ARW.L Regulatory News (ARW)

12 August 2021

Arrow Global Group plc

Interim results for the six months ended 30 June 2021

Strong second quarter performance; Execution of capital-light strategy on track, driving long-term growth

Highlights

· EBITDA before takeover costs of £61.3 million (H1 2020: loss of £100.0 million)

· Profit before tax and takeover costs of £22.9 million (H1 2020: loss of £135.9 million)

· Arrow shareholders voted in favour of the recommended all cash offer by TDR Capital at the court and general meetings on 21 May (93.8% of votes in favour); Completion, subject to regulatory approvals, expected by the end of Q3 2021; £22.4 million of takeover costs have been recognised leading to a statutory profit before tax of £0.5 million (H1 2020: loss of £135.9 million)

· Arrow Credit Opportunities 1 (ACO 1) fund deployment in line with expectations

· Asset Management & Servicing third-party contract wins continue

Fund and Investment Management (FIM) business - Attractive deployment opportunities

· Continued momentum in deployment of ACO 1 - 54% of fund deployed or committed (gross, before capital recycling and including both third-party and balance sheet co-investment); 64% deployed when co-investment is excluded

· Expect 70% deployment (excluding balance sheet co-investment) of ACO 1 in early 2022, enabling us to begin fundraising for our next fund, ACO 2

· Record deployment in Q2 2021; strong Q3 2021 investment pipeline

· H1 2021 third-party income of £10.8 million, up 92.9% (H1 2020: £5.6 million)

· Net deal IRR of 18% achieved in H1 2021 (FY 2020: 17%)

· Funds Under Management (FUM) of €4.8 billion at 30 June 2021 (31 December 2020: €4.3 billion)

Asset Management and Servicing (AMS) business - Resilient revenues and new contract wins

· Resilient third-party income growth, up 12.6% to £44.8 million (H1 2020: £39.8 million)

· 11 new contract wins during H1 2021 (FY 2020: 26), driving high-quality recurring revenues

· 71% of ACO 1 deployment serviced by AMS platforms (as at H1 2021, on a cumulative basis)

Balance Sheet (BS) business - Strong collections performance outperforming ERC

· H1 2021 collections of £179.6 million (H1 2020: £175.8 million), representing 119% of December 2020 forecast Estimated Remaining Collections (ERC)

· Portfolio purchases of £94.8 million (H1 2020: £42.9 million)

· No material changes to the outlook for macro-economic factors which informs the assumptions used in our ERC forecast

Capital and liquidity

· Robust balance sheet with liquidity headroom increasing to £190.0 million (FY 2020: £174.6 million) - driven by continued strong free cash flow generation of £90.7 million (H1 2020: £82.5 million), the successful €75 million bond tap in Q1 2021, partially offset by higher portfolio purchases

· Leverage of 4.7x (FY 2020: 5.1x), comfortably within covenant levels

· Continue to expect leverage to be circa 4.0x by the end of 2021 and within target 3.0x-3.5x range by 2023

Outlook and targets

· Strongly positioned to take advantage of the investment and asset servicing opportunities that are arising from European-wide economic dislocation

· Recovery in performance during 2021 aligned to improving operating conditions and capital-light strategy

· Outlook described at FY20 remains appropriate; 2025 strategic targets remain on track

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

"Arrow continues to build momentum, delivering a strong second quarter performance despite continued economic disruption in our European markets, and with most of our colleagues working from home. We remain focused on the execution of our capital-light strategy and are making excellent progress. The continued successful deployment of ACO 1 means we are on track to begin fundraising for our second fund as planned. I am also pleased that our AMS business continues to see strong demand for its services, with our reputation as a responsible servicer helping us continue to win new contracts. Arrow shareholders voted in favour of the recommended all cash offer by TDR Capital at the court and shareholder meetings on 21 May and we continue to work with TDR to progress regulatory filings to satisfy the remaining conditions to the acquisition, which is expected to complete by the end of the third quarter. As we look towards the future, Arrow's proven track record as a leading investor and servicer means we remain well positioned in the large and growing European market, as economic dislocation generates new opportunities at increasingly attractive returns."

Jonathan Bloomer, Group chairman, said:

"It has been a challenging 18-month period, and today's strong results reflect the resilience of our business and the strength of the integrated asset management platform we have built. I am immensely proud of the way Arrow has navigated the pandemic and on behalf of the board, I would like to thank all Arrow colleagues for their steadfast commitment to our customers and clients, and their continued engagement under difficult circumstances. I want to pay a particular tribute to Lee Rochford, our CEO, who has led the business through this period in an exemplary fashion thereby ensuring the strong performance. I would also like to thank our shareholders for their unwavering support since our IPO in 2013. The launch of our capital-light strategy towards the end of 2020 was a pivotal moment for the Group, only made possible by our transition into a scalable alternative asset manager and our successful track record. As Arrow embarks on its next chapter of growth, under the ownership of TDR Capital, I am confident that Arrow has bright prospects and will continue to build better financial futures for all of its stakeholders."

* These results exclude advisor fees associated with the potential purchase of the business and one-off acceleration of share-based payments and retention arrangements for key personnel below executive directors. For the reconciliation between this and the condensed consolidated profit and loss, please see the reconciliation on page 47.

** ROE has been calculated by extrapolating the half yearly results. The full definition of 'annualised' can be seen within the ROE definition in the glossary on page 50.

Presentation for H1 2021 results

No conference call will be held for the H1 2021 results; however, a presentation detailing Arrow's first half performance is available on the Group's Investor Relations website.

Notes:

A glossary of terms can be found at the end of the document. More details explaining the business can be found in the Annual Report & Accounts 2020, which is available on the Company's website at www.arrowglobalir.net

For further information:

Forward looking statements

This document contains statements that constitute forward-looking statements relating to the business, financial performance and results of the Group and the industry in which the Group operates. These statements may be identified by words such as "expectation", "belief", "estimate", "plan", "target", or "forecast" and similar expressions or the negative thereof; or by forward-looking nature of discussions of strategy, plans or intentions; or by their context. All statements regarding the future are subject to inherent risks and uncertainties and various factors could cause actual future results, performance or events to differ materially from those described or implied in these statements. Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which the Group will operate in the future. Further, certain forward-looking statements are based upon assumptions of future events which may not prove to be accurate and neither the Company nor any other person accepts any responsibility for the accuracy of the opinions expressed in this document or the underlying assumptions. The forward-looking statements in this document speak only as at the date of this presentation and the Company assumes no obligation to update or provide any additional information in relation to such forward-looking statements.

Important note:

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

Strategic overview

For the six months to 30 June 2021

Overview

Strong financial results delivered in the first half

Arrow has delivered a strong set of results in the first six months of 2021. Total income of £166.3 million was significantly ahead of the prior period (H1 2020: £3.4 million) driven primarily by the H1 2020 non-cash impairment charge of £120.8 million in income relating to the write-down of the ERC balance sheet asset. Profit before tax and takeover costs of £22.9 million (H1 2020: loss of £135.9 million) reflected a strong second quarter with the standalone result nearly twice that achieved in the first quarter of 2021. Profit before tax after takeover costs was £0.5 million (H1 2020: loss of £135.9 million) with circa £17 million of the takeover costs being contingent on the successful completion of the deal.

Balance sheet cash collections of £179.6 million were 2.2% ahead of the prior period (H1 2020: £175.8 million), representing 119% of the 84-month ERC at 31 December 2020. Despite the outperformance, we believe that the assumptions underlying the ERC forecast remain appropriate given that we have yet to see the full impact of the pandemic on customer finances as the withdrawal of government support measures begin to take effect in our target markets. Our Fund & Investment Management business generated third-party management fee income of £10.8 million in the first half (H1 2020: £5.6 million) reflecting the strong level of capital deployment in the ACO 1 fund. The second quarter of 2021 saw the highest rate of fund deployment to date, and we are on track to begin fundraising for our second fund in early 2022. FUM were €4.8 billion at 30 June 2021 (31 December 2020: €4.3 billion), including the Investment Management subsidiaries of Norfin, Europa Investimenti and Sagitta. The increase in FUM was driven primarily by Norfin and Sagitta. The Asset Management & Servicing business continues to benefit from the servicing opportunities arising from the deployment of ACO 1. This, together with 37 new third-party contracts won in the last 18 months, increased gross income by 7.7% to £64.2 million (H1 2020: £59.6 million).

Free cash flow generation in the first half of 2021 was £90.7 million (H1 2020: £82.5 million). The strong free cash flow, together with the bond tap raising €75 million and partially offset by our portfolio investments, led to an increase in our liquidity headroom to £190.0 million (FY 2020: £174.6 million). Management actions delivered in 2020 to strengthen the balance sheet, following the onset of the COVID-19 pandemic, places the Group in a robust financial position with the flexibility to invest into the significant market opportunities that are arising from economic dislocation. Balance sheet leverage (secured net debt/adjusted EBITDA) reduced to 4.7x from 5.1x at the end of 2020 and is expected to continue reducing as the negative impact of H1 2020 COVID-19 lockdowns on collections fall out of the Group's trailing 12-month calculation. We are targeting leverage of circa 4.0x by the end of the year and to return to within our risk appetite (3.0x to 3.5x) by 2023.

Strategic execution on track

Having undertaken the pivot from a balance sheet investor to a fully integrated asset manager, largely investing capital on behalf of third-party investors, we have a clear strategy in place, with granular targets that reflect our ambitions. Since the start of the year, we have been resolutely focused on strategic execution as well as capitalising on the significant market opportunity.

It has been a busy six months for our Fund & Investment Management business as we invest to drive scale and industrialisation to support ACO 1 deployment and future divestment, as well as future fund launches. We have built an in-house fundraising capability with the creation of the Clients and Capital Formation function and recruited a managing director to lead the team. Several other key senior hires have been made during the period to lead our underwriting, real estate and distribution teams. In addition, functions are being built out to optimise capital allocation, portfolio management and operational effectiveness. Building brand recognition and awareness across our target markets to support future fundraising is also a significant priority, and we will achieve this through a combination of sponsorships, media campaigns and thought leadership.

Our Asset Management & Servicing business is highly complementary to Fund & Investment Management with 71% of fund investments to date being serviced by our market leading AMS platforms, with the fund paying market referenced fees for such servicing. In addition, third-party demand for our asset servicing capability remains high as the volume of European NPL assets grow, with 11 new contracts won in the first half of 2021, following on from the record 26 contract wins during 2020.

The strategy for our Balance Sheet business is to maximise collections on the back book at least in line with our 84-month ERC asset and to co-invest alongside the ACO 1 fund in an approximate 25:75 ratio. We expect the proportion of balance sheet investment to reduce for subsequent funds. This would result in reduced capital intensity on the balance sheet and enables the Group to continue reducing leverage to within our risk appetite.

We remain on track to achieve the strategic targets that we set out in November 2020.

Priorities for the remainder of the year

Arrow's strong financial position, successful investment track record, and growing capital-light businesses uniquely positions the Group to take advantage of the attractive opportunities that are emerging from the pandemic. Arrow's priorities for the second half of 2021 are clear:

1. Deployment of remaining ACO 1 FUM

Arrow has a large on-the-ground presence in its markets with asset expertise on a very granular level. As such, around 70% of deals to date have been off-market bilateral trades that are smaller in size and offer our investors both the prospect of higher returns and enhanced diversification. This is where our business model performs optimally and offers its strongest competitive advantage versus some of the larger distressed credit funds, by limiting large single risk exposures. We expect this investment trend to continue for the remainder of the year as we continue the deployment of ACO 1 - with a continued preference for secured over unsecured assets, providing enhanced downside protection.

2. Prepare the ground for ACO 2 fundraising in 2022

We are on track to deploy 70% of ACO 1 FUM (excluding co-investment) by the end of 2021, enabling the start of the ACO 2 fundraising in early 2022. As such we are turning our focus towards preparing for the fundraise of our second fund. Given the success of the ACO 1 deployment and the returns achieved to date, we aim to leverage existing institutional investor relationships and are confident in achieving a strong level of re-investment into the second fund. We will also continue to target a diversified and global investor base for future fundraises.

3. Continued investment into FIM to enhance scalability

The foundations for growth in the FIM business are firmly in place and we are confident in achieving our goal of at least €10 billion of FUM by the end of 2025. Although much has been achieved in the first six months of the year with a number of key senior hires as well as the build out of a number of functions, in order to meet our target, we need to build additional scale in the business with further investment planned in talent, systems, technology as well as building the brand.

4. Seek further new business wins in AMS to drive high-quality recurring revenues

As the volume of defaulting assets in our European markets continues to increase, financial institutions will require our proven capabilities and leading collections platforms to service these assets. This has already led to a record number of deals won during 2020 and the first six months of 2021. The deal pipeline for the second half of the year is strong and we expect to continue our recent performance, which will contribute to the continued growth of the AMS business. We are confident in achieving our target of growing AMS revenues by 10% per annum over the next 5 years.

5. Monitor the macro-economic environment and maximise back book collections

Although macro-economies across the globe are starting to recover from the pandemic as economic activity picks up following the easing of restrictions, we are mindful of the potential negative impact on unemployment and asset prices as government support measures are withdrawn. We are therefore focused on continuing to maximise collections against our 84-month ERC, whilst maintaining high service levels to our customers in line with our ESG policy.

Summary and Outlook

Arrow has made a successful start to the year despite the vast majority of our people continuing to work remotely, which is testament to their ongoing dedication and commitment to Arrow. We grew earnings significantly in the second quarter, increased our balance sheet collections (which outperformed the December 2020 ERC forecast), and continued to increase the proportion of the Group's capital-light income streams in the Asset Management & Servicing and Fund and Investment Management businesses. We continue to target the generation of 50% of our EBITDA from capital-light sources by 2025. The deployment of ACO 1 is progressing as expected, achieving a net deal IRR of 18% in the first six months of the year and we look forward to starting the fundraise for ACO 2. There continues to be heightened demand for our servicing capability from banks and other financial institutions who require a trusted partner to help manage their non-performing assets as the volume of defaulting assets in our European markets continues to increase.

Our business benefits when economies are disrupted by structural change or turmoil, as evidenced by our strong performance in the aftermath of the Global Financial Crisis. Even before the impact of COVID-19, our target market was large across Europe; it is estimated that there are circa €1.5 trillion of non-core and non-performing assets estimated across Europe, of which around €1 trillion reside on bank balance sheets. Market estimates suggest that bank NPL assets will increase by at least 50% to around €500 billion by the end of 2022. In addition, we expect a large secondary market of around €300 billion over the next four years, resulting from asset sales by banks during the last seven years. The market opportunity is therefore clearly significant.

Arrow has undertaken the pivot towards capital-light fund management, and we have the right foundations in place to grow at scale and achieve our ambitious strategic targets by 2025. As we look towards the future, Arrow's proven track record as a leading investor and servicer means we remain well positioned in the large and growing European market, as economic dislocation generates new opportunities at increasingly attractive returns.

Finance and operating review

For the six months to 30 June 2021

Overview

Trading conditions in the first half of 2021 were much improved on the equivalent period in the prior year as the business was better adapted and more accustomed to working remotely. This, together with the benefits from a number of management actions taken in 2020 to strengthen the balance sheet, means Arrow remains well funded with sufficient financial capacity to deliver on its capital-light strategy, and to capture the large number of investment opportunities in our target markets. 

Strong cashflow generation

The Group has continued to improve cash generation, with £90.7 million of free cash flow generated in the first half (H1 2020: £82.5 million). The combination of improving cash collections, the growing proportion of capital-light income from the Group's FIM and AMS businesses, and the balance sheet business co-investing alongside ACO 1, underpins the Group's confidence in its ability to maintain strong liquidity and to continue deleveraging.

Statement of profit or loss

During the first six months of the year, the pre-tax result (before takeover costs) increased from a loss of £135.9 million in the prior period to a profit of £22.9 million at H1 2021. This was driven primarily by the H1 2020 non-cash impairment charge of £120.8 million in income relating to the write-down of the ERC balance sheet asset, which reflected the less favourable macro-economic outlook in the prior year due to the impact of the COVID-19 pandemic (H1 2021: non-cash impairment gain of £17.7 million).

Total income of £166.3 million in H1 2021 (H1 2020: £3.4 million) was driven by the non-recurrence of the ERC write down, as well as improved balance sheet collections and growth in servicing fees and management fees from the AMS and FIM businesses respectively.

Total operating expenses before takeover costs increased to £113.2 million (H1 2020: £112.3 million). In light of the potential acquisition of the business by TDR Capital, professional advisor fees have been accrued and some share-based payments and retention arrangements for key personnel below executive directors have been accelerated, which would otherwise not have been incurred in the reporting period, bringing total operating expenses after takeover costs to £135.6 million. Circa £17 million of the takeover costs are contingent on the successful completion of the deal with the balance representing unavoidable costs relating to the takeover. Total operating expenses before takeover costs increased due to a combination of higher collection activity and fund management costs and overheads. Collection and fund management costs increased to £66.4 million (H1 2020: £64.3 million) - a reduction in collections activity costs was more than offset by an increase in litigation costs and fund management costs, with the latter being driven by the build out of the fund management platform, including a number of strategic hires in 2021, the creation of new teams and build out of functions, and other costs associated with the strategic pivot to fund management. Other operating expenses before takeover costs of £46.8 million reduced (H1 2020: £48.0 million), despite accruing for increased bonus payments in H1 2021.

Net finance costs of £30.2 million were 11.9% higher (H1 2020: £27.0 million) - in line with expectations and reflecting the successful bond tap completed during the first quarter of 2021.

The tax charge before takeover costs impacts of £2.3 million represents an effective tax rate of 10.0% (H1 2020: (18.8%)) on profit/(loss) before tax. The primary driver for the lower-than-expected tax charge is the restatement of the UK deferred tax asset to reflect the enactment of Finance Act 2021, which increases the UK corporation tax rate from 19% to 25% effective from 1 April 2023. The UK deferred tax asset, expected to unwind after this date, has been restated at 25% which gives rise to a one-off tax credit of £3.7 million. The tax charge after takeover cost impacts was £1.4 million (H1 2020: £25.5 million credit).

Dividend and returns

As previously reported, the board is currently focused on capital allocation to capture the significant investment opportunity, as well as on deleveraging the balance sheet. As such, the Group is not declaring a dividend for the first six months of 2021.

Basic EPS was (£0.01) in H1 2021 (H1 2020: £(0.62)), due to the ERC reforecast and resultant write down of the balance sheet asset in the prior period, and the impact of the costs incurred in relation to the potential takeover by TDR Capital in the current period.

Annualised return on equity (ROE) at the half year was (1.7)% after takeover costs and 37.9% before takeover costs (H1 2020: (121.4)%). The Group continues to target ROE of greater than 25% through-the-cycle between FY 2021 - FY 2025.

Segmental Review

The comparative segmental table can be found in note 5 on page 26. For the reconciliation between this and the condensed consolidated profit and loss, please see the reconciliation on page 47.

Fund and Investment Management (FIM) business

Successful ACO 1 deployment; on track to start ACO 2 fundraising in line with plan

We continue to successfully deploy the capital in ACO 1, with the second quarter of 2021 being the highest rate of deployment to date, with €243 million invested across the fund vehicles (including deferred consideration). As of 30 June 2021, we have deployed 54% of ACO 1 (gross, before capital recycling and including both third-party and balance sheet co-investment) into attractive investment opportunities yielding a net deal IRR of 18%. Excluding co-investment, the fund is 64% deployed, which means we are on track to begin fundraising for ACO 2 in early 2022 (ACO 1 needs to be circa 70% deployed before fundraising for ACO 2 can commence). Portfolio management actions and strong collections have resulted in significant volumes of cash being generated from investments and being re-invested by the fund vehicles. Around 70% of investments to date have been off-market/bilateral deals, where our local in-country presence provides us with a significant competitive advantage.

FIM generated third-party management fee income of £10.8 million in the first half, up 92.9% (H1 2020: £5.6 million), which reflects the strong deployment momentum. Third-party fee income should continue to grow as the fund management net asset value increases. The EBITDA margin at H1 2021 was 30.7% and we are on track to achieve our target of 40% by 2025.

Building expertise and scale to achieve €10 billion of FUM by 2025

Having undertaken the pivot towards fund management we have the necessary foundations in place. However, to grow FUM significantly in line with our target, we need to invest further to create scale and drive operating leverage. We have made good progress in the first six months of the year by creating a Client Management & Capital Formation function and appointed a managing director (MD) to lead the team and our future fundraising efforts. We have also built out our Investment Strategy & Capital Allocation function, our Portfolio Management function as well as a Fund Operations function. In addition, we have appointed MDs to lead our Underwriting, Real Estate and Distribution & Securitisation teams. We continue to invest in our Fund Management IT system, focusing on agile and iterative development. Building brand awareness in the fund management arena is also high on our investment agenda.

Looking ahead until the end of 2021, we intend to create an Advisory Board comprised of individuals based in different parts of the world to help facilitate new investor relationships. Looking further ahead (beyond ACO 2), we are also exploring new product development with different risk and return profiles (such as private debt, real estate, direct lending, and litigation finance) as well as strategic partnering with investors to explore potential new geographies.

Asset Management & Servicing (AMS) business

Revenue resilience and continued contract wins

Gross AMS income from our servicing and collection activities grew 7.7% to £64.2 million (H1 2020: £59.6 million) notwithstanding the effects of a weaker Euro exchange rate versus GBP. Gross income includes a small contribution from servicing fees charged to the fund. AMS income from third-parties was up 12.6% to £44.8 million (H1 2020: £39.8 million), evidencing the resilience of the business's capital-light and recurring fees from long-term servicing contracts, despite the continuing impact from the COVID-19 pandemic, coupled with new business wins and a growing contribution from internal servicing fees referred to above. We continue to see a high demand from financial institutions for our asset servicing capabilities through our leading collections platforms, due to the increasing volume of non-performing assets as a result of the pandemic. During 2020 we won a record 26 new servicing contracts and have continued the strong momentum into 2021 with a further 11 new contracts won during the first six months of the year. The pipeline of further servicing opportunities for the remainder of the year is healthy. These new servicing contracts will continue to drive revenue growth in 2021 and beyond and supports our target of growing total revenues by 10% per annum over the next five years.

AMS continues to benefit from the ACO 1 fund deployment. We aspire to around 75% of fund investments being serviced on AMS platforms, with the fund paying market referenced fees for servicing. We achieved 71% at H1 2021 (on a cumulative basis) due to lower non-performing loan (NPL) investments during H1 2021 by ACO 1 in current market conditions.

In H1 2021, the AMS EBITDA margin decreased to 9.7% (H1 2020: 11.4%, restated). The restatement of the margin in the prior period reflected the updated segmental reporting methodology which aligned some of our fund management platforms previously reported under AMS into the FIM segment. The reduction in margin was driven by a decrease in revenue from collections-based and master servicing fees in the period. At a gross margin level, the reduction was also driven by an investment in direct costs associated with new third party contracts, where cost is typically incurred ahead of earning revenue. At EBITDA level the impact was compounded by increased recruitment and bonus costs year-on-year as well as higher IT costs driven by new contract wins. AMS is targeting a 25% EBITDA margin by 2025.

Balance Sheet business

Continuing trend of strong collections performance

The Balance Sheet business reflects the performance of the assets purchased with Arrow's own capital. Cash collections in the first half from our purchased portfolios were £179.6 million (H1 2020: £175.8 million), reflecting continued robust operational performance and the execution of a range of active portfolio management actions, despite the continuing impact of the COVID-19 pandemic.

Unsecured collections from our UK business have benefited from the recommencement of litigation collections strategies, with an acceleration of activity in Q4 2020 supporting strong performance throughout the first half. Elsewhere in Europe our unsecured collections have remained robust and generally the performance of this asset class underlines the strength of our underwriting processes.

Secured asset collections in Italy and Portugal during the first quarter of 2021 were impacted by the pandemic which halted real estate market transactions and court processes such as auctions, impacting the resolution of larger positions. Our reforecast of secured assets in these geographies reflects the potential for some further disruption in the second half of the year but an improving trend of resolutions/exits from H1 2022 onwards.

Increasing investment volumes reflect attractive market opportunities

In the first six months of 2021, Arrow invested £94.8 million into new portfolio purchases (H1 2020: £42.9 million), an increase of £51.9 million. Prior period purchases were impacted by the decision to preserve cash and liquidity due to the COVID-19 pandemic while the increase in the current year follows a significant level of off-market capital deployment in Q2 2021. This was driven by increases in real-estate backed investments in Portugal, UK and Ireland, credit-backed investments in Holland and the provision of asset-backed funding lines into a number of aggregation vehicles backed by the ACO 1 fund. Italian purchases remained broadly in line with H1 2020. The investment pipeline for second half of the year is robust and we remain well positioned to invest at substantial volume into the growing market opportunity.

The Group is currently seeing higher volumes of investment opportunities offering significantly higher returns than at the start of the year but continues to seek to optimise medium-term returns in its investment decision making.

Balance sheet revaluation drives non-cash impairment gain

The ERC reforecast exercise has resulted in the upwards valuation of the portfolio investment assets on the balance sheet, largely within unsecured portfolios, resulting in a non-cash impairment gain of £17.7 million (H1 2020 non-cash impairment loss of £120.8 million). Total income from portfolio investments has therefore increased to £105.1 million (H1 2020: loss of £43.3 million).

Reduced spend on collection costs

Collection activity costs reduced by 10.5% to £45.3 million in H1 2021 (H1 2020: £50.6 million), despite higher overall collections. This was driven by a change in the mix of collections in the first half, with a reduction in collections on amortised cost and real estate portfolios, which is where the bulk of collection activity costs are incurred. This was partially offset by litigation activity costs which increased year-on-year following a decision taken in Q2 2020 to halt litigation across all geographies to conserve cash and to support customers, while in H1 2021, despite some disruption, particularly in Italy and Portugal during the first quarter, these activities recommenced. The recommencement of litigation and our broader engagement strategies are performing well. Incremental collections generally follow several months after litigation spend and we therefore expect further margin improvement during the second half of the year.

Balance sheet

Strong cash and liquidity with long-term balance sheet funding

Arrow's liquidity headroom - the combination of the undrawn committed revolving credit facility and available cash on the balance sheet - was £190.0 million at H1 2021 (FY 2020: £174.6 million). This consistent increase is predominantly a result of resilient cash generation with £90.7 million of free cash flow in H1 2021 (H1 2020: £82.5 million), the successful €75 million bond tap executed in Q1 2021, and prudent working capital management. This was partially offset by higher levels of portfolio purchases (H1 2021: £94.8 million, H1 2020: £42.9 million).

The strong collections of £179.6 million in H1 2021 (H1 2020: £175.8 million) has enabled the Group to reduce leverage from 5.1x at 31 December 2020 to 4.7x as at 30 June 2021. We continue to expect leverage to reduce to approximately 4.0x by the end of 2021 and to be within our risk appetite of 3.0x to 3.5x by 2023. As at 30 June 2021, the Group's weighted average cost of debt was 3.8% (31 December 2020: 3.7%) and the average debt facility maturity was 3.4 years (31 December 2020: 3.7 years). Net debt reduced to £1,185 million at 30 June 2021 from £1,226 million at 31 December 2020.

The long-term support from Arrow's lenders, with amendments to financial covenants under the revolving credit facility executed during 2020, the additional non-recourse facility raised in 2020, and the successful bond tap executed in Q1 2021, demonstrate the strong support for the Group. Furthermore, the board has assessed liquidity and leverage for the coming five years and considers that the business can execute its strategy in compliance with its covenants. There has been no specific considerations or adjustments needed in relation to the offer by TDR Capital to acquire the Group as management currently have no indication that this would result in a materially different strategic direction for the Group. The business is well placed ahead of the next refinancing requirement in 2024, by when we expect leverage to have returned to within our risk appetite.

Principal risks and uncertainties

In our 2020 annual report we provided a summary of the principal key risk areas that could impact on the Group. We provide the following update against a number of these for the six months to 30 June 2021.

Macro and political

The Group's swift and effective response to COVID-19 has continued during the first half of 2021, with continued focus on colleague welfare, operational resilience to support our customers and clients, and collection performance. As before, we have maintained close dialogue with our regulators in all markets we operate. Transition to a post-Brexit world has been seamless in line with our preparations in 2020. With the recent strategic positioning of our business, we have also continued to benefit from investment and servicing opportunities emerging with COVID-19. Successful vaccine roll-out efforts across our target geographies and easing of lock-down measures have been decreasing macro-economic and political pressures in recent months. We expect this trend to continue for the rest of the year while we closely monitor the developments. Despite the improving outlook, we believe that the macro-economic assumptions underlying the ERC forecast remain appropriate given that we have yet to see the full impact of the pandemic on customer finances as the withdrawal of government support measures begin to take effect in our target markets.

Liquidity & Funding

Liquidity and funding risk is mitigated through the covenant renegotiation in 2020, recent bond tap and strong collection performance. Leverage is in excess of risk appetite but on track to deliver 2021 target, circa 4.0x by the end of the year. Good collection performance is supporting the plan to reach targets. Through the regular budgeting and forecasting processes, the Group continues to assess the required level of liquid resources, funding plans and risk appetite. Strong governance and alignment with risk appetite is managed via the Asset and Liability committee, with regular reporting of key metrics.

The Group has increased flexibility regarding investment levels, as it is able to increase investments through third-party funds it manages. This enables the Group to curtail investment volumes funded by the Group and conserve liquid resources, without impacting the franchise of the businesses. Overall, the Group continues to be well positioned take advantage of investment opportunities as they arise, given the profile of its liabilities.

Regulatory Scrutiny

Regulatory conduct and Treating Customers Fairly continue to be at the heart of our business with clearly defined, documented and communicated policies and procedures in place to guide colleagues on the required standards for customer outcomes, with particular emphasis on vulnerable customers especially during the pandemic. During the first half of 2021, we have maintained increasingly proactive relationships with our key regulators in all locations where there is continued evidence of the approach of FCA being adopted by other jurisdictions including the Senior Managers and Certification Regime.

Cyber Risks

External cyber threats facing industry and supply chains are continuing to grow and evolve at a rapid rate, even more so during COVID-19. Arrow manages this growing threat by having a robust information security framework aligned to the international standard for information security - ISO 27001, which is commensurate with a group of our size and the highly regulated sector in which we operate. During the first half of 2021, the Group continued to invest and enhance its information security framework and successfully mitigated emerging external threats.

Fund and investment management execution and business transformation

Despite delays due to COVID-19, organisational design and process improvements have been established with governance, leadership and clarity of responsibility formalised along with progress in management oversight. During the first half of 2021, the business segment continued to deliver process and operational improvements according to the targets. This trend is expected to continue for the rest of the year, further enhancing our fund and investment management business. During 2021, several critical hires have joined the business in line with strategic plans strengthening the team further. Ongoing focus on enhancing risk management practices into our Fund and embedding in daily operations also continued in 2021.

Scalability

Our risk management processes are continuing to embed across 1st and 2nd Lines of defence to drive ownership and accountability to where it is most effective, and this directly supports an action-oriented approach to mitigating risk and improving controls. The business was successful in attracting and retaining some of the key talent to scale and continued to strengthen the middle leadership layer in terms of capability and capacity to manage dependencies on key individuals. Enhancing systems and processes also continues across the Group with clear ownership and accountability and mitigating actions in place to ensure timely delivery.

Outlook for the rest of the year

The Group has been successfully and effectively managing and mitigating its principal risks during the first half of 2021 despite a challenging external environment. This positive momentum is expected to remain for the second half of 2021, and particularly be reflected in leverage and scalability risks, while the business continues to deliver its strategic objectives and plans. This outlook is expected to be further supported with an improving macroeconomic environment as the pace of vaccine roll out and economic recovery increases in our target geographies.

Related party transactions

Related party transactions are disclosed in note 12 to the condensed consolidated financial statements.

Going concern

In assessing whether the going concern basis is appropriate to adopt for the Group as at 30 June 2021, the directors have undertaken a thorough review of the latest forecast cash flow models and scenarios for a period in excess of 12 months from the date of approval of these accounts, with the primary focus of detailed forecasting running to the end of 2022.

A base case forecast, and several downside scenarios, have been prepared reflecting the Group's current financial position and expected future performance. Key items considered within each forecast were the future outlook for HPI and unemployment, including the length and severity of any potential macroeconomic shock, and the impact these may have on the Group's cash flows. These cash flows were considered against the Group's future liquidity position, taking into account that there are no bond maturities until 2024.

Adherence to the Group's liquidity, leverage and ERC loan to value covenants was also considered in all scenarios.

The results of this scenario analysis show that even in a severe but plausible downside scenario, after taking reasonable management actions (such as cost reductions, slowing purchases and collection acceleration) as required, the Group is able to maintain sufficient liquidity and cash reserves to operate within banking covenants, and to continue as a going concern. This scenario was aligned to the severe downside forecasts outlined in note 10.

Finally, a reverse stress test has also been prepared, incorporating a plausible set of management actions, to identify the magnitude of a downside stress that needs to occur to cause the group to breach its financial covenants. It has been concluded that this represents an overly severe and implausible scenario. The directors note the proposed acquisition by Sherwood Acquisitions Limited (a newly formed company owned by investment funds managed by TDR Capital LLP) ("Bidco") to acquire the entire issued and to be issued share capital of the Parent Company and, in particular, the statements that Bidco has made in the Offer Documents regarding its intentions for the Group if that acquisition completes. In accordance with the Takeover Code, the directors only have access to this publicly available information.

The directors considered the impact of the proposed acquisition in the Group's going concern assessment. They note that should the acquisition complete, Bidco's stated intentions do not depart significantly from the Group's existing strategy or present causes for concern that completion of the acquisition by Bidco would have an adverse effect on the ability of the Group and Parent Company to continue as a going concern. Based on all of the above indicators, the directors believe that it remains appropriate to prepare the financial statements on a going concern basis.

Directors' responsibilities statement in respect of the interim results

 We confirm that to the best of our knowledge:

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

The condensed set of consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group.

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

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

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

The interim results were approved on 12 August 2021 by the board of directors and are signed on its behalf by:

Matt HotsonGroup chief financial officer

Independent Review Report to Arrow Global Group PLC

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2021 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

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

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and the next annual financial statements will be prepared in accordance with UK-adopted international accounting standards. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted for use in the UK.

Our responsibility

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

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

Simon Ryder

for and on behalf of KPMG LLP

Chartered Accountants

1 Sovereign Square

Sovereign Street

Leeds

LS1 4DA

12 August 2021

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

For the period ended 30 June 2021

Note - There has been a reclassification between the two operating expense rows 'collection activity and fund management costs' and 'other operating expenses' in the prior period. This change was made to better reflect the evolved nature of the Group's business model and presenting direct costs of the Group's business lines is deemed to provide more relevant information. As such, we have reclassified £13,895,000 from 'other operating expenses' to 'collection activity and fund management costs' in the prior period. The total impact is £nil. Further information can be found in note 8. This adjustment is in line with that made in the Annual Report and Accounts 2020.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2021

The June 2020 balance sheet has been re-presented to show £14,332,000 of bank balances subject to certain restrictions within cash and cash equivalents in the period, that were previously shown within trade and other receivables. See the unaudited consolidated statement of cash flows on page 23 for more detail.

The interim results were approved on 12 August 2021 by the board of directors and are signed on its behalf by:

Matt Hotson Group chief financial officer

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the period ended 30 June 2021

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the period ended 30 June 2021

Included within cash and cash equivalents in £9,095,000 (2020: £14,332,000) of cash, which may be subject to constraints regarding when the balance can be remitted, such as cash in a consolidated securitisation structure awaiting a payment date. The 2020 reconciliation above has been re-presented to remove these amounts from the net cash generated/used by operating activities, as in the prior reporting they were included within this line item, but are now included within cash and cash equivalents at the beginning and end of each period.

Notes to the condensed consolidated interim financial statements

1. General Information

The Company is incorporated in England and Wales. These condensed consolidated interim financial statements (interim financial statements) of the Company as at and for the six months ended 30 June 2021 comprise the Company and its subsidiaries (together referred to as 'the Group'). The Group's principal activity is to identify, acquire and manage secured and unsecured non-performing and non-core loan portfolios and real estate from and on behalf of financial institutions, such as banks, institutional fund investors and specialist lenders.

2. Basis of preparation

These interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK. They do not include all the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 December 2020.

The annual financial statements of the Group are prepared in accordance with IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU. As required by the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, the interim financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated annual report for the year ended 31 December 2020.

The comparative figures for the financial year ended 31 December 2020 are not the complete version of the Company's statutory accounts for that financial year. The consolidated financial statements of the Group as at and for the year ended 31 December 2020 are available upon request from the Company's registered office at Belvedere, 12 Booth Street, Manchester, M2 4AW or online at www.arrowglobalir.net. Those accounts have been reported on by the Company's auditor and delivered to the registrar of companies. The report of the auditor:

(i) was unqualified;

(ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report; and

(iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The interim financial statements of the Group have been prepared under the historical cost convention other than the fair value of derivative contracts and certain portfolio investments and the amortised cost accounting for other financial assets and liabilities.

These interim financial statements were approved by the board of directors on 12 August 2021.

Going concern

In assessing whether the going concern basis is appropriate to adopt for the Group as at 30 June 2021, the directors have undertaken a thorough review of the latest forecast cash flow models and scenarios for a period in excess of 12 months from the date of approval of these accounts, with the primary focus of detailed forecasting running to the end of 2022.

A base case forecast and several downside scenarios have been prepared reflecting the Group's current financial position and expected future performance. Key items considered within each forecast were the future outlook for HPI and unemployment, including the length and severity of any potential macroeconomic shock, and the impact these may have on the Group's cash flows. These cash flows were considered against the Group's future liquidity position, taking into account that there are no bond maturities until 2024. Adherence to the Group's liquidity, leverage and ERC loan to value covenants was also considered in all scenarios.

The results of this scenario analysis show that even in a severe but plausible downside scenario, after taking reasonable management actions (such as cost reductions, slowing purchases and collection acceleration) as required, the Group is able to maintain sufficient liquidity and cash reserves to operate within banking covenants, and to continue as a going concern. This scenario was aligned to the severe downside forecasts outlined in note 10.

Finally, a reverse stress test has also been prepared, incorporating a plausible set of management actions, to identify the magnitude of a downside stress that needs to occur to cause the group to breach its financial covenants. It has been concluded that this represents an overly severe and implausible scenario. The directors note the proposed acquisition by Sherwood Acquisitions Limited (a newly formed company owned by investment funds managed by TDR Capital LLP) ("Bidco") to acquire the entire issued and to be issued share capital of the Parent Company and, in particular, the statements that Bidco has made in the Offer Documents regarding its intentions for the Group if that acquisition completes. In accordance with the Takeover Code, the Directors only have access to this publicly available information.

 The directors considered the impact of the proposed acquisition in the Group's going concern assessment. They note that should the acquisition complete, Bidco's stated intentions do not depart significantly from the Group's existing strategy or present causes for concern that completion of the acquisition by Bidco would have an adverse effect on the ability of the Group and Parent Company to continue as a going concern. Based on all of the above indicators, the directors believe that it remains appropriate to prepare the financial statements on a going concern basis.

3. Adoption of new standards

A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2021, which are deemed not to have a material impact on the results of the Group.

4. Accounting policies, critical accounting judgements and estimates

In preparing these condensed consolidated interim financial statements, management have made judgements, estimates and assumptions that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.

In preparing the interim financial statements, the accounting policies, areas of judgement, estimation and assumption were the same as those applied in the consolidated financial statements of the Group as at and for the year ended 31 December 2020.

5. Segmental reporting

Period ended 30 June 2021

Period ended 30 June 2020

1 In line with the requirements of IFRS 8:29, due to the change of the segmental reporting structure aligned to the Group now being managed through an integrated asset manager model, the corresponding information for 2020 has also been restated. This is done on the same basis as in the Annual Report and Accounts 31 December 2020.

2 The split of total operating expenses has changed from the Interim results 30 June 2020, with a reclass between 'collection activity and fund management costs' and 'other operating expenses', as part of the change in the segmental reporting structure aligned to the Group now being managed through an integrated asset management model. The total operating expenses impact is £nil. The main movements between the categorisation relate to allocation of internal staff costs and professional fees. This re-presented is on the same basis as done in the Annual Report and Accounts 31 December 2020.

Other operating expense inclusive of depreciation, amortisation and forex totals £48,104,000 (H1 2020: £48,040,000).

6. Earnings per share

7. Taxation charge on ordinary activities

The taxation charge for the period was £1,375,000 (H1 2020: £25,509,000 credit). The taxation before takeover cost impacts was £2,296,000 with an effective consolidated tax rate for the six months ended 30 June 2021 was 10.0% (30 June 2020: (18.8)%). The Group operates in multiple tax jurisdictions, which are subject to different corporate tax rates during the interim period. The Group has therefore calculated an estimated average annual effective tax rate for each jurisdiction, based on forecast profits and substantially enacted corporate tax rates relevant to those jurisdictions, to determine the Group's consolidated effective tax rate.

Deferred taxation is measured at the tax rates that are expected to apply in the periods in which the tax losses and temporary timing differences are expected to reverse. At Budget 2021, the government announced an increase to the rate of UK corporation tax for the year starting 1 April 2023, setting the rate at 25% which was passed in the Finance Act 2021 on 10 June 2021. A credit of £3,728,000 has been recorded to the profit and loss to reflect the restatement of the UK deferred tax asset. 8. Collection activity and fund management costs and other operating expenses

1 The split of total operating expenses has changed from in the Interim results 30 June 2020, with a reclass between the 'collection activity and fund management costs' and 'other operating expenses', as part of the change in the segmental reporting structure aligned to the Group now being managed through an integrated asset management model. The total operating expenses impact is £nil. The main movements between the categorisation relate to allocation of internal staff costs and professional fees. This re-presentation is on the same basis as done in the Annual Report and Accounts 31 December 2020.

1 The split of total operating expenses has changed from in the Interim Results 2020, with a reclass between the 'collection activity and fund management costs' and 'other operating expenses', as part of the change in the segmental reporting structure aligned to the Group now being managed through an integrated asset management model. The total operating expenses impact is £nil. The main movements between the categorisation relate to allocation of internal staff costs and professional fees. The prior period has been re-presented accordingly on this basis.

Other operating expenses have increased materially in the period due to costs incurred related to the potential takeover of the Group by TDR Capital.

9. Goodwill

10. Portfolio investments

The movements in portfolios investments were as follows:

Period ended 30 June 2021

Year ended 31 December 2020

Period ended 30 June 2020

Scenario modelling information

To assist with the understanding of how the Group has modelled the future cash flows which ultimately drive the valuation of the portfolio investment assets, the below table shows the probability that has been assigned to each macroeconomic scenario when preparing the cash flow forecasts.

The key macroeconomic indicator for each segment is the level of unemployment for unsecured and HPI for secured. These metrics are monitored at a national level with unemployment being the national unemployment rate, and HPI the relevant index of house prices used to observe the relative change in house prices in each country. The corresponding forecasts for unemployment and HPI are detailed on the following pages. Unemployment represents the expected year-end unemployment rate under the different scenarios relative to Base and HPI, the expected year-end growth rate under the different scenarios relative to Base.

Year-end unemployment rate relative to Base (change in %)

Year-end HPI rate (year-on-year) relative to Base (change in %)

In addition to these metrics, we also consider the impact of inflation and household indebtedness to provide additional context regarding macroeconomic conditions, albeit we consider these factors to have a less significant impact on performance.

When calculating the probability-weighted average for each country and asset class, the secured Base ERCs have been determined to most closely align to the 'Stagnation' macroeconomic scenarios. The forecasting methodology utilised for production of the unsecured Base ERCs, namely simulation methods, have an underlying assumption of a static macroeconomic environment, reflecting economic uncertainty rather than the anticipated macroeconomic improvements. To that end, the Group note that the unsecured Base ERCs have been produced using assumptions which are in the range between 'Stagnation' and 'Base' macroeconomic scenarios.

Application of the probability-weighted average on this basis indicates an anticipated increase in the Base ERCs as a result of future macroeconomic scenarios. However, given the continuing relative macroeconomic uncertainty, no macroeconomic adjustment (increase) has been applied to the Base ERCs.

11. Trade and other payables