ARW.L Regulatory News (ARW)

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 €838.0 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 £303.7 million investment volumes at a consistent 17.0% net IRR

· Gross Asset Management and Servicing (AMS) income up 5.9% to £140.1 million - 36.4% of gross total income (FY 2018: 32.9%)

· Free cashflow up 13.3% to £261.4 million (FY 2018: £230.7 million)

· Profit before tax increased 28.3% to £51.3m (FY 2018: £40.0m)

· 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 €838.0 million in initial Funds Under Management (FUM) - continue to target €2.0 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 £51.3 million. This helped increase free cashflow generation by 13.3% to £261.4 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 €838.0 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 €2.0 billion by the end of 2020."

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:

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 £303.7 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 £261.4 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 £51.3 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 €838.0 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 €2.0 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 €1 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 €2.0 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 £51.3 million (2018: £40.0 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 £78.1 million (2018: £82.4 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 €838.0 million of total capital commitments, with a target to manage €2.0 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 £261.4 million (2018: £230.7 million). This was driven by a 7.5% increase in core cash collections to £442.3 million (2018: £411.6 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 £94.4 million (2018: £91.7 million). The increase resulted in a 12.2% improvement in adjusted EBITDA to £330.0 million (2018: £294.0 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 £303.7 million in new portfolios, with £62.9 million of this payment deferred to 2020 (2018: £263.4 million purchased, with £12.0 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 £3.9 million (2018: £6.7 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 £442.3 million (2018: £411.6 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 £244.8 million (2018: £269.4 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 £12.7 million (2018: £50.7 million).

Arrow's Fund further evolves the purchase model and accounting

Arrow's new Fund is targeting FUM of €2.0 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 £140.1 million (2018: £132.3 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 £94.4 million (2018: £91.7 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 £136.0 million to £123.9 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 £21.1 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 £97.2 million (2018: £95.0 million).

Total adjusting items related to costs came in at £26.8 million, £3.8 million higher than guided. The cost of implementing the efficiency programme announced at the Interim results - representing an investment of £20.0 million to extract £20.0 million of run rate costs - was £15.2 million. Benefits for the programme have been reforecast at around £17.0 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 £10.1m as the size and scale of the launch of the business exceeded expectations. The remaining £1.5 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 £54.5 million were lower by 18.4% than 2018 as no bond refinancing costs were incurred during 2019. Underlying net interest charges of £54.5 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 £14.0 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 £153.0 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 £100.0 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 £1,134.2 million (2018: £1,089.2 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 £14.5 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 £0.20p (2018: £0.17p) with the increase largely relating to the lower levels of adjusting items incurred during the year.

Underlying basic EPS reduced by 10.8% to £0.33p (2018: £0.37p), 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 HotsonGroup 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

Consolidated and statement of financial position

As at 31 December 2019

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

Consolidated and statement of cash flows

For the year ended 31 December 2019

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:

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.

Total income includes income from portfolio investments, asset management and servicing and other income.

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.

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

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

5. Collection activity costs, other operating expenses and staff costs

In 2019, £8,817,000 of the other staff-related costs relates to temporary labour, recruitment and training (2018: £7,537,000).

b. Staff costs

6. Taxation

The Group's activities are predominantly UK based. The analysis below therefore uses the UK rate of corporation tax.

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:

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 €1,147,000 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 £2,560,000 (2018: £859,000) 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 £7,645,000 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)

Refer to table of alternative performance measures in the 'additional information' section for details of underlying earnings per share.

8. Goodwill

The following table provides a breakdown of goodwill acquired during the current and prior year:

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:

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:

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:

9. Trade and other payables

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:

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:

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:

The number of key management during the year was 6 (2018: 7).

12. Portfolio investments

Split of portfolio investments by period:

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

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

The impact of IFRS 9 shown above is pre-tax. The post-tax impact is £14,000,000. 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 £11,020,000 (31 December 2018: £10,870,000). 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

Senior secured notes

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

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 £18,658,000 incurred on the early redemption of the €230 million notes due 2023, of which £13,623,000 was a cash cost related to the call premium. The remaining £5,035,000 was due to a non-cash write-off of related 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 £215 million to £255 million. The maturity of the facility was extended to 2 January 2023 and the margin reduced to 2.5%.

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

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

On 31 July 2019, the Group sold a further £44 million of ERC into AGL Fleetwood Limited and subsequently borrowed an additional £25 million non-recourse funding on the same terms under the facility. 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 £11,115,000 including deferred and contingent consideration.

Contingent consideration is payable at various times within two years from completion of the transaction upon the satisfaction of three mutually exclusive conditions which are based upon the business achieving certain targets around future volumes and the successful migration of Group 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 £4,262,000 contingent consideration the gross undiscounted amounts are made up as follows;

Up to £2,000,000 is contingent upon the successful migration of Arrow accounts. The payment range could be anywhere between £0 and £2,000,000 with the final amount to be agreed upon in April 2020.

Up to £2,000,000 is contingent upon the performance of Arrow placed accounts against the jointly agreed business plan. The payment range could be anywhere between £0 and £2,000,000 with the final amount to be agreed upon in April 2021.

£1,000,000 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:

An intangible asset of £688,000 has been recognised at acquisition, being the fair value after appropriate discounting, of expected cash flows arising from existing customer relationships. 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 £14,519,000 was created as a result of this acquisition. The primary reason for the acquisition was to broaden the Group's range of servicing capabilities in the UK.

In the period from acquisition to 31 December 2019, Drydens contributed income of £3,650,000 and profit after tax contribution of £1,165,000 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 £1,167,000 and profit after tax would have been lower by an estimated £24,000.

15. Notes to the statement of cash flows

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.

2019 adjusting items

Of the £26,789,000 adjusting items total in 2019, £15,220,000 relates to the Group's strategic simplification programmes, £10,112,000 relates to the expansion of the Group's Fund Management business, and £1,457,000 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 £15,220,000 of spend related to the Group's strategic simplification programmes:

· £6,398,000 relates to the accelerated write-off and decommissioning of IT-related intangible assets

· £3,459,000 relates to the costs of exiting employees from certain functions across the Group, including staff restructuring

· £2,641,000 relates to the costs of exiting particular sites and small businesses lines across the Group

· £1,567,000 relates to employee costs (including allocations of existing employees' costs) of executing and delivering the programme

· £1,155,000 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 £10,112,000 of spend related to the expansion of the Group's Fund Management business:

· £6,897,000 relates to third-party advisory fees and sundry materials costs

· £3,215,000 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 £42,414,000 adjusting items total in 2018, £18,658,000 related to bond refinancing costs, £14,717,000 were acquisition related costs, and £9,039,000 related to 'One Arrow' costs.

Of the £18,658,000 related to bond refinancing costs:

· £13,623,000 cost related to the call premium, and

· £5,035,000 due to a non-cash write-off of related transaction fees, in connection with the 2023 Notes.

Of the £14,717,000 acquisition related costs:

· £3,068,000 related to acquisitions in the current year, and

· £11,649,000 related to contingent consideration payments on previous periods' acquisitions.

The remaining £9,039,000 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

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