Adjusted EBITDA after the effect
of capital expenditure and working capital movements.
'FVTPL' - Financial instruments designated at fair value with
all gains or losses being recognised in the profit or loss.
'FUM' means funds under management.
'GFC' means global financial crisis.
'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.
'IB' means the Investment Business.
'IFRS' means EU adopted international financial reporting
standards.
'Income from AMS' includes commission income, debt collection,
due diligence, real estate management, advisory fees and
intra-group income for these services.
'IPO' means initial public offering.
'Loan to value' or 'LTV ratio' represents the ratio of 84-month
ERC to net debt.
'LTIP' means the Arrow long-term incentive plan.
'NCI' means non-controlling interest.
'Net debt' means the sum of the outstanding principal amount of
the senior secured notes, interest thereon, amounts outstanding
under the revolving credit facility and deferred consideration
payable in relation to the acquisition of portfolio investments,
less cash and cash equivalents. Net debt is presented because it
indicates the level of debt after taking out of the Group's assets
that can be used to pay down outstanding borrowings, and because it
is a component of the maintenance covenants in the revolving credit
facility. The breakdown of net debt for the year ended 31 December
2019 is as follows:
2019 2018
GBP000 GBP000
--------------------------------------------------------- --------- ---------
Cash and cash equivalents (88,765) (92,001)
Senior secured notes (pre-transaction fees net off) 902,656 935,567
Revolving credit facility (pre-transaction fees net off) 234,683 245,587
Asset-backed loans (pre-transaction fees net off) 85,604 -
--------------------------------------------------------- --------- ---------
Secured net debt 1,134,178 1,089,153
Deferred consideration - portfolio investments 62,944 12,031
Deferred consideration - business acquisitions 30,372 59,922
Senior secured loan notes interest 7,999 5,542
Asset-backed loan interest 131 -
Bank overdrafts 1,255 2,696
Other borrowings 3,672 11,635
--------------------------------------------------------- --------- ---------
Net debt 1,240,551 1,180,979
--------------------------------------------------------- --------- ---------
'Net IRR' means the internal rate of return net of cost to
collect.
'NPL' means non-performing loan.
'OCI' means other comprehensive income.
'Off market' means those loan portfolios that were not acquired
through a process involving a competitive bid or an auction like
process.
'Paying account' means an account that has shown at least one
payment over the last three months or at least two payments over
the last six months.
'Pay-out ratio' represents the total amount of dividends paid
out divided by the underlying profit after tax.
'Portfolio amortisation' represents total collections plus
income from portfolio investments.
'POCI' means purchased or originated credit impaired
'Portfolio investments' are on the Group's statement of
financial position and represent all debt portfolios that the Group
owns at the relevant point in time. A portfolio comprises a group
of customer accounts purchased in a single transaction.
'RCF' means revolving credit facility.
'Replacement rate' means the level 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 2018 to 2019 as shown in the
quarterly and half yearly statements. In the comparative period
this is calculated as the average annual equity attributable.
'Secured net debt' see table in 'net debt' definition.
'SIP' means the Arrow all-employee share incentive plan.
'SMART' means aligning the leadership teams across the Group
around our Mission, Vision and Strategy.
'SME' means small and medium-sized enterprises.
'SPPI' means solely payments of principal and interest.
'TCF' means the treating customers fairly FCA initiative.
'Total cost-to-income ratio' is total operating expenses over
total income.
'Translation reserve' comprises all foreign currency differences
arising from the translation of the financial statements of foreign
operations.
'TSR' means total shareholder return.
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.
END
FR GPUBCWUPUUQP
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