A
r
r
o
w
G
l
o
b
a
l
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
1
8
SMART thinking
Intelligent execution
Annual Report and Accounts 2018
Introduction and contents
Arrow Global is a leading European
investor and asset manager in non-
performing and non-core assets. We apply
smart thinking and intelligent execution
to unlock value others cannot realise.
In this year’s annual report we showcase
our unique model and the consistent
high return investment and servicing
opportunities it provides.
Governance
50 Board of directors
52 Executive management team
54 Corporate governance report
58 Audit committee report
62 Risk committee report
64 Nomination committee
report
66 Directors’ remuneration
report
82 Report of the directors
86 Directors’ responsibilities
statement
2018 highlights
Chairman’s statement
Strategic report
1
2
4 Our business today
6 Chief executive officer’s review
10 Market review
12 Business model
14 Investment case
15
Leadership Q&A
20 Strategy
22 Key Performance Indicators
24 Operational review
26 Chief financial officer’s review
30 IFRS to cash result
reconciliations
32 Our stakeholders
42 Risk management
46 Principal risks and uncertainties
49 Statement of viability
Financial statements
87
96
Independent auditor’s report
Consolidated statement
of profit or loss & other
comprehensive income
Consolidated & parent company
statement of financial position
Consolidated & parent company
statement of changes in equity
Consolidated & parent company
statement of cash flows
97
98
99
100 Notes to the financial
statements
142 Additional information
(unaudited)
144 Glossary
IBC Shareholder information
2018 highlights
1
Underlying profit after tax
£64.1m +13.3%
(2017: £56.6m)
Underlying return on equity (ROE)
34.8% +1.9ppts
(2017: 32.9%)
Underlying basic earnings per share (EPS)
£0.37 +13.0%
(2017: £0.32)
Total income
£361.8m +13.4%
(2017: £319.0m)
Profit after tax
£30.0m -24.9%
(2017: £39.9m)
Basic EPS
£0.17 -25.4%
(2017: £0.23)
Full-year dividend per share
12.7p +12.4%
(2017: 11.3p)
Asset Management and Servicing Business
EBITDA margin
20%
(H1 2018: 19%)
Investment Business EBITDA margin
57%
(H1 2018: 56%)
84-month ERC
£1,634.8m +7.8%
(2017: £1,516.9m)
120-month ERC
£1,972.1m +10.8%
(2017: £1,780.2m)
Assets under management
£52.6bn +11.0%
(2017: £47.4bn)
Core collections
£411.6m +20.3%
(2017: £342.2)
Underlying
financial
highlights
Financial
highlights
Operational
highlights
Leverage
3.7x
(2017: 3.9x)
Underlying cost: income ratio
63.9%
(2017: 64.6%)
Important notes:
IFRS, cash metrics and underlying results are important to understand the key drivers of the business. Reconciliations on pages 28 to 31 have been
prepared to aid this understanding, which helps to support the commentary of the financial review of for the year.
Additional information on underlying results and a glossary of definitions can be seen on pages 142 to 146.
Arrow Global Annual Report and Accounts 2018
Strategic report 2
Chairman’s statement
Jonathan Bloomer, Chairman
“It has been both a year of strong
growth and financial results, with
the correct strategy in place for
us to continue to deliver on
our targets.”
Ambitious five-year strategy
This year the board approved Arrow’s strategic vision for
the next five years, which was presented at the Group’s
Capital Markets Day in November 2018. Our confidence
in the continued growth opportunity for the business
in markets we consider attractive is underpinned by
through-the-cycle underlying return on equity (ROE) in
the mid-20s per cent. An important factor in our belief
in this consistent high return delivery is the growing
contribution from the capital-light Asset Management
and Servicing (AMS) Business. The capital-light income
from this division is highly accretive to ROE and has
grown rapidly from a negligible contribution at the
time of the business’s IPO in 2013, to 32.9% of gross
total income in 2018. We have set ourselves an ambitious
target to double income from the AMS business over
the next five years, while also increasing its margins
from the high-teens per cent to the mid-20s per cent.
We also outlined a new, lower, leverage target of 3.0x to
3.5x secured net debt to adjusted EBITDA, from 3.5x to
4.0x. This underlines our confidence in the business’s
ability to generate consistently strong cash flows, as
we continue to see the benefits from our enlarged
European footprint and more diversified income
streams. This cash generation profile has also meant
that we have taken the decision to increase our
dividend policy, raising the pay-out ratio from 25%-35%
of underlying profit after tax, to at least 35% of underlying
profit after tax. Not only does this create an attractive
returns profile when viewed alongside our high return
on equity, but it also ensures continued balance sheet
discipline – an area of significant focus for the board.
With the significant uncertainty that surrounds Brexit,
the Group performed comprehensive stress tests, which
showed the Group’s future strategy to be resilient to
potential economic uncertainty arising from Brexit.
More details of this can be seen on page 44. We are
mindful of the economic and political environment, but
remain confident in the strategic opportunities for our
differentiated business model.
Arrow Global Annual Report and Accounts 2018
“We now have
the right pan-
European
platform across
the countries
and assets niches
we view as most
attractive.”
3
The board and executive management
The Arrow board continues to be made up of highly
experienced individuals who all contribute valuable skills
and thinking to Arrow’s operations. Our Group chief
executive officer, Lee Rochford, has been instrumental
in shaping Arrow’s five-year strategy and is already
delivering well against the new objectives presented
at the Group’s Capital Markets Day. Lee leads a strong
executive team of established members and new talent.
The executive team’s energy, focus and commitment is
notable and gives me great confidence that they will
continue to ensure we deliver against our strategic
objectives in the coming years.
Looking forward
I am pleased that Arrow has achieved yet another
strong year of growth and financial results and believe
that we have the correct strategy in place for us to
continue to deliver on our targets. The expansion
of our pan-European platform is largely complete,
which means the business has a more significant market
opportunity available to it than any time since IPO.
The Group, therefore, remains extremely well positioned
for 2019 and beyond, with a strong balance sheet and
proven management team underpinning its prospects.
Finally, I would like to thank my fellow board
members, Arrow’s senior leadership team and all of
the Group’s employees for their continued hard work
and commitment to make 2018 another successful
year for the Group. I also appreciate our shareholders’
continued support for the Arrow strategy, as we position
the business optimally to achieve sustainable through-
the-cycle returns.
It continues to be an exciting time for Arrow and
I remain confident that we have the right team and
strategy in place to deliver long-term shareholder value.
Jonathan Bloomer
Chairman
28 February 2019
Strong financial performance
I am pleased to report another strong set of financial
results. High cash generation remains a fundamental
part of this business’s attractive model and, at £244.3
million (2017: £197.8 million), Arrow delivered another
record year of operating cash flow prior to investment
in new portfolios. This was driven by another excellent
year of core collections from the Investment Business
of £411.6 million (2017: £342.2 million) and capital-light
gross income of £132.3 million from the AMS Business.
Underlying profit after tax increased by 13.3% to £64.1
million (2017: £56.6 million), giving an increase in
underlying earnings per share of 13.0% to 36.6p. This
strong performance enables us to propose a final 2018
dividend of 8.7p, bringing the full-year dividend to 12.7p
– a 12.4% increase and representing the top of our
pay-out range.
A pan-European platform built to drive growth
In recent years, the Group has expanded from one
geography and asset class to operate in five geographies
and multiple asset classes. This growth has been driven
by the significant market opportunity throughout
Europe, as well as demand from our institutional fund
clients to access our expertise across a broader footprint
and gain exposure to attractive investments in high value
niches. Through the acquisition of leading servicing
businesses and high-quality management teams, we
believe we now have the right pan-European platform
across the countries and asset niches we view as most
attractive in order to provide the best investment
opportunities for us and our clients.
A business built to focus on customers and clients
Arrow has a core set of Group Values, which are focused
on helping all of our customers and stakeholders to
‘build better financial futures’. In order to ensure that
these Values remain at the heart of everything we do,
employee remuneration is closely aligned with ‘living
the Values’, with behaviours such as providing excellent
customer service being consistently rewarded. Arrow’s
business strategy is client-led, and this is emphasised by
the fact that our co-investment partners, who represent
some of the largest institutional funds in the world,
invested over £1.6 billion alongside the £263.4 million
we invested organically into portfolio purchases. We also
focus on maintaining strong relationships with financial
institutions and aim to assist them to deleverage and
recapitalise by acquiring assets from them. As a trusted
partner, we are often able to participate in off-market
transactions – a key competitive advantage of the
Arrow model – and these deals formed 78% of our
portfolio purchases in 2018.
Arrow Global Annual Report and Accounts 2018
Strategic report 4
Our business today
We have built a truly unique
business with a proven track
record of unlocking value
We aim to be the most sophisticated purchaser and specialist asset
manager of debt portfolios across our five core European markets
while fulfilling our purpose of building better financial futures for
our stakeholders.
We tap into a large, growing
market with a fundamental
need for our specialist skills
We focus on non-performing loans, non-core
assets and complicated assets that banks and
investment funds need to sell.
Investment
Business
We buy debt at a significant
discount to face value and use our
platform to unlock returns far
above our cost of capital.
Asset Management
and Servicing
We advise on, manage and collect
debt portfolios on behalf of clients
who pay long-term and recurring
fees to utilise our platform.
Unique synergy
We purchase the ‘tails’ of our
clients’ funds towards the end
of their lifespan, transfer these
familiar assets to our investment
business and extract the
remainder of their
considerable value.
Read more about our specialist platform on page 13
Arrow Global Annual Report and Accounts 2018
£1.6 billion
third-party co-investments in 2018
5
Investment Business:
Specialist
debt
investor
Asset Management and
Servicing Business:
Rapidly growing
capital-light
income
• Consistent underwriting outperformance
• Total AMS income of £132.3 million – 32.9% of total
(104% cumulative performance since inception)
segmental income
• Specialist focus on niche assets
• Aim to co-invest with institutional fund clients –
generates servicing income
• Generates high returns – 17% net IRR achieved in
2018 (2017: 15%)
• Over 500 portfolios well diversified by geography
and asset class
• Five-year target to grow income contribution
to towards 50% of Group gross income and
increase margins from high-teens per cent
to mid-20s per cent
• Fund management offering build out will contribute
to income growth and margin enhancement
Investment by vintage split by Arrow balance sheet
organic investment and third-party investment
Arrow asset management timeline
£137.7m £176.3m £223.0m £223.9m £263.4m
100%
32%
59%
22%
14%
2013: 100% of assets managed on
balance sheet
86%
78%
68%
2013 – 2017: Acquired leading
servicing platforms
41%
2018: Manage £52.6 billion
of assets
2019 onwards: Shift to higher
margin business via fund
management offering
2014
2015
2016
2017
2018
Arrow investment
Third-party capital
Arrow Global Annual Report and Accounts 2018
Strategic report 6
Group chief executive officer’s review
Lee Rochford, Group chief
executive officer
“We are now positioned to
maximise investment and servicing
opportunities across five of the
most active markets in Europe.”
Q
What are the key highlights of 2018?
Arrow delivered excellent performance throughout
the year and ended 2018 a stronger more diversified
Group. Not only did we deliver on our key financial
targets, but we also largely completed the pan-
European platform that positions us for success in the
future. We are now operating leading businesses in all
the key geographies where we believe we need a
presence in order to offer a compelling service to our
financial institutional clients and fund partners.
Our platform has deep investing and servicing
capabilities in our chosen markets. This ensures that we
continue to source attractive investment opportunities,
growing our portfolio investment volumes by 18% in
2018, in order to take advantage of a two-percentage
point improvement in net IRRs over the course of the
year, from 15% to 17%. Operationally, the Investment
Business saw core collections increase by over 20%,
as we continued to benefit from enhanced synergies
through the ‘One Arrow’ investment programme and
experience strong outperformance versus our initial
conservative underwriting practices. This resulted in
another record year of operating cash flow prior to
investment in new portfolios of £244.3 million, a 23.5%
increase. Due to this strong cash generation, our
leverage ratio reduced to 3.7x secured net debt to
adjusted EBITDA from 3.9x in 2017. Importantly, our
cash interest cover also grew to 6.7x, an improvement
of 13.6%.
Balance sheet discipline is key to running our business
efficiently, and in March 2018 we completed the journey
to fully refinance our bonds. On 26 February 2019, we
extended the revolving credit facility to 2024 with no
change in margin. This means we now have no debt
maturities due until 2024, extending the weighted
average duration of our debt to 6.1 years and resulting in
a weighted average cost of debt of only 3.9%, down from
over 8% at IPO in 2013. We consider this to be a strong
vote of confidence from the debt markets in the Group’s
business model and long-term opportunities. Given the
softening appetite in the credit markets we have seen
in the second half of 2018, we are very happy with our
decision to build this attractive capital structure, which
we believe is a competitive advantage and positions us
well to weather and capitalise on any downturn in the
wider economy. I therefore believe we now have the
platform and balance sheet strength to continue to
source and invest in attractive portfolio opportunities
into 2019 and beyond, to drive consistent cash
generation and EPS growth.
In our interim results in August, we started reporting our
financial results on a new segmental basis. This provides
the market with greater insight into our fast-growing
and capital-light Asset Management and Servicing
Business. This business again grew strongly in 2018,
generating over £130 million of income. We remain
excited about the potential for the business, targeting
approximately double the income over the next five
Arrow Global Annual Report and Accounts 2018
“Delivering the
momentous year
we had in 2018 was
a real team effort
and I’m proud
when I reflect on
what we achieved
together.”
7
years, and strongly believe that this should be
fundamental to the Group’s future valuation.
• Reduce leverage target to 3.0x to 3.5x secured net
debt to adjusted EBITDA
We’ve also continued to build an extremely strong and
capable management team. The business has grown
and diversified in recent years, and it’s been essential
that we’ve invested in the depth of our management
capabilities. The ‘One Arrow’ investment programme
was an important part of this and I’m pleased to say that
that project has now been completed on time and to
scope. The improved systems and capabilities we have
developed mean we are well positioned to drive the
business forward.
Over the past 18 months, we’ve brought in a considerable
amount of talent, which complements the existing team
including the appointment of Paul Cooper as our Group
chief financial officer and Dave Sutherland as our Group
chief operating officer at the management level. The
Group platform is largely complete, and we have a board
that’s confident we have the right team – with the right
skills and experience – for the next chapter of Arrow’s
growth story. The same applies to the depth of talent
within the Group teams and our country-level leaders
and their teams – all of which we’ve invested in heavily.
Q
What are the key drivers of your evolved strategy?
We have adapted our business strategy to respond
to a more competitive market for purchasing non-
performing and non-core assets. By focusing on
high-value, smaller transaction niches where higher-
quality returns are available we have successfully
diversified our income and driven higher-quality
earnings through our capital-light AMS Business.
With the build-out of our unique platform now
largely complete, we are in prime position in our
chosen markets to deliver our strategic priorities over
the next five years, which are to be a leading player in
our chosen markets, develop our differentiated business
model, ensure a fair outcome for our customers, create
a high performance culture and realise the investment
opportunities of ‘One Arrow’. Our strategy aims to
build a sustainable and growing business that delivers
attractive returns to shareholders. We do not have an
ambition to be the largest, but to be the best at what
we do. Our two business lines are interdependent and
together they will allow us to deploy capital intelligently
and maximise returns through the credit cycle.
In November, we held a Capital Markets Day for analysts
and investors. I felt that the entire senior management
team did an excellent job in explaining what their key
individual area of focus is and the way forward they see
for Arrow, as we continue to mature as a diversified,
pan-European business. It also provided us with the
opportunity to outline a number of new targets that we
have for the business over the next five years. These are:
• Continue to achieve an underlying ROE in the
mid-20s through-the-cycle
• Double gross AMS income towards 50% of Group
gross income and increase margins from high-teens
per cent to mid-20s per cent
•
Increase our dividend policy to a pay-out ratio of at
least 35% of underlying profit after tax
• Reduce our cost to income ratio towards 60%
Q
How does stakeholder engagement impact
your strategy?
Credit and Asset Management is a highly specialised
industry that requires everything from knowing how
to value and service an asset, to ensuring excellent
customer experience and outcomes. Our purpose is to
build better financial futures for all of our stakeholders.
All of our stakeholders expect us to act in an ethical
and responsible way and this is at the heart of how we
conduct our business. Our Group-wide Values support
this approach and we seek out and reward behaviours
across the organisation that will make us more
sustainable, more successful.
On page 32, you will see how we proactively engage and
respond to all of our stakeholders.
Q
How have your two key business lines performed
this year?
Investment Business
We continued to find opportunities to deploy capital
that exceeded our mid-teens IRR target, due to our
unique origination capabilities in the high-value niches
targeted by our pan-European platform. As a result, we
achieved a blended 17% net IRR for the 2018 investment
vintage as a whole. The 2018 vintage is the most
balanced by geography and asset class that we have ever
recorded. The high-return opportunities we continue to
originate in our non-UK jurisdictions has meant that, for
the first time, the total proportion of our back book that
is exposed to the UK – our original country of operation
– fell below 50%, resulting in a more diversified book
with better risk-adjusted returns. In total, the 120-month
Estimated Remaining Collections (ERC) grew by 10.8%
to £1,972.1 million.
The ability to price risk is a core competency of
our business. We’ve built an outstanding track record
of consistent underwriting, collecting more than our
original expectations at the point of underwriting, and
this is built on firm foundations, a deep team of experts,
across both secured and unsecured asset classes, as
well as a deep database of performance data, on which
our forensic and prudent underwriting is focused.
Maintaining this core competency is fundamental to
what we do and facilitates our entry into new markets.
Our sustainable performance is also helped by local
expertise, providing experience-based insight into our
approach at each stage of the underwriting process.
This has meant that the performance on the back
book continually informs our front book underwriting.
So, we are getting better as we build on our 13 years of
experience. We were particularly pleased, therefore
that core collections from our investment portfolio
continued to outperform our initial expectations in
2018, with the cumulative core collections exceeding
underwriting performance at 104%.
Arrow Global Annual Report and Accounts 2018
Strategic report 8
Group chief executive officer’s review continued
“Arrow is a
business with an
outstanding track
record of excellent
financial results,
a unique operating
platform and
a strong and
disciplined
capital structure.”
Asset Management and Servicing Business
In 2018, we grew gross AMS income to £132.3 million
and now it constitutes 32.9% of gross income. The AMS
Business has been the fastest growing part of the Group
in recent years, generating an increasing proportion of
capital-light income. This has been built through the
establishment of leading servicing platforms in all of the
core geographies and asset classes in which we want to
operate. This has been a client-focused strategy, guided
by our wish to provide an increasingly sophisticated
and attractive investment and servicing offering. We
have taken great care in our approach to building this
platform, meticulously identifying the niches that are
most attractive and the businesses and management
teams that run them. We believe that we now have
the optimal platform covering the asset classes and
geographies we view as attractive.
2018 saw a small, but quickly growing, contribution
from our fund management business. In March, we
announced that we had raised a £300 million fund with a
single global institutional investor. The fee structure for
this business is attractive and will contribute to margin
expansion in the AMS Business over time. This fund is
now nearly 50% invested – significantly ahead of our
initial projections – at returns considered compelling by
our sophisticated investment partner. Over the course
of the year, we have also added a further number of
smaller managed accounts with similar agreements
and fee structures in place. We therefore remain excited
about the potential to raise a future flagship fund that
gives investors access to similar high-return deals, as well
as the secondary market offered by our growing AUM
base of £52.6 billion as the amortised tails of these
assets get sold back into the market. During the year,
we acquired Norfin Investimentos, a fund manager
specialising in real estate investment. Given the trend in
Portugal for banks to increasingly sell mixed portfolios
consisting of residential mortgages – a core focus for
our Whitestar business – alongside other assets, such
as residential developments, office blocks and land, we
found ourselves increasingly partnering with Norfin to
help us value these parts of portfolios in order to ensure
that we retained our pricing discipline. Norfin is an
award-winning business and adds over £1 billion of pure
fund management AUM to our AMS operations, as well
as an experienced management team with notable
fund management experience across asset classes.
Our confidence in our ability to continue to grow the
AMS Business, due to the significant market opportunity
we continue to see, means that we set out an ambitious
target at our Capital Markets Day in November 2018,
to double capital-light AMS income over the next
five years.
Q
How important is external recognition of
your success?
It’s extremely important as it validates what we
do and how we do it. I was extremely proud of the
industry recognition two of our divisions received this
year. Our Portuguese business was named as the Credit
and Portfolio Management Business of the Year 2018 and
then awarded the prestigious Brand Excellence in Credit
Portfolio Management towards the end of the year. I was
also delighted to attend November’s UK Credit Strategy
awards, where we won three awards including Debt
Purchaser of the Year (for a fifth year running), as well
as Contact Centre Team and Agent of the Year, for
Anna Smagiel.
Q
What were your personal highlights for the
year and how do you engage employees in
the business strategy?
I’m delighted that we have largely completed the
build-out of our unique and differentiated business
model. We are now well positioned to maximise
investment and servicing opportunities across
five of the most active markets in Europe.
One of the activities I personally enjoyed most this
year was touring the entire business during our recent
SMART Story roadshow – a presentation reminding the
business of the impressive journey we’ve been on and
the exciting direction we are taking the business in next.
Supported by my management team, I was delighted
with the engagement and interest in our next chapter
of growth. Following these presentations, I was also left
with the impression that we have a very motivated and
engaged team, and I thank all of our employees for their
continued support and passion for what we do and how
we do it.
Q
What is your outlook for the business and
why are you confident the business will
continue to deliver?
Looking forward, we’re confident that the business
will continue the momentum that we’ve seen over
the previous five years as we extract further operating
leverage and cost synergies from our platform. That
confidence is based on a number of key factors:
• We operate in a sector which offers a long-term
growth opportunity. Financial institutions across
Europe continue to have an enormous stockpile of
non-performing and non-core assets, even 10 years
after the financial crisis. Regulatory and accounting
changes added to the pressure for accelerated
recognition of NPLs and faster sales. In addition, we’re
starting now to see increasing secondary trades from
assets that were first traded in 2012 and onwards, and
all of this, before we consider the potential offered
from another turn in the credit cycle
• Arrow has built a highly differentiated business model.
We have an attractive Investment Business, with a
history of investing at consistently strong returns.
We also have a fast-growing Asset Management
and Servicing Business, which is generating increased
capital-light income. Importantly, these businesses
Arrow Global Annual Report and Accounts 2018
“We are now
well positioned
to maximise
investment
and servicing
opportunities
across five of
the most active
markets in
Europe.”
feed each other in a unique way. Our co-investment
model is rapidly contributing to new servicing income,
and our greatly expanded AUM provides many years
of potential future purchasing opportunities
• We have an outstanding track record of underwriting.
This has been maintained even as we’ve diversified
the business – both by geography and by asset class.
Over time we get better at what we do, as our data
and our market penetration deepens, but also
because we continually monitor positive and
negative experiences and feed them back
into the underwriting process
• Arrow invests in specialised asset classes that
generate resilient cash flows, right through the cycle.
We existed before the global financial crisis and,
therefore, have a proven track record of ‘through-
the-cycle’ returns. However, we recognise that we
have expanded and diversified since then and, in
response, we’ve invested heavily in our portfolio
management and risk management capabilities.
We believe that we are, therefore, more resilient
than a typical financial institution in a downturn
• We remain acutely aware of where we are in the
credit cycle; this applies to both the asset and the
liability side of the balance sheet. As a management
team, we have spent a considerable amount of
time developing a capital-allocation framework that
explicitly recognises this. However, the unique aspect
of our business model is that it provides optionality to
deploy varying degrees of capital intensity depending
on the current stage of the economic cycle, by flexing
between the capital-intensive Investment Business
and the capital-light AMS Business
• Our entire approach is co-ordinated through
a prudent risk management framework. This is
demonstrably supported by our actions: we operate
in mature regulatory environments where we can
achieve regulatory conduct parity with the banks, we
focus on building a diversified portfolio by geography
and asset class, we have a disciplined approach to
returns and we have good balance sheet discipline –
a conservative asset recognition policy, long-duration
debt and a prudent approach to leverage
Arrow is a business with an outstanding track
record, a unique operating platform and a strong
and disciplined capital structure – all supported by a
talented management team. We, therefore, remain very
ambitious for the business and confident in delivering
considerable shareholder value.
As we approach the date for the UK’s exit from the EU,
we are fully prepared for any impact on our business.
While by no means complacent, being separately
regulated in each market in which we operate means
that we expect limited to no impact on our licence to
9
operate. However, a working group chaired by our
Group chief risk officer means that we have active
plans in place to manage people, business continuity
and financial risks. Set out on page 44, our modelling
indicates that our portfolio is resilient in the face of any
potential downturn arising from a ‘Hard Brexit’ scenario.
Q
Do you have any words for the Arrow team?
We have achieved an enormous amount this year,
requiring a real team effort, and I’m immensely proud
when I reflect on what we achieved together. We largely
completed the build out of our unique investment and
servicing platform that now sees us perfectly positioned
for future growth in our five core markets; a market
that has massive opportunity for our unique and
differentiated business model with an addressable
value of €1 trillion. The year started with the acquisition
of Parr Credit in Italy, continued with the acquisition of
Europa Investimenti in Italy and then ended with Norfin
in Portugal in December – all of which added new, highly
skilled colleagues to the deep talent pool we already
have at Arrow.
2018 was also momentous in that we launched our
new Vision – to be the Valued and Innovative Partner in
Credit and Asset Management – that better reflects our
future ambitions and how we will work with our UK and
European partners. I’m also hugely encouraged by the
strong adherence that I see every day to our Purpose
and Values. Although we operate across five different
markets with language and cultural differences, we are
united by our Purpose, ‘Building Better Financial Futures’,
and by our Values that together guide our decision-
making at all levels of the Group and provide a
strong moral compass for everything that we do.
I strongly believe that our Values are a source of
competitive advantage for us and will make us more
successful a business – having the right culture in place
is key to the success of any business. As part of this, we
run a recognition scheme that rewards employees who
noticeably embody and promote our Values. Every
month, these colleagues are rightly given Group-wide
recognition, and all attend an annual gala dinner with
the senior management team as a way of showing our
appreciation. This year alone 104 colleagues were
recognised for their efforts and I am extremely
proud of each and every one of them.
Lee Rochford
Group chief executive officer
28 February 2019
Arrow Global Annual Report and Accounts 2018
Strategic report 10
Market review
An enormous market of sustainable
growth opportunities
€2 trillion
of assets to move off European
bank balance sheets and on to
platforms like ours
€450 billion
of assets for us to target
in our chosen markets
and selected niches
Approximately
£180 billion
sold in 2018, leaving a significant
opportunity in place
£53 billion
of assets under management
already on our platform, providing
future purchasing potential
Arrow Global Annual Report and Accounts 2018
11
Increasing regulatory and accounting pressure on EU banks, subsequent
future secondary trades and the formation of new stock through regular
credit cycles means that Arrow has an enormous pipeline of investment
opportunities to selectively choose from.
European banks remain under growing pressure
Euros of European NPLs in chosen markets1
Italy
UK
Netherlands
Portugal
Ireland
€bn
200
150
100
50
0
Arrow’s chosen geographies
1. Source: European Banking Authority Risk Dashboard 2018 Q2
There are over €2 trillion of non-
performing and non-core assets on
European bank balance sheets. More
of these assets are being created all the
time and, increasingly, banks are under
pressure from the European Central
Bank and accounting requirements such
as IFRS 9 to recognise and provide for
these assets much faster than they
have done historically, increasing
pressure to sell.
Our strategic positioning – Arrow has
market leading positions in key markets
where these assets are divested in large
volumes and have attractive returns.
Our market provides a growing pipeline of opportunities
Ultimately, all €2 trillion of these
non-core and non-performing loan
assets must move from bank balance
sheets into the capital markets.
Our strategic positioning – Arrow
facilitates this process through our
ability to value, purchase and service
these assets effectively; both for
ourselves and our institutional
fund relationships.
Bank clients rely on Arrow’s services
Banks seek to partner with us to provide
a solution to their non-core asset and
non-performing loan assets.
Our strategic positioning – Arrow
maintains regulatory parity with banks
in terms of customer conduct in order
to ensure the seamless transition of
bank assets into our portfolio of
managed assets.
Arrow’s pricing models are correlated to the credit cycle
Smart capital allocation through the cycle
Fresh non-performing loans and
non-core assets are constantly being
created as part of the usual cycle of
lending and defaulting. However, the
pricing of these assets can be correlated
to the credit cycle: towards the top of
the cycle, competition for these high
return assets tends to increase – raising
prices – and at the bottom of the cycle
competition reduces – decreasing
prices. Due to the enormous stock to
be sold by banks, this usual cyclicality
has been dampened in recent years.
Our strategic positioning – the current
pricing environment indicates that we
are near the top of the current credit
cycle. Arrow’s focus on smaller scale
(average transaction size of only £7
million), niche investments that match
our servicing platforms means that our
returns have remained attractive at 17%
in 2018 – especially against the Group’s
weighted average cost of debt of 3.9%.
Arrow’s flexible, dual business line model
means that we can focus on growing the
capital-light AMS Business at the top of
the cycle when returns are lower and
then commit increasingly more capital
through our IB when the cycle turns,
and returns are at their highest.
Top of cycle
Very strong
core collections –
focus on AMS
growth and
deleveraging
Resilient
core collections –
focus on excellent
high return IB
purchasing
opportunities
Arrow Global Annual Report and Accounts 2018
Strategic report 12
Business model
We are specialists in unlocking value
from high-return niches
Our unique platform enables us to achieve returns significantly above
our cost of capital, deliver significant shareholder value and fulfil our
purpose of building better financial futures for our stakeholders.
Our focus
Our pan-European platform now
operates in five countries where
we view the assets niches as the
most attractive.
Niches by
asset class
UK
Portugal
Italy
Netherlands
Ireland
Consumer
Capquest
Gesphone
Parr Credit
SME
Mars Capital
Whitestar
Europa
Investimenti
Vesting
RNHB
Small market
Mars Capital
Mortgage
Mars Capital
Whitestar
Expanding Parr
Vesting
Mars Capital
Real Estate
Mars Capital
Norfin Europa
Investimenti
(Vegagest)
M7
Mars Capital
Master
servicing/
Securitisation/
Credit bureau
Fund
management
Mars Capital
Hefesto
Zenith
Focum
Mars Capital
Arrow UK
Norfin
Europa
Investimenti
(Vegagest)
Arrow
Netherlands
Arrow Ireland
Arrow Global Annual Report and Accounts 2018
13
Our unique platform
The value we create for our stakeholders
Customers
We help our customers build better financial
futures by assisting them in creating affordable
repayment plans in order to help them
rehabilitate their credit scores.
Clients
We maintain strong relationships with financial
institutions and institutional investors. This
means we are able to assist financial
institutions to deleverage by acquiring
portfolios from them (the Investment
Business) and are strongly positioned to assist
our institutional fund partners to value and
service their own portfolio acquisitions (the
Asset Management and Servicing Business).
Employees
Our people provide the essential talent and
energy to fulfil our purpose and goals. We rely
on them to drive premium customer service
and deliver excellent customer outcomes.
Communities
We believe in working with the communities
where we operate, ensuring that we do all
we can to have a positive influence through
supporting local charities and initiatives. We
have a clear strategy to support organisations
that focus on financial education and support.
We work closely with Citizens Advice (CA), as
well as a range of debt charities and advisory
firms, including StepChange, Payplan and
Christians Against Poverty.
Shareholders and investors
We believe that focusing on ensuring
excellent outcomes for all our stakeholders
will help us to deliver consistently strong
returns and, therefore, create long-term value
for shareholders. We have a consistent track
record of meeting our financial targets of
delivering underlying return on equity in the
mid-20s percentage and a dividend pay-out
ratio of at least 35% of net underlying income.
This consistency is further underpinned by
balance sheet discipline that prioritises stable,
long-term funding.
Our unique platform strategically
positions us to be a partner of choice
for local banks, credit funds and the
capital markets.
We originate
high quality assets
through our Investment
Business and Asset
Management and
Servicing Business
We use our data
advantage and local
expertise for prudent
underwriting across
asset classes
We service our own and
our clients’ portfolios
through a highly
customer-centric
approach
We maintain regulatory
conduct parity with
banks and prudently
manage risk across our
portfolios and operations
Read more about our stakeholders on page 32
Arrow Global Annual Report and Accounts 2018
Strategic report
14
Investment case
SMART thinking
Intelligent execution
Our focus is to provide servicing capabilities, through our platform,
for key asset niches in our target markets, at a prudent return,
with good customer outcomes.
• Focus on high value niches
• Unique origination channels
• Ability to invest above replacement
rate at a minimum of mid-teen
net IRRs
1
S o p histic ate d
in v e st m e n t platfo r m
w th m ark et
in a g ro
R
e
c
l
i
y
a
c
l
b
e
l
e
p
t
e
h
r
f
r
5
o
o
r
u
m
g
h
a
-
n
t
c
h
e
e
• Flexible model depending on credit
cycle: capital intensive Investment
Business and capital-light Asset
Management and Servicing Business
• Capital-light Asset Management and
Servicing Business fastest growing
part of the business
• Target to double AMS Business
income and increase it to 50% of gross
total Group income over five years
2
Increasin
of earnin
g q
uality
gs
s
r
e
g
n
old
o
r
t
h
tly s
e
r
a
h
r s
s fo
3
n
e
t
sis
n
o
C
n
r
u
t
e
r
Resilient balance sheet
4
• Balance sheet discipline
• Long duration debt – first funding
• Strong through-the-cycle
• Prudent approach
to underwriting
• Sustainable returns
for shareholders
maturity not due until 2024
underlying ROE target of 25%
• Low weighted average cost of debt
– reduced to 3.9% from over 8%
• New lower leverage ratio of 3.0x-3.5x
secured net debt to adjusted EBITDA
• Focus on prudent portfolio investing
• Sustainable dividend policy
with a payout ratio of at least
35% of underlying profit after tax
combined with reducing leverage
Arrow Global Annual Report and Accounts 2018
Leadership Q&A
15
A unique business model
with a track record of
delivering strong growth
at high returns
Q
&
A
Lee Rochford, Group
chief executive officer
“Given our skills in these core
disciplines, we diversified in order
to address a much larger market.”
Q
Why is the platform you have built unique and
how will it drive further growth?
We have consciously built the platform over the past
five years, both by geography and by focusing on the
highest value niches. When the business floated in 2013,
it was heavily focused on a single country – the UK –
and a single asset class – unsecured credit – albeit with
an important European foothold in the shape of
our Portuguese portfolio investments. The decision
was made in 2014 that, in an increasingly regulated
world, it would be a competitive advantage to also own
our own servicing platforms, giving us the ability to drive
the highest quality customer outcomes and control the
entire value chain, from origination and underwriting,
to collections. This has proven correct. Given our skills in
these core disciplines, we diversified in order to address
a much larger market opportunity. Our successful
diversification has been built on acquiring the right
Q
in-market platforms to give us the data, the forensic
underwriting experience in targeted niches, effective
collections platforms and, importantly, the right
management teams. In conjunction with our London-
based origination arm, at the heart of Europe’s capital
markets, we have connected these platforms with an
ever-increasing number of capital providers. And we’ve
executed very well, identifying the right platforms in
the right markets, paying attractive prices and retaining
and incentivising key management team members.
Q
Why do you need this platform to operate in
your sector?
It would be almost impossible to be successful in this
market without all the components of our platform.
A business like ours needs the ability to originate and
provide a range of solutions to financial institutions
across a wide range of specialist asset classes. Effectively,
you need: the insight to effectively underwrite complex
assets, transforming them from assets with unpredictable
cash flows into ones with predictable cash flows; the
platforms to service different assets in the high-margin
niches that we target; regulatory conduct parity with the
banks, and; the ability to drive portfolio core collections
and to manage the inherent risks. Arrow has, therefore,
built a platform to enable the transfer of assets out of the
banking system, either to our balance sheet, the capital
markets or – increasingly – through a wide range of
co-investors. This platform generates assets at returns
that are considerably ahead of our own cost capital.
These assets are also very attractive to institutional
fund clients who want access to those high-return
assets, but who have neither the skills, nor the desire,
to run complex, regulated operating businesses for
the long term.
Q
How are you able to generate such high returns?
There has been some speculation about the degree to
which high returns are available in our market, but our
clients include some of the smartest investors in the
alternative assets base, and they use our unique platform
to access higher returns than they otherwise could.
The powerful driver of this for our business model is
that it creates a ‘walled garden’ of future purchasing
opportunities, as those clients with funds shorter-dated
than the asset tail lives have 100% propensity to sell.
And Arrow now has £52.6 billion of assets under
management. Given our high proportion of off-market
deals, this alone feeds our purchasing pipeline for years
to come. It’s also important to remember just how big
the market in which we operate really is: there are
€2 trillion of non-performing and non-core assets on
bank balance sheets throughout Europe – all of these
need to shift into the capital markets. Our average
transaction size in 2018 was less than £7 million; this
deal size is not where the majority of the competition
is. It’s not uncommon to see transaction sizes of a
multiple of 40x the size of our average deal size; it
is these transactions, where large global funds can
gain attractive asset level leverage meaning that
lower returns are acceptable, that exhibit the most
competitive characteristics. This is not Arrow’s model,
nor the market where we operate.
Arrow Global Annual Report and Accounts 2018
Strategic report 16
Leadership Q&A continued
Balance sheet and
capital allocation
Q
&
A
Paul Cooper,
Group chief financial officer
“We have actively refinanced
the entire balance sheet, taking
advantage of an attractive point
in the credit cycle to halve our
cost of debt.”
Q
Why are you confident you retain
balance sheet discipline?
Having balance sheet discipline is vital for a business
such as Arrow. Over the last two years, we have actively
refinanced the entire balance sheet, taking advantage of
an attractive point in the credit cycle to halve our cost
of debt and extend its duration. This has resulted in our
weighted average cost of debt falling to 3.9%, with no
bond maturities due until 2024. When combined with
the resilient cash flows from our back book of portfolio
investments, this is an extremely strong position to be
in at this point in the cycle. We have plenty of capital
available to continue to invest at attractive returns above
our cost of capital. It also means we are well positioned
to capitalise on investment opportunities generated by
an economic downturn.
Debt maturity & 120-month ERC (£m)
Cumulative 120-month ERC
£285m Relvolving Credit Facility L+2.5%
£320m Fixed Rate Notes due 2024, 5.125%, 1st Call Sep-19
€400m Floating Rate Notes due 2025, E+2.875%, 1st Call Apr-19
€285m Floating Rate Notes due 2026, E+3.75%, 1st Call Mar-20
1,736
1,635
1,518
1,382
1,903
1,972
1,181
1,181
925
925
566
1,192
974
701
369
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Arrow Global Annual Report and Accounts 2018
17
“We’ve spent
a considerable
amount of time
developing a
capital allocation
framework.”
Q
How do you think about capital allocation?
To run a business like ours successfully, you need to
be acutely aware of where you are in the credit cycle.
This applies to both the asset and the liability side of
the balance sheet. As a management team, we’ve spent
a considerable amount of time developing a capital
allocation framework that explicitly recognises this. At
a high level, depending on our view of market returns,
we make capital allocation choices about portfolio
purchases, leverage and capital returns to shareholders.
For example, in the past when our view of market pricing
was that it was improving, and higher returns were
available, we increased the capital intensity of our
purchases and increased leverage. The converse is
true when our view of market returns is that they
are reducing. However, the strength of the Arrow
business model is that we have two business lines:
The Investment Business – capital intensive – and the
Asset Management and Servicing Business – capital-
light. Together, they provide us with the ability to lean
in with different degrees of capital intensity depending
upon where we believe we are in the cycle.
Arrow Global Annual Report and Accounts 2018
Strategic report 18
Leadership Q&A continued
Consistent underwriting
generating strong returns
Q
&
A
Dan Perry,
Director of investments,
analytics and performance
“We have a track record of
outperforming our initial
underwriting assumptions.”
crisis and demonstrates the strong cash flow profile of
the investments we make that tend to be correlated to
the macro economic climate.
Q
104% underwriting performance sounds
impressive – how do you manage to achieve
this consistently?
We achieve this through the use of our extensive
historical datasets and incorporating previous learnings
on over and under performance into the pricing process.
This, combined with performing extensive due diligence
as part of the portfolio acquisition process, generates
high quality underwriting and hence lower variability
and a trend of outperformance.
“We take a
conservative
approach to
underwriting.”
Q
You talk about your strong underwriting track
record. What does this look like?
We take a conservative approach to underwriting.
This has resulted in average outperformance versus our
initial forecasts across all of our investments of 104%.
This includes performance through the last financial
Arrow Global Annual Report and Accounts 2018
19
Resilience
through the cycle
Clodagh Gunnigle,
Group chief risk officer
“We purchase assets at a fraction
of face value, conservatively
forecasting predictable cash flows.”
Q
What does the ‘cycle’ look like for Arrow?
We purchase assets at a fraction of face value, turning
unpredictable cash flows into predictable cash flows,
and our customers’ own economic cycle often does not
coincide with the general economic cycle meaning that,
while some of those core collections may be delayed
during a credit cycle – we suffer very little ultimate
loss of cash flow and also see increased returns on
new investments as capital withdraws from the sector,
reducing competition. As the cycle improves, typically
bank balance sheets improve, less stock becomes
available and prices tend to rise again. It is at this
point where our business’ focus tends to shift relatively
towards the Asset Management and Servicing Business,
driving capital-light fee and performance income from
the wider market’s desire to invest in these assets.
Q
How resilient is the business through the cycle?
As a management team, we’re acutely aware that the
sector has traditionally been cyclical when it comes
to new asset-purchasing opportunities. However,
Arrow has the attractive characteristics of generating
consistent cash flows during a downturn while being
presented with compelling investment opportunities
as more defaulting portfolios become available and
competition withdraws from the sector. Furthermore,
around a third of our income comes from AMS, which is
far less cyclical. At our Capital Markets Day in November,
I presented a scenario analysis of how the business
might perform in a recessionary environment due to
Brexit, using how the business performed during the
last downturn as a reference point. This showed that
we expect there would be a minimal impact on the cash
returns on the average portfolio over a 10-year period
of around 2% pre-foreign exchange movements. This
minimal cash collection impact, therefore, positions
us well to capitalise on the high-return investment
opportunities a recessionary environment naturally
presents to a business such as Arrow.
Arrow Global Annual Report and Accounts 2018
Strategic report 20
Strategy
Clear strategic priorities
Focus on strong
consistent returns
in the Investment
Business
To grow our
specialist
capital-light Asset
Management and
Servicing Business
Our approach
• Maintain investment discipline and target
• Ensure our servicing platforms provide value
our mid-teens IRR target
• Ensure that investments are well
diversified by geography and asset
class to increase risk-adjusted returns
• Specialise in high value niches where
Arrow’s specialist capabilities deliver
sustainably high returns
• Look to invest via bilateral trades and
in off-market situations, which provide
higher quality returns
• Access larger deals by co-investing with
partners, providing a combination of
equity exposure and servicing fees
for managing the assets
• Significant diversification as a result
of larger volumes of smaller deals
for us and our clients
• We have built a high-quality servicing
platform across our chosen geographies
which provides unique access to deal
flow and regulatory conduct parity
with European banks
• Meet the growing demand from clients as
banks increasingly outsource their specialist
servicing requirements and alternative
investors seek asset exposure, not
servicing platform acquisition
• Continue to grow diversified and predictable
cash flows by increasing the number of
long-term servicing contracts
• Outperform client core collections targets in
order to capitalise on incentive fee structure
• Capitalise on our scale benefits through
operating leverage, local expertise and
local relationships
• Grow our discretionary fund management
offering in response to sophisticated
institutional investor client demand
• Grow total AUM – creates ‘walled garden’
of assets from which our Investment
Business can purchase tails of proven
assets at attractive returns
• Organically invested £263.4 million in
portfolio purchases across 40 deals
• 78% of transactions in off-market
transactions
• Average Arrow investment contribution
per deal of £6.7 million
• Grew AUM 11.0% from £47.4 billion to
£52.6 billion
• Acquired relevant European servicers in
order to complete the formation of our
pan-European platform focused on our
chosen markets
• £1.6 billion of third-party capital invested
• Announced ambitious target to double
alongside Arrow’s equity
• Ended the year with our 2018 vintage
geographic split by investment of:
UK: 20%, Ireland: 14%, Portugal: 17%,
Netherlands: 18%, and Italy: 31%
• Continue to invest in loan portfolios
that meet our strict returns criteria
of a mid-teens IRR
• Continue to create balanced investment
vintages by geography and asset class
• Maintain investment volume growth
in line with our target to grow faster
capital-light earnings from our Asset
Management and Servicing Business,
but still grow volumes well above
our replacement rate
AMS income by 2023
• Disposed of non-core Belgian platform
• Grow AUM across all geographies
• Continue to manage client
assets accretively
• Continue to grow AUM through
managed accounts
• Progress towards material fund raising
ahead of the future launch of Arrow’s
discretionary fund management offering
Progress in 2018
Key priorities in 2019
Arrow Global Annual Report and Accounts 2018
21
To be a leading
player in our
chosen markets
To transform the
customer journey
within our
industry
To attract and retain
the best talent
• We understand that to be the best in
one’s industry it is vital to employ the best
• We aim to employ talent from leading
financial and technology companies
and education institutions
• We support all our employees through
a focus on providing accessible training
and career planning
• We look to retain talent by providing a
competitive package of pay and benefits,
as well as valued incentives and
recognition programmes, with a focus
on rewarding behaviours that promote
a culture orientated around
customer satisfaction
• We have an ongoing commitment to
build the strength of the leadership,
which is key to ensuring the productive
growth of the Group
• We have carefully identified the markets
we want to operate in; those with strong
NPL volumes, high returns characteristics
and established regulatory environments
• Enable customers to build better financial
futures by helping them to rehabilitate
their credit scores and gain access to
future credit
• We use industry leading data and
analytics to better understand our
customers’ financial situations and
tailor our interactions with them on
an individual basis
• We work with debt charities and other
organisations that provide free impartial
services to ensure that customers get
the best possible advice
• We have focused on identifying and
acquiring the best businesses with
the best management teams in
our chosen markets
• This has allowed us to increasingly
diversify our earnings by both geography
and asset class. It has also enabled us to
increase our Asset Management and
Servicing income significantly
• Operating over a wider geographical
footprint has provided us with access to a
greater range of investment opportunities
and supported our ability to continue to
source high-return opportunities
• We are regulated in all of our jurisdictions
and actively participate in industry bodies
that help lead change in legislation and
best practice
• Our strong reputation and relationships
make us a favoured buyer of portfolios,
enabling us to engage in a greater
number of off-market transactions
• Acquisition of Parr Credit in Italy
• Acquisition of Europa Investimenti in Italy
• Acquisition of Norfin in Portugal
• Organically purchased £263.4 million of
portfolio investments and increased
84-month ERC by £117.9 million
• Customer engagement via digital means
• Continued to promote our Group
continued to increase
• We won three awards at the Credit
Strategy awards
• Maintained our strong relationship
with Citizens Advice in the UK
• Worked closely with and funded
StepChange, Payplan and Christians
Against Poverty on consumer debt issues
values and purpose programme with
Group-wide management roadshows
• Strengthened leadership structures
throughout the Group through key
hires across all countries and at Group
• Average employees across the Group
increased by 266, largely due to the
acquisitions of Europa Investimenti, Parr
Credit and Norfin
• Ensure the smooth integration of the
• Continue to focus on excellent
most recent acquisitions into the Group
• Continue to drive operational excellence
throughout the business
•
customer outcomes
Increase customers’ digital interaction
with us
• Maintain staff incentives based on
positive customer outcomes
• Continue to cultivate a culture orientated
around our Group Values that rewards
positive customer outcomes and promotes
an enjoyable working atmosphere
• Reward high flyers in order to
maintain high retention rates
of talented employees
• Attract new talent through offering
unique working opportunities combined
with attractive compensation and
benefits packages
Arrow Global Annual Report and Accounts 2018
Strategic report
22
Key Performance Indicators
Measuring our performance
Our KPIs were discussed as part of the Capital Markets
Day in November 2018. We also continue to define and
shape how we manage the business, both financially
and non-financially, and as these discussions develop
into additional KPIs, we will share these in the future.
Underlying ROE
34.8%
(2017: 32.9%)
AMS EBITDA margin
20%
(H1 2018: 19%)
34.8%
32.9%
29.1%
20%
19%
2016
2017
2018
H12018
FY2018
• Arrow aims to achieve an underlying
ROE in the mid-20s through-the-cycle
• The expectation is to reach this target
range by the end of 2019
• Arrow has a five-year target to increase
AMS margins from a level of high-teens
per cent to mid-20s per cent, as well as
to double AMS income to around 50% of
Group gross income over the same period
• Arrow’s two business segments – the
Investment Business (IB) and the Asset
Management and Servicing Business (AMS)
– provide the capital allocation flexibility to
sustain returns depending on the point of
the cycle; at the bottom of the cycle, the
Group will increase balance sheet intensity
into a higher returns market environment
and at the top of the cycle the Group will
reduce balance sheet intensity into a lower
returns environment and emphasise the
capital-light AMS business
• The AMS business is projected to be the
fastest growing division in the Group over
the next five years and is highly accretive
to ROE
• Arrow sees significant potential for margin
enhancement as we continue to grow our
servicing offering in high-margin niches
where our specialist servicing capabilities
allow us to be the partner of choice for
sophisticated institutional fund clients
• The Group intends to build a fund
management offering over time in
response to institutional fund client
demand. The Group began this process
with the raising of a £300 million fund with
a single institutional fund client in February
2018 and have since acquired other
managed accounts
• The fund management business is
expected to start contributing materially
to the income statement by FY 2021
KPI
Description
Link to strategy
Arrow Global Annual Report and Accounts 2018
23
Net IRRs
17%
(2017: 15%)
Leverage ratio
3.7x
(2017: 3.9x)
Dividend pay-out ratio
12.7p – 35%
(2017: 11.3p – 35%)
3.6x
3.9x
3.7x
12.7p
11.3p
9.1p
18%
17%
15%
2016
2017
2018
2016
2017
2018
2016
2017
2018
• At our Capital Markets Day in November
2018, the Group introduced a new lower
leverage ratio target of 3.0x to 3.5x
secured net debt to adjusted EBITDA
• At our Capital Markets Day, the Group
outlined our new dividend policy as part of
our revised capital allocation framework,
increasing the pay-out ratio from up to
35.0% of underlying profit after tax to at
least 35.0% of underlying profit after tax
• The Group targets a mid-teens per cent
net IRR for our Investment Business
• The target is on an annual blended basis
and consists of investments made across
our various geographies and asset classes
• Arrow’s decision to increase the pay-out
ratio is closely related to our expectation
that the AMS Business will be the fastest
growing part of the Group over the next
five years and will see significant margin
enhancement over that period
• When combined with the consistent
cash generation we forecast from the
Investment Business, we have the
confidence that we will be in a position to
pay a higher dividend while continuing to
deliver on our mid-20s per cent
underwriting ROE target
• The Group aims to build a balanced
•
annual investment vintage by geography
and asset class with an estimated return
profile in the mid-teens per cent IRR
If a return in the mid-teens per cent IRR
was not considered attainable across
the vintage, the Group would consider
slowing the rate of investment until
returns had improved
• Conversely, if the returns available are
considered to be significantly in excess
of our targets, the Group may choose
to increase investment volumes
• The Group’s view on leverage forms
part of our conservative capital
allocation framework
• When market pricing is less competitive
and higher returns are available, the
Group looks to increase the capital
intensity of purchases and increase
leverage. The converse is true when
market returns are seen to reduce in
a more competitive environment. This
process is linked to the credit cycle
and the Group’s current view is that
the market is near the top of the cycle
• Given our current assessment of the
credit cycle, we have taken the decision
to deleverage in the near-term in order
to be well positioned to capitalise on the
opportunities that present themselves
should the cycle turn, competition
reduce and returns increase
Arrow Global Annual Report and Accounts 2018
Strategic report 24
Operational review
Performance highlights
We now have a platform that operates across
five geographies.
Region
2018 highlights
UK
AUM:
ERC*:
Portugal
£13.9bn
43.3%
AUM:
ERC*:
£7.0bn
29.2%
• Stable returns through 2018
•
Increasing returns seen through 2018
• Established new UK leadership team
• Core collections significantly ahead
• Build out of secured servicing solutions with
of forecasts
the integration of Mars Capital
• Acquisition of Norfin Investimentos S.A.
• Continued development of digital platforms
• Streamlining and consolidation of servicing
platforms across all businesses
• Received three awards at the Credit
Strategy Collections and Customer Service
awards 2018
completed
• Senior management team enhanced
through new business acquisitions
• Whitestar business won two international
awards – the Global Banking and Finance
‘Best Credit Portfolio Management
Company Portugal 2018’ and the Finance
Digest ‘Brand Excellence in Credit Portfolio
Management Portugal 2018’
Oliver Stratton,
UK country manager
João Bugalho,
Portugal country manager
* Total investment split by 84-month ERC
Arrow Global Annual Report and Accounts 2018
25
Italy
AUM:
ERC*:
Netherlands
Ireland
£26.2bn
13.2%
AUM:
ERC*:
£4.6bn
12.3%
AUM:
ERC*:
£0.8bn
2.0%
•
Increasing returns seen through 2018
• Stable returns throughout 2018
• Core collections significantly ahead
• Sold non-core Belgian business
of forecasts
• Completed consolidation of employees
• Acquisitions of Parr Credit and Europa
into one office
Investimenti completed
• Acquisitions integrating well into the Group
• Further office consolidation achieved
• Further strength added to senior
management team from acquisitions
and recruitment of new talent
• Continued to increase efficiency,
with improving core collections, client
satisfaction and employee engagement
• Mars now firmly established as a provider
of credit servicing solutions in Ireland
• Completed the consolidation of Irish
operations into one business and one
office with established country manager
and senior leadership team
• Successfully maintained strong relationships
with all stakeholders in Ireland, including
engagement with the Irish regulator and
the Department of Finance regarding
innovative proposals to solve Irish
non-performing loans
Massimiliano Ciferri,
Italy country manager
Madiha Mouchtak,
Netherlands country manager
Colin Maher,
Ireland country manager
Arrow Global Annual Report and Accounts 2018
Strategic report 26
Group chief financial officer’s review
Strong performance for 2018
“Both operating
segments
contributed
strongly to
earnings growth
during the year.”
Paul Cooper,
Group chief financial officer
“Another excellent cash collection
performance has driven strong
cash generation and further
deleveraging.”
I am pleased to present another good set of results for
2018. They demonstrate strong returns together with
high growth, underpinned by operational and financial
excellence across the business contributing to
sustainable, profitable growth and enhanced
shareholder value.
Important note:
Both IFRS and cash metrics are important to understand
the key drivers of the business. The reconciliations
and commentary on the following pages have been
prepared to aid this understanding, which helps to
support the commentary of the financial review for
the year. Additional information on underlying
results and a glossary of definitions can be seen
on pages 142-146.
Consistent cash generation
The business continued its track-record of strong cash
generation in 2018, with net cash flow from operating
activities prior to purchases of portfolio investments of
£244.3 million (2017: £197.8 million). The positive result
was driven by an increase in core collections to £411.6
million. This resulted in an increase in adjusted EBITDA
of 27.5% to £294.0 million (2017: £230.6 million).
The reconciliation for the year of profit after tax to
the cash result, including a reconciliation to adjusted
EBITDA, is provided on page 31. Adjusted EBITDA is a key
proxy of the business’ cash flow and allows us to monitor
the operating performance and cash flow generation
of the Group.
Good income growth
The growth in total income to £361.8 million (2017:
£319.0 million) has been driven by both our Investment
Business and AMS Business, through the increasing size
of the portfolio balance and higher volumes within the
AMS Business.
Investment Business
Improving returns
Over the course of the year, net IRRs increased from 15%
to 17%, as we have seen material benefits from our newly
expanded platform and further improved our ability to
select what we bid and transact for – all underlined
by our disciplined approach to targeting returns in
the mid-teens.
Portfolio purchases better than guidance
In the improving pricing environment, we have
continued to grow our portfolio investment asset
base conservatively due to the Group’s view that we
are approaching the top of the credit cycle. Our focus
on appropriately deploying capital means we continued
to focus on the significant opportunities presented
by the AMS Business in 2018, growing incomes and
AUM strongly. Increasing AUM size has tangible future
benefits for the business, as it creates future purchasing
opportunities when the owners of those portfolios
look to sell into the secondary market – where we are
Arrow Global Annual Report and Accounts 2018
“Core collections
were again
ahead of our ERC
forecast, reflecting
our continued
outperformance
versus our initial
underwriting
expectations.”
27
extremely well positioned to purchase them at attractive
returns given our prior experience of servicing them.
Over the course of the year the Group organically
purchased £263.4 million of new assets (2017: £223.9
million). Of the purchase price invested, 63% related
to secured portfolios, 37% to unsecured portfolios and
78% was acquired in off-market transactions where
no competitive auctions took place. Our strong client
relationships and growing secondary market activity due
to our large AUM base provides us with this competitive
off-market transaction advantage. There continued
to be a good balance of investment by geography,
providing another important element of diversification.
The Group continues to acquire debt portfolios
significantly in excess of the required replacement rate
(the amount of annual investment required to keep the
Estimated Remaining Collections (ERC) constant). This is
reflected in the increased value of the ERC (84-months)
from £1,516.9 million to £1,634.8 million, an increase
of 7.8%.
All portfolios continue to be monitored carefully and,
where appropriate, adjusted for both positively and
negatively in the ERC forecast based upon our detailed
modelling. Although it has increased in total, individual
elements of the ERC have been adjusted up or down
to account for any areas of over or underperformance.
Core collections – record performance
Core collections from our purchased portfolio asset
base increased to £411.6 million (2017: £342.2 million),
reflecting continued strong operational performance.
Core collections were again ahead of our ERC forecast
in 2018, reflecting our continued outperformance versus
our initial underwriting expectations. As at 31 December
2018, we have cumulatively collected 104%, an
improvement against 2017’s 103%, reflecting
our continued underwriting discipline.
Asset Management and Servicing Business
Continued income growth
Since IPO, the Group’s third party AMS income has
grown from £1.4 million to £91.7 million. This has been
driven by the continued strength of the franchise, as well
as the acquisitions of Mars Capital in November 2017 and
Parr Credit in March 2018. Importantly, organic growth
remained healthy.
In 2018, the Group published enhanced disclosure on a
segmental basis demonstrating the contribution from
both the Investment Business and AMS Business. The
Group provides asset management and servicing to
other group companies as well as external parties and
its gross income was £132.3 million, including income
from the Group’s Investment Business on an arm’s
length equivalent basis.
At our Capital Markets Day in November 2018, we
provided an ambitious target to double gross income
from the AMS Business over the next five years to
FY 2023 from £132.3 million in FY 2018. The growth in
third-party co-investment volumes, representing £1.6
billion on top of our total organic portfolio purchases
of £263.4 million means we remain confident of the
long-term growth potential for this business.
The EBITDA margin in the AMS Business for 2018
was 20%. Previous guidance for the margins in this
business was high-teens and at our Capital Markets Day
in November 2018, we indicated that we expected this
to increase to towards 25% as we deliver on our strategy
to develop our servicing offering in high margin niches
and build out our fund management offering. The Group
began this process with the raising of a £300 million fund
with a single institutional fund client in February 2018
and have since acquired other managed accounts.
We expect the fund management business to start
contributing materially to the income statement
by FY 2021, which supports our AMS income and
margin guidance.
Costs – continued ratio improvements
Our total cost-to-income ratio increased to 70.5%
(2017: 66.8%) due to an increase in ‘One Arrow’ and
acquisition related expenses. After adjusting items in
the year of £23.8 million (2017 £7.1 million) the ratio was
63.9%, being a decrease from 64.6% in 2017. Adjusting
items include £9.0 million (2017: £4.6 million) related to
the ‘One Arrow’ investment programme and business
acquisition costs of £14.7 million (2017: £2.4 million) that,
due to their size and nature are outside the normal
operating activities of the Group. The ‘One Arrow’
programme has now completed on track and on scope.
At our Capital Markets Day, the Group gave new
guidance that it expects its underlying cost-to-income
ratio to fall towards 60% over the next five years. The
underlying rate of 63.9% in 2018 reflects the necessary
investment in expanding Group functions, including
several important executive level appointments, via the
‘One Arrow’ investment programme. The ratio will
reduce through a combination of scale benefits and the
benefits of strategic integration flowing from the ‘One
Arrow’ programme, notwithstanding the more rapid
growth of the AMS business which carries a higher
cost-to-income ratio.
Our underlying cost-to-collect ratio improved by an
impressive 4.3 percentage points to 32.6% (2017: 36.9%),
as we began to see benefits from the ‘One Arrow’
investment programme over and above the impact of
the growth in the AMS Business, which has a higher cost-
to-collect than our Investment Business. Our statutory
cost-to-collect ratio also improved to 32.9% (2017: 37.1%).
Statutory other operating expenses were £136.0 million
(2017: £94.6 million) and underlying other operating
expenses were £113.3 million (2017: £88.3 million) in
the year.
Arrow Global Annual Report and Accounts 2018
Strategic report 28
Group chief financial officer’s review continued
“Our focus
on prudently
deploying
capital means we
continue to focus
on the significant
opportunities
presented by the
AMS Business.”
Tax
The tax charge of £10.0 million represents an effective tax rate of 25.1% (2017: 21.1%) on profit-before tax. The effective
tax rate on underlying profit is 22.2% (2017: 19.5%) 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.
Profit after tax
On an underlying basis, profit after tax increased by 13.3% to £64.1 million (2017: £56.6 million). Statutory profit after tax
decreased to £30.0 million (2017: £39.9 million). FY 2017 includes an adjusting gain of £14.7 million from the sale of
associate Promontoria MCS Holdings SAS.
As well as the factors outlined above, FY 2018 also includes non-underlying items totalling £42.4 million (2017: £34.4
million), which the Group considers adjusting items, arising from costs associated with restructuring the Group’s
long-term financing of £18.7 million and One Arrow costs and business acquisition and other costs of £23.8 million,
with a full reconciliation shown in the table below. Offsetting the £42.4 million of adjusting items is a tax impact
of £8.3 million.
The underlying result is driven by strong organic growth and sensible business expansion as discussed in
previous sections.
Alternative performance measures (APMs)
The Group believes that the use of APMs for profitability, earnings per share and cash metrics (see pages 30 to 31),
provide valuable information to the readers of the financial statements. They can provide a more comparable basis
for assessing the Group’s performance between financial periods, by adjusting for items that by their size, nature
or incidence are not necessarily representative of the underlying performance of the business. APMs also reflect
key operating targets and are used to monitor performance by the board. APMs are not defined within IFRS and,
therefore, may not be directly comparable with similarly titled measures reported by other companies. APMs in this
document are not a substitute for, but complement, statutory IFRS measures and readers should also consider these.
Reported profit
Adjustments:
Acquisition related costs
One Arrow costs
Bond refinancing costs
Gain on sale of associate
Total adjustments
Underlying profit before NCI
Non-controlling interest
PBT
£000
39,991
14,717
9,039
18,658
–
42,414
82,405
–
2018
Tax
£000
(10,022)
(2,742)
(1,988)
(3,545)
–
(8,275)
(18,297)
–
PAT
£000
29,969
11,975
7,051
15,113
–
34,139
64,108
–
PBT
£000
50,559
2,444
4,645
27,352
(14,696)
19,745
70,304
(44)
2017
Tax
£000
(10,644)
(267)
(896)
(5,265)
3,374
(3,054)
(13,698)
–
PAT
£000
39,915
2,177
3,749
22,087
(11,322)
16,691
56,606
(44)
Underlying profit after tax
82,405
(18,297)
64,108
70,260
(13,698)
56,562
See page 142 for further details of adjustments.
Profit after tax
Average net assets
ROE (%)
Weighted average ordinary shares
Basic EPS (p)
2018
2017
Reported
£000
29,969
184,083
16.3%
174,939
17.0p
Underlying
£000
64,108
184,083
34.8%
174,939
36.6p
Reported
£000
39,915
171,905
23.2%
174,768
22.8p
Underlying
£000
56,562
171,905
32.9%
174,768
32.4p
The underlying figures in the table above are important as they are how the business is managed and monitored. It is important to be able to consider
the underlying results excluding the adjusting items in the reported results as these may impact on how business decisions are made. See page 142 for
further detail.
Arrow Global Annual Report and Accounts 2018
“Since its IPO, the
Group has more
than halved its
cost of debt while
focusing on long
duration debt for
added balance
sheet stability.”
Balance sheet – further strengthened following
full refinance
Funding and net debt
The Group has £131.4 million cash headroom and no
facilities maturing until 2024 – a very strong position.
On 7 March 2018, the Group issued €285 million floating
rate senior secured notes due 2026 at EURIBOR + 3.75%.
Additionally, the Group issued a tap of £100 million of
the existing 5.125% fixed rate notes due 2024. As part
of the transaction the Group redeemed its €230 million
floating rate secured notes, which were issued at 4.75%
over EURIBOR.
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, with the margin unchanged. Post year end
on 26 February 2019, the revolving credit facility was
extended to 2024, with the margin unchanged.
The Group’s secured net debt position at the period end
was £1,089.2 million (2017: £899.2 million). The Group’s
total assets at the end of the year increased to
£1,596.1 million (2017: £1,258.5 million).
Leverage has reduced to 3.7x (2017: 3.9x), and we are on
track to reach our new lower target range of 3.0x to 3.5x
by FY 2019 and are committed to maintaining leverage in
that range in order to position us well for any turn in the
credit cycle.
The Group’s weighted average cost of debt has been
maintained at 3.9% and the average debt facility maturity
is now 6.1 years. This means that since its IPO, the Group
has more than halved its cost of debt while focusing on
long duration debt for added balance sheet stability.
Strong returns and dividends
The underlying ROE is 34.8%, up from 32.9% at FY 2017,
and well above our target of mid-20s underlying ROE.
The Group has maintained its target of generating
underlying ROE in the mid-20s per cent on a
through-the-cycle basis.
Basic EPS is 17.0p compared to 22.8p in FY 2017, with
the decrease largely due to adjusting costs offset
by the growth in income. Underlying basic EPS
has increased 13.0% to 36.6p (FY 2017: 32.4p).
Facilitated by the Group’s guidance that income from
the capital-light AMS Business will double over the
next five years, the Group has revised its dividend policy,
giving a pay-out ratio of at least 35% of underlying profit
after tax, an increase from the previous guidance of
between 25%-35% of underlying profit after tax. The
Group proposes to pay an 8.7p final dividend, taking
total declared and proposed dividends for the year
to 12.7p. This is an increase of 12.4% from the FY 2017
dividend of 11.3p.
29
Sale of Belgian business
In December 2018, we took the decision to exit the
Belgian market by selling our non-core Belgian platform
and some associated portfolios. Our Belgian business
existed in a relatively small NPL market and was acquired
as part of our much larger acquisition in the Netherlands,
to gain access to that attractive NPL opportunity. In line
with our disciplined approach to capital allocation, the
Belgian business was therefore considered non-core
and the sale enables us to focus on the Netherlands
as one of our five key geographies.
Brexit
The Group completed stress testing in light of the
significant uncertainty around Brexit, which showed the
Group and strategy to be resilient to possible outcomes.
More details of this can be seen on page 44. With
extensive scenario testing, strong liquidity, no debt
maturities due until 2024 and potential foreign exchange
upside in the event of a hard Brexit, the Group feels
confident in its future position.
Summary and outlook
The Group has performed strongly in the financial
period. The new segmental disclosure of our two
operating business segments – the Investment
Business and the AMS Business – show both
divisions contributing strongly to earnings growth.
The high-quality, recurring earnings stream from asset
management servicing, underpinned by our institutional
fund client base, is capital light and highly accretive
to ROE.
The guidance we have given regarding how we intend
to grow strongly the AMS Business – by doubling its
income and significantly increasing its margins over the
next five years – provides for the business potential.
Returns in the Investment Business saw an upward trend
despite record levels of investment. When combined
with our strong balance sheet, reduced leverage ratio,
further operating leverage being extracted from our
expanded platform and the delivery of an attractive
through-the-cycle underlying ROE target at least in the
mid-20s, we have continued belief in the strong
prospects for the business.
Paul Cooper
Group chief financial officer
28 February 2019
Arrow Global Annual Report and Accounts 2018
Strategic report 30
IFRS to cash result reconciliations
“Our core
competence is
using data to
identify, manage
and collect non-
performing
portfolio
investments.”
IFRS to cash result reconciliations
Introduction
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 on pages 144 to 146.
Our core competence is using data to identify, manage
and collect non-performing and non-core portfolio
investments. We use this competence to drive two key
income streams: the Investment Business (IB), where we
acquire the portfolio; and the Asset Management and
Servicing Business (AMS), where we manage the
portfolio, but do not take capital risk.
The way in which the business recognises income on
each of these business streams differs substantially.
Investment Business
For IB, 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.
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.
The ERC forecast to 84 months or 120 months from date
of purchase divided by the purchase price is the gross
money multiple (GMM) that we expect to achieve from
that investment. The GMM is an important measure to
understand the gross cash return on our investment.
The GMM, therefore, is a measure of portfolio asset
quality and is one of the metrics we evaluate when we
appraise a portfolio. In 2018, we organically purchased
portfolio investments for £263.4 million, which with an
84-month GMM of 1.5 times added £406.4 million to ERC
and a 120-month GMM of 1.8 times added £463.8 million
to ERC.
We are required to calculate the effective interest rate
(EIR). This is the discount rate which would allow the
estimated future cash flows to be discounted to the day
one purchase price of the portfolio. This rate is used
to calculate the amount of income we recognise each
year. The EIR is fixed at the point of purchase. The EIR
is used to allocate the collections received between
a repayment of our original purchase price; this is
accounted for as a reduction in the loan balance
(amortisation) and the balance of the collection as
interest income (which is accounted for as income
from portfolio investments). This is akin to the way
in which a mortgage would pay down.
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 discount rate is the
year-end carrying value of the portfolio investments.
This movement of the portfolio investments is reflected
in income from portfolio investments 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.
Asset Management and Servicing Business
As part of our strategy to diversify the business, the
Group has also strengthened its capabilities in asset
management servicing to complement the strength
it has in debt purchase. AMS income is driven by
commissions received, largely based on collections,
plus fee income.
AMS income does not require significant capital
investment and therefore the development of this
business is important to improving both the IFRS
and cash result for the business.
Arrow Global Annual Report and Accounts 2018
31
Movement in portfolio investments under IFRS reconciled to cash ERC
Brought forward
Portfolios acquired during the year1
Portfolio additions from acquired entities
Collections in the year2
Income from portfolio investments at amortised cost3
Fair value gain on portfolio investments at FVTPL4
Net impairment gains5
Exchange and other movements
Effect of discounting7
Carried forward 31 December 2018
IFRS
£000
934,467
263,350
11,853
(411,588)
193,932
24,745
50,727
19,544
1,087,030
ERC
84-month
£000
1,516,909
406,362
20,753
(411,588)
–
–
–
–
102,350
1,634,786
(547,756)
1,087,030
ERC
120-month
£000
1,780,245
463,790
21,112
(411,588)
–
–
–
–
118,571
1,972,130
ERC brought forward
ERC acquired during the year
Collections in the year
ERC roll forward and reforecast 6
ERC carried forward
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. See 8 in the reconciliation of profit after tax to the cash result below for more detail on total income
4. Fair value gain on portfolio investments at FVTPL represents net increases to carrying values, discounted at a market rate, of portfolio investments held at FVTPL as a result of
reassessments to their estimated future cash flows
5. Net impairment gain represents net increases to carrying values, discounted at the credit-adjusted EIR rate, of portfolio investments held at amortised cost as a result of reassessments to
their estimated future cash flows
6. The ERC roll forward and reforecast reflects management’s updated estimation of future collections. It takes account of updated information on specific portfolios, the latest exchange
rate and rolls forward the 84-month forecast collection period
7. Under IFRS, the carrying value of portfolio investments includes 84-months of discounted cash flows, however we expect to see cash flows beyond this period and report a 120-month
ERC also, as is customary for the industry
Reconciliation of profit after tax to the cash result
Income from portfolio investments
Fair value gains portfolio investments at FVTPL
Impairment gains on portfolio investments
at amortised cost
Income from Asset Management
and Servicing
Profit on sale of property
Total income8
Total operating expenses9
Operating profit
Net financing costs
Profit before tax
Taxation charge on ordinary activities
Profit after tax
Reported
profit
£000
193,932
24,745
Adjusting
items11
£000
–
–
Underlying
profit after tax
£000
193,932
24,745
Other
items
£000
217,656
(24,745)
Cash
Result
£000
411,588
–
50,727
–
50,727
(50,727)
–
91,661
731
361,796
(255,013)
106,783
(66,792)
39,991
(10,022)
29,969
–
–
–
23,756
23,756
18,658
42,414
(8,275)
34,139
91,661
731
361,796
(231,257)
130,539
(48,134)
82,405
(18,297)
64,108
–
3,028
145,212
18,281
163,493
5,18310
168,676
8,869
177,545
91,661
3,759
507,008
(212,976)
294,032
(42,951)
251,081
(9,428)
241,653
(10,944)
(153,181)
77,528
Collections in the period2
Income from Asset Management
and Servicing
Proceeds from sale of property
Cash operating expenses
Adjusted EBITDA12
Capital expenditure13
Replacement rate14
Cash result
8. Total income is largely derived from income from portfolio investments as explained in 3 above, plus income from asset management and servicing being commission on collections
for third parties and fee income received. The non-cash items add back loan portfolio amortisation to get to core collections. Amortisation reflects a reduction in the statement of
financial position carrying value of the portfolio investments arising from collections, which are not allocated to income. Amortisation plus income from portfolio investments equates
to core collections
9. Includes non-cash items including depreciation and amortisation, share-based payment charges and FX
10. Non-cash amortisation of fees and interest
11. The cash result is viewed on an underlying basis which excludes certain items. See APM table on page 28. These items have been excluded to provide a more comparable basis for
assessing the Group’s performance between financial periods. Details of the adjusting items are provided in the Group chief financial officer’s review on page 28 and the additional
information on page 142
12. Adjusted EBITDA is a key driver to the cash result. This measure allows us to monitor the operating performance of the Group. See additional information provided on page 143 for
detailed reconciliations of adjusted EBITDA
13. Excludes £2.5 million of ‘One Arrow’ investment programme capital expenditure
14. Replacement rate is the rate of portfolio investments purchases, at our target portfolio returns, required during 2019 to maintain the 2018 average 84-month ERC
Arrow Global Annual Report and Accounts 2018
Strategic report
32
Our stakeholders
Responding to our
stakeholder’s needs
Our key stakeholders are those who impact or are impacted
by our strategy materially. As a responsible business, we
listen to our stakeholders regularly to define strategy and
ensure we deliver relevant services that meet our clients’
and customers’ needs.
Customers
Employees
Why we engage
Understanding our customers’ financial
situations is vital to ensure we treat them in
the most responsible and sustainable way
possible. We also use this understanding to
refine our processes, train our people and
improve our industry-leading service
It is important to attract, retain and engage
people who have the skills, values and
expertise to implement our SMART strategy
and ensure our clients and customers are
serviced to the best of our ability. Engaged
employees will make us more successful
and act as business ambassadors
Key areas of interest
• Affordable repayment plans which repay
• Professional development and
debt in a sustainable and realistic time frame
• Flexible repayments and payment methods
• Convenience and functionality to support
customer’s preferred method of contact
• Empathetic and approachable
conversations
career development
• Recognition and fair reward
• Diversity and inclusion
• Transparent and timely communications
• Clarity on business purpose and Values
• Responsible and fair treatment
• Trusted and responsible servicing panel
of customers
and credit manager
• Safe and productive working environment
• Clear and transparent communications
• Customer-friendly websites
•
Interactive customer portals, designed in
conjunction with customers, for customers
• Customer surveys to help improve the
customer journey
• Design and implementation of career
development frameworks
• Succession and talent development for
high-potential colleagues
• Annual Senior Leadership Conference and
• Customer-service centres and specialised
strategy roadshow to all employees
panel of service providers ensure
customers receive bespoke management
• Prompt and detailed complaint
resolution process
• Quality-Assurance programme
driving excellence
• Customer-journey mapping
• Market research and focus groups
• Forums focused on delivering
best-in-class customer service
• Management development programmes
• Engagement and pulse surveys
• Recognition and reward programmes
• Training and development programmes
including data protection, conduct risk,
regulation and policies
• Flexible working in the Netherlands
enabled by technology
Read more about how we respond to our
customers’ needs on pages 34
Read more about how we respond to our
employees’ needs on pages 36
How we engage and respond
Arrow Global Annual Report and Accounts 2018
33
Communities
Regulators and industry
Shareholders and investors
We believe that we can add considerable
value by engaging and working with the
communities where our customers and
employees live. Specifically, we believe that
we can bring our Purpose ‘Building Better
Financial Futures’ to life through financial
education. Consumers who are well
informed can make more responsible
financial decisions
• Affordable repayment plans
• Employment
• Financial literacy programme via
Junior Achievement Europe
• Wider community support programmes
i.e. charity fundraising, volunteering
• Financial-literacy programmes
• Employee volunteering
• Charitable partnerships and donations
• Financial-literacy surveys
• Partnership with established and credible
debt charities including Citizens Advice,
Christians Against Poverty
• Funded FairShare contributions to
StepChange, Christians Against Poverty
and Payplan
We proactively work with regulators and the
wider industry through our well-established
relationships in the sector to help influence
regulation that delivers a positive outcome
for consumers and business. Our approach
is widely respected and evidenced by
industry awards
As a publicly-listed organisation, we are
required to provide fair, balanced and
clear information to enable investors to
fully understand our business, so they
may make an informed and educated
investment decision
• Compliance with EU and
national regulations
• Control and supervision
• Affordable repayment plans
• Treating vulnerable customers fairly
• Taxation
• Employment
• Strategy and performance
• Risk management and corporate
governance
• Executive remuneration
• Dividend policy
• Access to senior management
• Regular dialogue
• Board membership of sector associations
like the Credit Sector Association and
the Federation of National Collection
Associations (FENCA)
• Participation on public consultations
• Engagement on draft regulation
• External adviser network
• Ongoing dialogue and meetings
• Capital Markets Day
• Annual general meeting
• Annual Reports
•
• Corporate website
Investor roadshows and conferences
Read more about how we respond to our
communities’ needs on pages 38
Read more about how we respond to our
regulators’ needs on pages 40
Arrow Global Annual Report and Accounts 2018
Strategic report
34
Our stakeholders continued
Customers
“Our aim is
to establish
affordable
and sustainable
relationships with
our customers.”
“Understanding our customers’
needs is vital for our operations.
It is an evolving process and
one which secures positive
engagement over the
customer account lifespan.”
Better customer outcomes
The Arrow Global Group operates a hybrid business
model with an in-house collections operation
complemented by a panel of Arrow ‘Approved Partners’.
This model allows Arrow to make use of the skills
of market-leading specialist partners to provide a
service, which complements our internal capability.
Understanding our customers’ needs is vital for our
operations. It is an evolving process and one which
secures positive engagement over the customer
account lifespan. In order to develop a comprehensive
approach to this, we must at all times, work within the
remit of the regulations set by the regulators in all of
the geographies we operate in, including the Financial
Conduct Authority (FCA), Portuguese Securities Market
Commission (CMVM), Dutch Authority for Financial
Markets (AFM), Banca D’Italia and the Central Bank
of Ireland, when treating customers fairly and with
the appropriate level of forbearance.
Our aim is to establish affordable and sustainable
repayment plans with our customers, which enables
them to rehabilitate their credit history and ultimately
gain access to mainstream financial products. We work
closely with our customers, colleagues and specialised
servicing panel to help us to understand our customers’
circumstances and to respond accordingly. Through our
investment in leading customer-service platforms, we
are able to ensure that all of our customers receive a
best-in-class service.
Customer centricity
In the UK, we undertook a major research project,
‘Debt Britain – The Changing Landscape in 2018’
to further enhance our knowledge of customers in
personal indebtedness in the UK. This helped shape
our understanding and drove our desire to implement
changes to our processes, giving customers more
confidence and clarity around their finances.
These changes include investment in our induction and
training programme to ensure front-line conversations
support our Purpose to build better financial futures, and
this sees new collections colleagues attend an 18-day
New Starter Programme. The induction programme
provides training on regulation, systems, processes and
customer communication. Our external panel of service
providers must comply with a set of minimum standards,
which place fair and transparent customer treatment at
the forefront of our expectations. This is tested in our
extensive Quality-Assurance programme.
Arrow Global Annual Report and Accounts 2018
“Our customer
portals lead the
way in the industry,
putting control
back into the
customer’s hands.”
In Portugal, we rolled out a comprehensive and
tailor-made Customer Communication training
programme for all customer service employees. The
programme includes theory, role play and 1:1 coaching
and feedback sessions. The concepts covered in the
training are being reinforced and embedded through
a refreshed Quality-Assurance programme, delivering
our best in class service.
2International customer
forums in 2019
In Ireland, we have a dedicated Business Excellence
Team, whose role is to monitor the activities of the
Irish business to ensure the operation deliver on its
commitment to ensure positive outcomes for our
customers, and recommend changes to people,
procedures or technology, where warranted.
Handing back control is very important for our
customers in the Netherlands, and to do this we
have developed easy-to-use self-service portals.
The customer can not only get an up-to-date
account status, but also make repayments, change
their personal information, including their bank account
details, and, if necessary, contact us or file a complaint.
Vulnerable customers
In the UK, we work closely with local organisations to
discuss Mental Health Case Studies, which continues to
support our managers and employees in understanding
mental health issues and what this means to our
customers, employees and our Group. We hold regular
‘lunch and learn’ sessions for all colleagues to ensure this
is embedded in our culture and is included in everything
that we do. Our managers and agents will conduct
regular CARE call calibrations, so that CARE situations can
be discussed in an open, honest and safe environment
to ensure that we are doing the right thing by our
customers. This also gives us an opportunity to
celebrate our successes.
In Ireland, we have a dedicated vulnerable case manager,
who is specifically trained and manages the vulnerable
portfolio and all interactions with customers who may
require an alternative approach while managing their
financial difficulties. We feel that this is important as
we hope to create a positive and supportive culture
of relationship management for customers during
difficult times, as the dedicated vulnerable case manager
is fully aware of the issues and can make appropriate
recommendations to service their accounts. In
addition, escalation of accounts to management for
risk assessment or removal is conducted through a
vulnerable monthly forum, which ensures we continue
to apply best practice approaches and consider various
points of view when making decisions.
In the Netherlands, behavioural credit scores are
combined with operational data to help the team
identify, and then help, vulnerable customers. This
focus on preventative arrears management, also
extends to budget coaching, that sees our colleagues
visit customers in their own homes to help plan realistic
and affordable repayment plans.
35
Looking ahead to the future, in 2019 we will be
assessing our frameworks for identifying and supporting
vulnerable customers across all our geographies, with
the aim to leverage best practices and to standardise
our approaches to the highest levels of excellence. We
are revising our customer policies across the Group to
ensure we work towards the highest standards, which in
some geographies means we go above and beyond the
local regulatory requirements. Below are some examples
of the work we are already doing across the Group.
Voice of the customer
The introduction of the Customer Satisfaction Surveys
(CSAT) across our panel of specialist service providers
has enabled us to utilise feedback provided directly
by customers. This has provided a tool for customers
to voice their opinions on the treatment they have
received, and it has enabled the business to have
a unique independent insight into the customer
experience. This has highlighted key areas for
improvements to ensure that the customer is
treated to the best possible service.
Last year, we conducted an extensive piece of
market research to understand how, when and why our
customers want to engage with us. Of particular focus
was our web portal and the content and layout of our
mail correspondence. These changes have now been
implemented, in line with recommendations provided
by our customers.
Our customer portals lead the way in the industry,
putting control back into the customer’s hands.
Similarly, the changes made to our mail correspondence
inform the customer of what their situation is now, and
what options they have to address.
We are now leveraging the learnings from this UK led
market-research initiative to upgrade communication
collateral and portals across all of our geographies.
Customer forums
This year, we piloted the creation of a Customer
Committee in the UK. Supported by a bespoke MI
suite, this committee drives the delivery of customer
outcomes throughout the organisation – not just in
front-line areas. The Committee is guided by senior
leaders within the organisation, who can drive changes
to ensure customers are treated fairly and responsibly.
In 2019, we will host two international customer forum
conferences. Here customers will be invited to attend
to provide further insight to our colleagues. Finally, we
have developed a customer-focused scorecard, which
is prepared monthly and scrutinised by our board. This
includes key-performance indicators, such as complaint
volumes, customer-service levels and customer
satisfaction scores. These performance indicators are
reported and consolidated from all of our collection
platforms across the Group.
Arrow Global Annual Report and Accounts 2018
Strategic report 36
Our stakeholders continued
Employees
“Our
entrepreneurial
drive is
complemented
by a deep
commitment
to rewarding
work done in
the right way,
the Arrow way.”
“Our shared Purpose, Vision and
Values creates a powerful adhesive
that binds our Group together and
makes us stronger, more aligned.”
alignment and takes teams through a learning journey
over a 9 to 12-month period. In September, as part of our
annual leadership conference, we introduced our top
100 leaders to our SMART Story and to the DIPS process.
We will continue to roll out the DIPS programme
out across the Group during 2019, and beyond.
Building employee engagement
2018 was an exciting year for the people agenda with
teams from across the business continuing to make
great progress in providing learning and development
solutions to support our employees’ careers. We deliver
this through:
Strategic and leadership alignment
Aligning leadership teams across the Group around
the Mission, Vision and Strategy (our SMART Story) is
a key priority, ensuring we strengthen the ‘One Arrow’
family while utilising the competitive advantage each
unique business brings. In March 2018, starting with
the executive management team, Arrow embarked
on a senior leadership development programme DIPS
(Define – Insight – Practice – Sustain). The purpose
of the programme is strategic, cultural and leadership
Management development
We recognise the critical role our leaders have in
inspiring teams and we have worked hard to enhance
management development programmes across the
Group to build capability and confidence. In the
Netherlands, management development is orientated
around operational efficiency, or ‘lean initiatives’ that
will be taken to other countries in 2019. In the UK, we
were one of the first organisations to utilise the UK
Government’s apprenticeship levy and we now have a
growing management development programme that
will, by the end of 2019, consist of four cohorts. Our
business in Portugal has also successfully introduced
a development programme for line managers.
Gender diversity at 31 December 2018
Board
Senior Management
All employees
2
2
Male
Female
5
5
Male
Female
977
782
Male
Female
Arrow Global Annual Report and Accounts 2018
“Recognition lays
at the heart of our
business, saying a
simple thank you
is what we do
every day.”
104Employee Recognition
Scheme winners across
the Group in Ireland,
Italy, the Netherlands,
Portugal, and UK
37
Core capability
Locally, each Learning & Development (L&D) team
ensures our employees have the skills to be highly
competent in their current roles and provide support to
build personal capability and confidence for the future.
During 2018, we made enhancements on how we induct
new colleagues, deliver regulatory skills requirements
and identify development opportunities for future talent.
Our ethos for learning and development is ‘doing the
core tasks brilliantly’, ensuring quality design and
development that is tailored to meet the needs of the
learner. We have offered more experiential learning,
taking into consideration diversity in generations
working for the Group and learning preferences.
As we move into 2019, our focus is to accelerate best
practice and collaborate on the talent strategy including
management onboarding, succession planning and
career development pathways, the continued roll-out
of DIPS, and creating and embedding the Arrow
diversity and inclusion strategy.
Competitive total reward
Arrow delivers a reward and recognition structure that
provides competitive remuneration that is fairly derived
and incentivises high performance. There are a suite of
benefits that support our employees short, medium
and long-term personal goals and circumstances,
and an Employee Recognition Scheme rewards and
celebrates employees that live our Values. We deliver
these items through:
Remuneration linked to Group and
personal performance
Arrow benchmarks salaries across our businesses and
locations to ensure we are providing competitive fixed
pay that is reviewed and appropriately adjusted on an
annual basis. The Group bonus scheme is driven by a
combination of Group and personal performance to
ensure employees are aligned to the delivery of our
strategic objectives and corporate Values and that they
are rewarded for delivering exceptional performance
against those objectives and Values. Arrow also
operates a Long-Term Incentive Plan to drive long-term
engagement and retention of our most talented people.
Commitment to fairness and inclusivity
Arrow is committed to building a diverse and inclusive
workforce and the treatment of Reward and Recognition
is central to this commitment. For transparency the
2017/2018 Gender Pay report exceeded the statutory
requirements and reported Gender Pay Ratio’s for both
the UK workforce and the wider Group. The Group sets
clear measurable actions to drive real outcomes. More
information on this is available on the Group’s website.
The report with April 2018 UK data will be published in
April 2019 and included on the Group website in April
2019, in compliance with the UK regulations.
Competitive benefits provision
Giving our employees the opportunity to select
benefits that support their short, medium and long-term
personal goals and circumstances is a critical part of our
Total Reward package. We have a vibrant and diverse
workforce and we provide benefits that span a variety
of topics such as health and well-being and retirement
provision that are benchmarked across our geographies.
Employee recognition scheme
Intrinsic reward and recognition are extremely
powerful, and they are a key part of creating a truly great
place to work. Arrow operates a Group-wide Employee
Recognition Scheme where all employees can nominate
and are eligible to win. The core drivers are to recognise
employees who live our Values, work at a continuously
high standard and deliver innovative solutions, build
long-term relationships, work collaboratively and seek
to continuously improve all we do. Employees nominate
colleagues monthly and the programme is supported by
our Values Champions, over 50 of whom provide advice
and guidance on how to engage in the scheme. Winners
are publicly presented with their award in each of our
locations on a monthly basis and they, alongside our
Values Champions, attend the annual award gala,
hosted by our executive committee, to celebrate
their successes.
Arrow Global Annual Report and Accounts 2018
Strategic report 38
Our stakeholders continued
Communities
“Financial
awareness is
critically important
and will help
ensure consumers
manage their
finances in a
responsible and
affordable way.”
“Financial literacy is a key
skill that supports long-term
outcomes like entrepreneurship
and employability. Working
with Arrow Global contributes
to closing the financial skills gap
and helps young people succeed
in the global economy.”
Caroline Jenner
Chief executive officer of JAE
Building financial literacy
Our Purpose is to Build Better Financial Futures and our
employees work hard to equip young people with vital
employability and financial literacy skills.
As a diverse organisation working across five countries
with more than 1,700 employees, our Vision, Values and
Purpose are incredibly important. They provide the glue
that binds our organisation together and gives us a
common set of standards and behaviours that we
all adhere to.
In 2018, the board signed off our new Corporate
Social Responsibility strategy, which saw us extend our
partnership with Junior Achievement Europe (‘JAE’)
from two to five countries across the Group. JAE is
Europe’s leading non-profit provider of educational
programmes for financial literacy and entrepreneurship
and has a track-record of partnering with public and
private organisations to equip young people with
work readiness skills.
Having already worked very successfully in the UK and,
Portugal, we knew they had the local expertise to meet
our ambition to embed our Purpose across all of our
operating businesses. This is particularly important as
we expand our credit and asset management expertise
in our five core markets and become the innovative and
valued partner of choice.
In the UK, we ran several Economics for Success
workshops across the UK, that expanded young people’s
working knowledge of personal finance including smart
budgeting, responsible credit management and reducing
financial risks. The outcome is that young people can
apply these skills to their everyday lives, whether it’s
planning a birthday, organising a holiday, buying
school books, or helping to prepare them for
life away from home.
In addition, the UK team also established a mentoring
programme called ‘Bridge Builder’, continuing our
successful relationship with City Year, that saw a number
of our colleagues become year-long mentors to young
people from deprived backgrounds, helping to broaden
their perspective on life’s opportunities.
In Portugal, the partnership with JAE is already
delivering great results. During the course of the year,
our Portuguese business, Whitestar, helped almost 2,000
school children across 34 schools to raise awareness
and understanding of financial education. Expanding
our Purpose outside Europe, the Portuguese team
sponsored Ilocano school in Mozambique to help
provide much-needed school places for children
aged between three and six years old.
Arrow Global Annual Report and Accounts 2018
“It really shows
that gaining an
understanding of
finances from a
young age can
make a difference
and encourage
them to work
hard for what
they want in life.”
Claire Stapleton,
volunteer, Arrow,
Dublin, Ireland.
756Young people attending
an Arrow-JAE workshop
between October 2018
to January 2019
In the Netherlands, we continue to work with LEF,
a foundation dedicated to reducing debt problems
in society by increasing financial awareness amongst
young people. The team also works with the Matchpoint
Foundation, an organisation dedicated to reducing
poverty through a diverse range of activities such
as helping the homeless in Amersfoort, renovating
accommodation for the vulnerable, hot meals for the
elderly and workshops on debt to help make responsible
financial decisions. In addition, our business in the
Netherlands is busy planning activities for 2019 that
will see it partner with JAE to launch a new Job Shadow
programme, in addition to other local initiatives.
In 2019, we will work alongside JAE to support more
than 2,200 young people, supported by our board and
executive team. We expect around 150-200 employees
will deliver this valuable programme thanks to their skills
and commitment to our Purpose.
Recognising the intrinsic value to our organisation, our
employees and the young people we help, we have also
launched a CSR brand, Building SMART Skills, that will
help us to communicate our activities, both internally
and externally, in a more effective manner.
39
Supporting debt charities
During the course of the year, we supported the
activities of the major debt charities who provide free
impartial advice to our customers, particularly in the UK.
In addition to fully supporting StepChange, Payplan
and Christians Against Poverty by way of FairShare
contributions, we continued to work with Citizens
Advice on its new Debt Management Service pilot,
to provide a more effective end-to-end service
for customers.
Helping our local communities
While we have developed a programme that will
harmonise our approach to Building Better Financial
Futures via financial education, we still promote a
culture of independent initiatives to support the
communities where we operate.
These initiatives are at the discretion of our in-country
teams and take various forms to reflect local needs.
Although too numerous to mention, examples include
a 5-10 kilometre fun run to raise money for the LEF
Foundation in the Netherlands, coffee mornings around
the UK to support Macmillan Cancer, a ‘Tour de Arrow’
to support Sports Relief in Glasgow and Farnborough as
well as Christmas and Easter collections to support the
Wood Street Mission in Manchester; a charity helping
children and families on low incomes.
We also support colleagues’ contributions to the
community by matching funds raised by them for our
chosen charities and we encourage our employees to
volunteer and assist local community organisations,
both in and out of company time.
Arrow Global Annual Report and Accounts 2018
Strategic report 40
Our stakeholders continued
Regulators and industry
“During the year,
Arrow has actively
contributed to
a wide range of
initiatives across
the collections
and debt advice
sectors.”
“Arrow remains fully committed to
raising standards and promoting
fairer practices in the collection
of debt.”
Regulatory and industry engagement
We actively contribute to a wide range of initiatives
across the collections and debt advice sectors, to
help Build Better Financial Futures for our customers.
During the year, Arrow has actively contributed to
a wide range of initiatives across the collections
and debt advice sectors.
In 2018, we held a number of important industry positions:
• After an extended three-year presidency of the
Credit Services Association (CSA) we retained a board
seat for Public and European Affairs, promoting
constructive and collaborative relationships with
government and regulators, the debt advice sector
and other stakeholders, to ensure they are made
aware of the processes and high standards of
Arrow and the rest of the membership of the CSA.
• Member of the Steering Committee on Reciprocity
(SCOR), which governs the rules for credit data
sharing in the UK, bringing about important new
rules and safeguards for the use of credit data by
debt buyers.
• The vice presidency of the Federation of European
National Collection Associations (FENCA). Persistent
FENCA lobbying to the department of justice resulted
in significant changes to the final wording of the EU
General Data Protection Regulation (GDPR), and we
hold the responsibility through FENCA of developing
a Code of Conduct for GDPR for the collections
industry and liaison on the proposed EU Directive for
debt collection and purchase. A draft Code has now
been approved in 2019. This Code will help provide a
level playing field for our customers across Europe,
and clarity on GDPR industry regulation.
• Through FENCA, we have also contributed
to consultations on the NPL secondary market,
particularly the draft EU Directive regulating credit
servicers and purchasers. We attended meetings
with high-ranking officials who are responsible
for EU policy on banking and finance.
• We hold a board position on the influential Money
Advice Liaison Group, and a trusteeship of the FairLife
Charity, promoting fair treatment of the consumer
across financial services. We also hold the 2019
presidency of the prestigious International
Collectors Group, organising the annual
ICG conference in Portugal.
•
In addition to our various CSR initiatives at Group and
country level, specialising in financial education and
data philanthropy, we have supported major debt
charities during the year, assisting Citizens Advice to
implement its Debt Management Service pilot, and
helping Christians Against Poverty (CAP) toward its
successful matched funding target. As a responsible
industry partner, we also fully funded FairShare
contributions to StepChange, Payplan and
Christians Against Poverty.
Arrow Global Annual Report and Accounts 2018
41
We have continued to actively engage at numerous
trade body events and conferences during 2018, and we
chaired and presented regularly at non-performing loan
and industry events and conferences throughout the
year. We have a constructive and open relationship
with the FCA and other European regulators. We also
contributed to the Money Advice Service Debt Advice
Operational Group, considering the future funding of
debt advice as a result of Peter Wyman’s report, and
contributing a well-regarded case study indicating
the benefits of free financial advice to our customers.
Arrow remains fully committed to raising standards,
promoting fairer practices in the collection of debt by
government and other sectors we are active in, lobbying
for the Single Financial Guidance Body to be an effective
successor to The Money Advice Service, and supporting
better financial futures for children and adults who, as
shown by our updated 2018 Debt Britain report, are so
often in need of our help and support.
Supporting human rights
All of the Group’s current activities are carried out
in developed countries that have strong legislation
governing human rights, and Arrow complies with
applicable legislation in every country where it operates.
Sustainability – caring for the environment
Due to the nature of its business activities, the
Group’s environmental impact is considered minimal.
An environmental policy is in place to increase
employee awareness of environmental issues and
complies with all relevant regulatory requirements.
With the acquisitions made in the last three years,
the Group now has a truly European structure. This has
inevitably seen an increase in international travel, but to
reduce the impact of this and other travel on our carbon
footprint, we actively encourage colleagues to increase
the use of video and telephone conferencing facilities.
In the UK, we offer colleagues, a cycle to work scheme
and, at appropriate sites, we have car shares and group
transport schemes in place.
Key areas of the policy addressing the business’
environmental impact are as follows:
• minimising paper usage and the purchase of recycled
paper and packaging where possible;
• energy efficient office products;
• recycling office waste;
•
increased use of video and conference calls and Skype
for business facilities; and
• only booking travel for essential business reasons.
6Industry boards hold an
Arrow representative
Reporting
requirement
Environmental
matters
Some of our relevant policies
Relevant information including our impact
and principal risks
Environmental policy
Caring for the environment, page 41
Employees
Equality and diversity policy
Environmental policy and carbon reporting,
pages 84 to 85
Employee engagement, page 36
Reward and recognition, page 37
Fairness and inclusivity, page 37
Diversity, page 65
Employee consultation, page 84
Human rights
Human rights policy
Supporting human rights, page 41
Social matters
Corporate social responsibility policy
Modern slavery statement:
www.arrowglobalir.net
Building financial literacy, page 38
Supporting debt charities, page 39
Helping our local communities, page 39
Regulatory and industry engagement, page 40
Regulatory risk, page 47
Anti-bribery
and corruption
Anti-bribery and corruption policy
Bribery Act compliance, page 57
Whistleblowing policy
Whistleblowing, page 84
Business model
N/A
Business model, pages 12 to 13
Non-financial
KPIs
N/A
Our stakeholders, pages 32-41
GhG emissions, page 85
Arrow Global Annual Report and Accounts 2018
Strategic report 42
Risk management
Our approach to risk management
Robust and proportionate risk management is at the centre of our
day-to-day activities and culture. It benefits our business through balanced
investment and growth decisions, while protecting our customers and,
ultimately, the long-term sustainability of future earnings via a
disciplined approach to regulatory compliance.
u
t
r
G r o
n
u
C o
e
t
I n
T r
Market Initiatives
Trade Bodies
External
Policy
affairs
e
r
c
y
e
p
- W i d
c i fi
p
S
-
a l C o m m s
n
n
g a
a i n i n
e
n
e
r
a w a
3LOD
Risk Committees
Policy Framework
Governance
d
s
s
A
p
p
B
e
o
a
t
i
t
E
r
e
x
d
R
C
S
A
t
i
s
k
o
a
p
m
p
e
t
r
O
o
m
u
p
t a tional risk
R e
a
w
v
e
p
e
n
p
n
e
d
t
s
e
d
/
-
t
i
t
e
m
P
o
a
r
n
t
f
Risk culture
I
n
v
C
a
P
o
e
s
t
p
i
t
a
l
F
r
i
n
t
f
a
o
m
e
n
l
i
n
A
c
i
o
a
l
I
n
t
O
v
l
l
o
c
R
s
i
e
a
g
o
l
i
e
m
e
o
r
i
s
n
k
t
k
s
i
R
n
o
i
t
a
c
fi
i
t
n
e
d
i
s
l
o
r
t
n
o
C
&
s
k
s
i
R
t
n
e
m
e
g
a
n
a
M
t
n
e
d
i
c
n
I
e
c
n
e
g
i
l
i
D
e
u
D
R
e
c
o
g
ulat
plia
n
o
r
y
c
e
P
m
olicie
ss
A
s & Sta
u
D
u
ra
e Dilig
n
c
e
n
d
ar
d
s
e
n
c
e
assess m e nt
Risk
T o p E nterprise Risks
A n alysis & M o nitorin g
Strate gic C h an g e B o ard
Information
security
GDPR
Data Privacy
Cyber Risk
i
a
s
g
t
i
k
h
r
s
i
o
n
t
g
h
t
Arrow Global Annual Report and Accounts 2018
43
“The ongoing
investment in a
risk management
system facilitates
the evolution of
our risk culture.”
Risk framework
The deployment, and continual improvement, of the
Enterprise Wide Risk Management Framework defines
a common approach across the whole organisation
and embeds mechanisms to:
• Balance long-term risk and return
• Deliver within risk appetite
• Drive a robust and dynamic Risk Management culture
• Enable proportionate capacity, capability and
infrastructure plans
The overall framework is underpinned by 10 Group-
wide risk appetite statements covering each of our
three headline risk categories; strategic, financial and
operational. The governance structure is overseen by
the board via a board risk committee, which is supported
by the Group executive risk committee and country risk
committees in the UK, Netherlands, Italy, Portugal and
Ireland. Country risk committees are run independently
by each country risk leader, with the Group chief risk
officer in attendance. This approach allows for risks to
be raised and mitigated with accountability where it is
needed. The Group continues to review governance
arrangements and is expanding the treasury and tax
committee into an assets and liabilities committee,
promoting increasingly robust and efficient oversight
and control across the balance sheet, funding and
income in line with our risk appetite.
Delivering our strategic priorities within stated appetite
levels relies on the successful identification, assessment,
management and reporting of risks and opportunities.
There is an ongoing focus on the enterprise-wide top
risks which could impact the business, alongside horizon
scanning and monitoring of macro, geo-political and
other emerging risks that may affect the business or
wider sector in the future. People and infrastructure
commitments have been made to support these key risk
processes, thereby creating greater consistency across
the Group in support of the One Arrow model. Our risk
culture is a fundamental driver of success, is aligned to
the Arrow Values and ensures that how we do things,
as well as what we do, remains in focus.
The ongoing investment in a risk management system
facilitates the evolution of our risk culture, helping to
support a proactive and consistent approach to the
identification and management of risks across the
whole business. Notably, it provides transparency
and allows for actions across all three lines of defence
to be managed to completion via a single data source.
Three lines of defence
A three lines of defence model is employed in order to
operationalise this approach, driving clear accountability
into the first line. The country managers are, where
applicable, approved people in their country, thereby
maintaining the long-term perspective that we strive for.
The Group risk team maintains an overarching
responsibility across key areas of the framework:
• Enterprise and operational risk
• Portfolio risk
• Country risk and compliance
• External affairs
• Cyber risk, information security and data privacy
Our three lines of defence
First line Business owners
• Day to day ownership and management of risks
• Adhere to risk framework and processes
• Responsible for control environment
Second line Risk and Compliance
• Business partner
• Develop and maintain risk framework
• Provide oversight, monitoring and assurance
Third line Audit
•
Independent
• Review and challenge of first and second line
Arrow Global Annual Report and Accounts 2018
Strategic report 44
Risk management continued
“Arrow is well
positioned post-
Brexit given the
operating licences
held by each of
our regional
servicers and
strong ongoing
relationships built
across the local
regulators.”
The third line internal audit activity has been performed
by Deloitte LLP, predominantly for UK and Group
functions, with our own internal audit teams in our
European businesses. As of 1 December 2018, the Group
head of internal audit has been appointed to further
embed a singular and proportionate approach to third
line activity. Reporting to the board audit committee,
the role also ensures a clear distinction between roles
and responsibilities in the second and third lines.
Key considerations in 2018
Brexit
During recent periods, management have been
preparing the Group for the UK’s departure from the
European Union, led by the Group chief risk officer and
subject matter experts from both the UK business and
Group functions.
While all risk categories have been reviewed, our focus is
on financial impact, business continuity and our people.
With respect to financial risk, the Group has performed
scenario analyses simulating the financial impact upon
the Group should the UK not agree an orderly post-
Brexit arrangement with the EU. The Group’s ‘No-Deal’
Brexit scenario, modelled upon the last Global Financial
Crisis (GFC) and shared at our Capital Markets Day in
November, demonstrates the anticipated resilience of
the Arrow book in the event of a disorderly departure
from the EU by the UK. The Group’s ability to withstand
such an event and, indeed, thrive in the aftermath is
due largely to five key factors:
• Geographical diversification – with circa 57%
of expected receivables represented by non-UK
investments, Arrow is far less exposed to the risk
of any deteriorating macro-economic conditions
in the UK
• Currency diversification – with almost 60% of
12-month collections due from euro-denominated
assets, Group income is protected from a likely
short-term devaluation in sterling
• UK asset class resilience – while the GFC
highlighted some deterioration in settlement
payment amounts, overall collections demonstrated
strong resilience over this period
• Funding – Arrow is well positioned to withstand
any potential volatility in credit markets, with
external funding out to 2024. Meanwhile, Arrow’s
mix of bond issuance acts as a natural currency
hedge to Group income
• Investment business changes – potential
redeployment of capital, taking the form of either
increased debt repayment or non-UK investments,
ahead of improving financial returns for the UK
investment business as NPL pipeline increases
Regarding business continuity, Arrow is well positioned
post-Brexit given the operating licenses held by each of
our regional servicers and strong ongoing relationships
built across the local regulators.
With respect to our people, timely communications are
provided to our teams across the UK and EU, providing
targeted information on the Brexit process and
encouraging engagement with the human resources
team for those individuals uncertain of impact upon
their personal situations.
Increasing regulatory scrutiny
With diversification comes a greater spread of
regulatory relationships. While not all parts of the
Group are prudentially regulated, we are fully focused
on our regulatory conduct responsibilities across all
platforms. This includes the FCA in the UK, the AFM in
the Netherlands, Bank of Italy, Central Bank of Ireland
and Bank of Portugal. The country risk and compliance
director, reporting to Group chief risk officer, now has
oversight of all countries with the local risk leaders
reporting directly to that role. In doing so, we drive
consistent culture and behaviour around the customer
journey, treating customers fairly and broader regulatory
compliance by blending our in-market expertise with
Group-wide standards. In addition, it allows us to deploy
the deep domain expertise inherent in the UK origins of
the business. Given the span of regulation we interact
with, we can see that other regulators are moving
progressively towards the high standards of the FCA
and are confident our experience stands us in good
stead. We are in frequent dialogue with our regulators
and trade bodies across our markets and have no
regulatory fines to report.
Information security and resilience
A fundamental area of operational risk management
in today’s world is information security, which
highlights the growing threat to all businesses of
malicious cyber-attacks by external parties. Data
is key to our value proposition and is therefore
safeguarded for everyone’s benefit including
both our customers and our clients.
We baseline our minimum information security
standards against the international standard of good
practice for information security – ISO27001. Our
framework involves identifying what our critical data is
and applying strong protection controls to safeguard
that data. However, we acknowledge that the cyber risk
landscape is continually evolving. Hence, we advance
our people, processes and technology to protect us,
our customers and clients by strengthening our ability
to detect, respond to, and recover from cyber threats
that may cause us issues in the future. As cyber-attacks
are inevitable, we are focused on deploying resources
in this area and continue to build our cyber resilience.
Arrow Global Annual Report and Accounts 2018
45
Top enterprise risks
Top enterprise risks are identified through the risk framework and tracked
via our risk committees. The table below identifies key thematic risks and
mitigants, alongside an indicative risk rating based on risk framework data,
management oversight and areas of business activity. These are further
expanded on in principal risks and uncertainties.
Key risk
Strategic risk
Key mitigating actions
A. Delivering long-term operational
• Detailed strategy defining operational initiatives
gains
B. Pricing risk (on vs
off-market opportunities)
C. Macro (‘No Deal’ Brexit)
Financial risk
D. Funding risk
• Clear capital allocation framework,
strong origination franchise
•
Independent country licenses, Euro bonds,
stress testing
• External funding out to 2024, strong cash interest
coverage and underlying leverage
E. Risk/return assumptions
• Strong governance and second line oversight,
underwriting track record
Operational risk
F. Regulatory (fulfilling increasing
• Local expertise, leveraging UK experience and
conduct expectations)
external affairs
G. Cyber risk (information security
• PwC verified approach, defined minimum
and defence strategies)
standards and roadmap
H. Integration risk (ensuring
acquisitions align with the Group)
• Prioritise embedding of risk governance into new
businesses and align with IT infrastructure planning
More broadly, our principal risks are captured under the headline categories of strategic, operational and financial
risk. The disclosures on the following page should not be regarded as a comprehensive list of all the risks and
uncertainties facing the Group, instead providing a summary of those key areas with the potential for material
impact. Further financial risks are discussed in note 24 to the financial statements.
Arrow Global Annual Report and Accounts 2018
Strategic report
46
Principal risks and uncertainties
Key risk
Strategic risk
Key mitigating actions
Focus areas
A. Delivering long-term
operational gains
Lack of enterprise-wide alignment on
strategic goals, budget management, target
operating model and culture which causes
a gap between plans and performance.
Long-term strategy, risk appetite and
financial planning are aligned with the aim
of providing greater depth of analysis and
management tools for decision making.
This is supported by the evolution of the
organisation’s capacity and capability
through both acquisitive and organic growth.
The strategic plan is supported by second
line activity covering risk identification and
mitigation, risk appetite and capital allocation.
Functional and country level forums are
in place to manage performance against
detailed financial and operational targets.
A common set of values has been defined
and rolled out across the Group and will
increasingly form part of the performance
management process. A culture steering
committee provides senior management
with a focal point to review progress of
initiatives supporting our ‘One Arrow’
culture and behaviours.
B. Pricing risk (on versus off
market opportunities)
Failure to identify, establish, maintain and
effectively exit strategic relationships which
impacts on the operational performance
and strategic execution of the Group.
C. Macro ('no deal’ Brexit)
Changes in the competitive, economic or
political environment in the UK or Eurozone
which could impact our ability to collect from
portfolios, or competitively purchase and
invest in line with our strategic objectives,
consolidation or changing appetite within
the sector.
In order to best leverage our market position,
strong relationships have been developed
with our creditor client base and investment
funds in order to maintain competitive
advantage through off-market transactions,
minimising the amount of business that
is generated via on-market auctions.
Continued focus on identification
and selection of investments within risk
appetite. Optimisation of investment
process to ensure resources are allocated to
those opportunities with returns in line with
financial risk appetite while satisfying strategic
and operational risk requirements.
Management monitor the competitive,
economic and political environments in
which we operate to influence future
strategy. The board regularly carry out
reviews of the markets and strategy, with
impacts managed through our governance
activities in accordance with regulatory
requirements and industry best practice
in each jurisdiction.
The Group has continued to assess the risks
associated with Brexit, including disruption
within the UK political landscape. The analysis
performed indicates that the Group is well
positioned should the UK’s exit from the EU
be executed in a disorderly ‘no deal’ fashion.
The Group remains well-placed to capitalise
on any market opportunities arising from
possible disruption and our increased
geographic diversification and increased
exposure to euro-denominated assets
provides further protection.
In the event of a ‘no deal’ Brexit scenario,
the executive management team have
assessed strategic responses based upon
financial modelling, supported by scenario
analysis performed by the second line. The
diversification of the debt portfolio in asset
class and geography provides mitigation and
strategic flexibility, as does the mix of sterling
and euro financing.
Arrow Global Annual Report and Accounts 2018
47
Key risk
Financial risk
D. Funding risk
The risk that the Group is unable to meet its
obligations as they fall due.
E. Risk/return assumptions
The risk of returns adverse to forecast due
to inadequate portfolio purchase analysis
and consequent mispricing, or inadequate
portfolio performance, therefore affecting
Estimated Remaining Collections (ERC).
Operational risk
F. Regulatory risk
Risk of non-compliance with regulatory
obligations, increased regulatory
scrutiny and inappropriate conduct
and customer treatment.
Key mitigating actions
Focus areas
Funding and liquidity risks are managed
by ensuring asset receivables are funded
beyond the weighted average maturity.
This is supported by ongoing review and
forecasting of funding requirements,
application of scenario analysis and
ensuring a balanced maturity profile
of existing debt facilities.
Portfolio credit risk is managed through
rigorous due diligence and controls to
consider risks (including operational risks)
and accurately price new investment
opportunities. Newly proposed investments
are subject to second line oversight by Group
risk, executive review through an investment
‘gate’ process and in certain circumstances
board approval prior to purchase execution
in accordance with agreed mandate levels.
Strong governance and alignment with
risk appetite via the assets and liabilities
committee in 2019.
The business remains highly cash generative
and aims to maintain a flexible cost base.
Portfolio investment is largely discretionary,
providing a large degree of control over
working capital. In addition, appropriate
currency liquidity management and
scenario planning is in place.
Mandate levels for 2019 designed to
balance risk appetite and operational
efficiency. Portfolio performance is regularly
monitored by senior management and the
board, subject to portfolio risk appetite limits.
Management information further supports
the process, with reporting metrics aligned
to the relevant risk appetite statements.
We operate in highly regulated environments,
particularly in the UK and increasingly in other
European countries. Any actions leading to
poor customer outcomes or customer
detriment could lead to a breach
of regulations, resulting in censure,
financial loss and reputational damage.
Poor customer outcomes or customer
detriment could arise through the debt
collection activities within our in-house
operations or the third-party servicer
network of collection agencies, whether we
are collecting debt which we have acquired
or whilst working on behalf of clients.
We always seek to ensure we adhere to all
local collections best practice and strive for
regulatory parity with those counterparties
that we transact with or act on behalf of.
Increased governance over our remediation
activities has been established to address
instances of customer detriment, including
on behalf of clients. This now forms part of
business as usual activity.
Horizon scanning and industry body
presence helps to influence best practice
across the sector and ensures our internal
practices and training are updated accordingly.
Regulatory conduct and Treating Customers
Fairly (TCF) are at the heart of our business.
Employees and third parties acting on our
behalf receive mandatory training, including
conduct risk, handling vulnerable customers
and complaints relevant to the local market
and our activities.
Arrow Global Annual Report and Accounts 2018
Strategic report
48
Principal risks and uncertainties continued
Key risk
Key mitigating actions
Focus areas
Operational risk continued
G. Cyber risk
Risk of IT failures as a result of inadequate
IT infrastructure, security and/or systems
and applications.
H. Integration risk
Risk that poorly executed processes and
transactions result in financial loss and/or
poor customer outcomes.
The Group relies on IT systems for
customer and data management including
data analytics. Should these systems
experience performance issues or outage
through, for example, cyber-attack, our
customers would be impacted, and we
could experience financial loss and/or
reputational damage.
Process execution failures are managed
through our incident process, with clearly
defined reporting, escalation and governance
in place. Incidents are assessed against a
severity matrix which considers the impact
from both a business, customer and
third-party perspective, ensuring that we
reduce these impacts where possible. We
seek to learn from all instances of process
failures, undertaking root-cause analysis
in order that we can take appropriate
action to resolve the incident and share
lessons learned.
Our IT systems are regularly tested, backed
up and managed through a set of quality
and security policies, supported by disaster
recovery and business continuity plans.
We are in the process of reviewing our
IT infrastructure and systems across all
geographies with a view to rationalising
and consolidating where appropriate. This will
enable us to be more efficient, by automating
processes and managing data more effectively.
Resilience and business continuity will be
increasingly tested commensurate to the
external and internal threats which exist.
Alignment of country platforms with
the Group governance framework and
embedding of risk culture, especially to
integrate new acquisitions. Significant
plans to invest in technology infrastructure,
overseen by strategic change board. The risk
and control self-assessment process has been
adopted by teams in each country and is
being systemised to drive the next stage of
risk management evolution across the Group.
This will more readily identify process gaps
and opportunities to enhance controls
and efficiency.
Arrow Global Annual Report and Accounts 2018
“The Group is
highly-cash
generative,
receiving
consistent flows
of cash in the
form of collections
from customers.”
49
Statement of viability
The directors have considered the Group’s viability
in detail over a three-year period to December 2021.
This assessment is in accordance with provision C.2.2 of
the UK Corporate Governance Code. It has been made
taking into account the current position of the Group,
the corporate planning and budget process, and the
Group’s principal risks as detailed in the strategic
report on pages 46 to 48.
Additionally, a variety of stress tests are performed
on the plan. The tests selected consider the principal
risks faced by the Group. As explained in the risk
management section on page 44, the Group has given
significant consideration to the impact of Brexit on its
future operations. As part of performing stress testing
on the Group’s three-year forecasts which are used
as the basis of the viability assessment, a number of
potential Brexit outcomes were modelled, including
a hard-Brexit scenario.
Additional stress tests were also performed on specific
variables in the plan, with the most material factor
being future collections levels. As a result, the Group
has determined that it would have sufficient headroom
in a reasonably plausible collections reduction stress
scenario, as a result of current headroom and where
applicable, available management actions to mitigate
the impact on the Group’s financial position.
As a result of the analysis performed on the forecast
future position of the Group, the directors have
concluded that they have a reasonable expectation
that the Group will be able to continue in operation
and meet its liabilities as they fall due over the
three-year period of their detailed assessment.
The directors are required to make an assessment
of the Group’s ability to continue to trade for the
three-year period of assessment used to assess the
business. The directors have given this matter due
consideration through a review of forecast cash flow
models, current cash availability and possible future
scenarios and have concluded that it is appropriate
to prepare the Group financial statements on a going
concern basis.
The main considerations were as follows:
The Group prepares annually a five-year plan as part
of its corporate planning process, which is aligned to
the strategic goals approved by the board. The plan
is predicated on a detailed year one budget, and
extrapolated forecasts, in outer years. It is the first
three years of the forecast, which command the
greater focus and have the greater certainty over
the forecasting assumptions used. Hence this is why
the board has concluded that the viability statement
should cover a period of three years.
The Group is highly cash generative, receiving constant
cash flows in the form of collections from customers.
Furthermore, the Group has a long-track record of
generating predictable cash flows over many years. The
directors have reviewed the available cash headroom of
the Group and confirmed that the Group has sufficient
resources to meet its future obligations as they fall due.
The principal banking covenant (event of default) of the
revolving credit facility that the Group currently has in
place is to maintain a leverage ratio which is below 4.4x
12-month rolling adjusted EBITDA measured in relation
to the Group’s secured net debt position. The directors
have reviewed the Group’s financial projections covering
a minimum period of at least 12 months from the date of
signing of these financial statements and the projections
show covenant compliance. Furthermore, based on
the three-year forecast and funding plan the Group
will continue to be in compliance across the
assessment period.
Approval of strategic report
The strategic report for the year ended 31 December
2018 has been approved by the board and was signed
on its behalf by:
Lee Rochford
Group chief executive officer
28 February 2019
Arrow Global Annual Report and Accounts 2018
Strategic report 50
1
Board of directors
2
3
4
1. Jonathan Bloomer MBE
Non-executive Chairman
Appointment
5 October 2013
Committee membership
Nomination (chair) and remuneration
Skills and experience
Jonathan has a wealth of experience in the
financial services industry and has significant
board experience both as an executive and
non-executive. His previous positions include
chief executive of Prudential Plc, Chair of the
employee benefit business of Jardine Lloyd
Thompson Plc, senior independent director
of Hargreaves Lansdown Plc, Chair of the
Practitioner Panel of the FSA, board
membership of the Geneva Association
and membership of the code committee
of the Takeover Panel.
External appointments
Jonathan is currently Chair of Morgan Stanley
International, Chair of Shepherd Direct Ltd,
and director of Change Real Estate Limited.
Contribution in 2018
Jonathan led the board through a significant
period of growth and diversification, highlights
being the acquisition of Norfin in Portugal
and the two acquisitions in Italy, being Europa
Investimenti and Parr Credit, together with
the continued evolution of the Group’s asset
management income streams. As chair of the
nomination committee, Jonathan oversaw
the beginning of the implementation of the
diversity recommendations set out in the
2018 Corporate Governance Code.
2. Lee Rochford
Group chief executive officer
Appointment
3 January 2017
Committee membership
Disclosure, treasury and tax
Skills and experience
Before joining the Group, Lee was chief financial
officer at Virgin Money between October 2013
and August 2015, seeing the group through its
successful IPO and into life as a listed company.
Prior to this he held a number of roles at RBS
between 2007 and 2013,
culminating as managing director and head of
the Financial Institutions Group. A significant
amount of his focus from 2008 onwards was
advising banks and non-bank lenders on
balance sheet restructuring after the global
financial crisis and subsequent new capital
regimes as well as working with funds and other
buyers of assets from the lending industry.
Earlier in his career, Lee was managing director
of Wachovia Securities’ Principal Finance team,
managing director and head of European asset
finance at Credit Suisse and head of Northern
European securitisation at BNP Paribas. Lee has
a degree in Philosophy, Politics and Economics
from Oxford University.
External appointments
None.
Contribution in 2018
Lee has led the Group through a significant
year of growth and financial performance in
the Group’s history, highlights include: total
income growth of 13.4%, growth in underlying
profit after tax of 13.3% and underlying return
on equity now standing at 34.8%. Lee was
instrumental in the implementation of the
‘One Arrow’ programme, which centred on
investing in infrastructure and the Group’s
governance and core capabilities for future
growth. As well as putting culture at the heart
of the strategic focus of the Group, Lee has
also supported the Group’s new chief financial
officer and chief operating officer and their
integration into the management team.
3. Paul Cooper
Group chief financial officer
Appointment
1 January 2018
Committee membership
Disclosure, treasury and tax
Skills and experience
Paul has over 20 years’ experience in financial
services roles both in the UK and overseas.
He joins Arrow from leading global insurance
business Sompo Canopius Group, where he has
been in a variety of senior executive roles since
2013. Previously, Paul was a partner at Ernst &
Young LLP in the Financial Services division,
following five years as a Finance Director at the
quoted insurer, Hiscox. Paul is a Chartered
Accountant, having trained at PwC.
External appointments
None.
Contribution in 2018
Paul joined the business in January 2018, as
Group chief financial officer. Paul has been
instrumental in delivering a strong set of results
for 2018, which demonstrates the excellent
progress that has been made to develop the
business, in addition Paul has been pivotal in
laying the foundation for future growth and
enhancing shareholder value, has led financial
due diligence on acquisitions, embedding them
into the Group and has further strengthened
the finance processes and strategic finance.
Highlights of the financial results are set out
in the Group chief financial officer’s review
on pages 26 to 29.
4. Iain Cornish
Non-executive director and senior
independent director
Appointment
15 October 2013 (Iain became senior
independent director on 4 June 2015)
Committee membership
Senior independent director, audit,
disclosure (alternate), nomination,
remuneration and risk (chair)
Skills and experience
Iain has a wealth of experience in the financial
services industry having spent over 20 years
in senior leadership roles, until 2011, at the
Yorkshire Building Society, including eight
years as chief executive officer. Iain was
previously a non-executive director of the
Prudential Regulatory Authority, the non-
executive Chair of Shawbrook Group Plc,
a non-executive director of Vanquis Bank,
Chair of the Practitioner Panel of the FSA,
Chair of the Building Societies Association
and executive committee member of the
Council of Mortgage Lenders.
External appointments
Iain is currently Chair of St James’ Place Plc (and
Chair of the risk and nomination committee),
trustee and treasurer of Macmillan Cancer
Support, and non-executive director of Leeds
Building Society.
Contribution in 2018
As chair of the risk committee, during the year
Iain oversaw the strengthening and
Arrow Global Annual Report and Accounts 2018
5
6
7
8
51
development of the Group’s risk management
framework to align with the growth, scale,
diversity and complexity of the business.
Focus areas included the General Data
Protection Regulation readiness programme,
customer treatment and risks associated
with external factors including Brexit and the
political coalition risks in Italy. Iain also led the
committee through the oversight of the risks
associated with the acquisition and integration
activity in relation to Norfin in Portugal, and the
Europa Investimenti and Parr Credit acquisitions
in Italy and the integration of Mars Capital into
the Group. Iain has continued to support the
Chair in his role as senior independent director.
5. Lan Tu
Non-executive director
Appointment
9 March 2015
Committee membership
Remuneration (chair), audit, nomination
and risk
Skills and experience
Lan is currently chief strategy officer at
Standard Life Aberdeen and previously had
over 10 years of experience in senior leadership
roles within American Express. Until 2015,
Lan ran its Emerging Payment and Services
business in Europe, Middle East and Africa;
was the general manager for its UK and Nordics
Merchant Services business; and previously
led its International Strategic Planning group.
Previous experience also includes 12 years
at McKinsey & Company, working primarily
in the financial services sector.
External appointments
Lan is chief strategy officer of Standard Life
Aberdeen PLC and non-executive director
of Kings College London.
Contribution in 2018
Lan chaired the remuneration committee
throughout 2018 and oversaw the development
of the Group’s new remuneration policy which
received strong shareholder support at the
annual general meeting in May 2018. Lan also
played a key role in leading the committee’s
review of its practices in light of the new
Corporate Governance Code, which was
published in July 2018 and will be effective
for the Group’s 2019 financial year onwards.
6. Maria Luís Albuquerque
Non-executive director
Appointment
7 March 2016
Committee membership
Audit and risk
Skills and experience
Maria Luís was Portuguese Minister of State and
Finance from July 2013 until November 2015
when there was a change of government in
Portugal, and Deputy Minister for Treasury from
June 2011 to July 2013. She had previously held a
number of senior finance/treasury positions in
the Portuguese public sector, including Head of
Issuing and Markets at the Portuguese Treasury
and Debt Management Agency, and director
of the department of financial management
at REFER, the state-owned rail infrastructure
company. She is an economist who also
lectured in Universidade Lusíada of Lisbon
from 1991 to 2006.
External appointments
Maria Luís is a Member of the Portuguese
Parliament, having been re-elected in the
general election of 4 October 2015.
Contribution in 2018
Maria Luís brings a wealth of international and
financial expertise to the board and throughout
the year provided insight and challenge to the
board on the Group’s geographic expansion
and diversification, particularly in the context
of European financial stability, preparation
for Brexit and the Group’s long-term funding
strategy. As a member of the risk committee,
Maria Luís was involved in the review of the risks
associated with the acquisition and integration
activity related to the Norfin Investimentos
S.A. acquisition in Portugal, and the Europa
Investimenti and Parr Credit acquisitions in Italy.
7. Andrew Fisher
Non-executive director
Appointment
9 December 2016
Committee membership
Audit (chair), remuneration, risk and disclosure
(alternate)
Skills and experience
Andrew, a chartered accountant, was previously
the finance director of Provident Financial plc
for 12 years. He has spent over 20 years as a
finance director of major-listed companies
where he has accumulated broad international
experience and a considerable depth of
knowledge across a variety of consumer credit
asset classes. Prior to working in the financial
services industry, he was a partner with Price
Waterhouse LLP.
External appointments
None.
Contribution in 2018
Andrew brings a wealth of international and
financial sector knowledge and experience to
the board and provides particular insight and
challenge on the Group’s long-term funding,
accounting and tax strategies. As chair of
the audit committee, Andrew has led the
committee through the assessment of the
integrity and effectiveness of the financial
reporting process, together with the going
concern review and approval of the long-term
viability statement for recommendation to the
board. Andrew has directed the committee
through the review of the Group’s approach to
the implementation of IFRS 9 and the Group’s
move to segmental reporting and oversaw
the handover from the outgoing Group
chief financial officer to Paul Cooper.
8. Stewart Hamilton
General counsel and company secretary
Appointment
24 September 2013
Committee membership
Disclosure
Skills and experience
Stewart has over 16 years’ experience as a
solicitor in corporate and commercial law.
He joined the Group from Addleshaw Goddard
in 2011, where he worked principally on private
company acquisitions and disposals and public
fund raising, as well as gaining direct experience
with the Clydesdale Bank plc and FTSE-listed
healthcare company, Assura Group Limited.
Stewart holds an M.A. (Hons) in economics
and law from the University of Edinburgh and
previously worked at Linklaters LLP and Baker
& Mckenzie where he was based in London
and Tokyo.
External appointments
None.
Arrow Global Annual Report and Accounts 2018
Governance 52
1
3
6
Executive management team
2
4
5
7
Arrow Global Annual Report and Accounts 2018
Buyers Association. He was named an Ernst
and Young Entrepreneur of the Year in 2010.
Zachary is on the board of the English National
Ballet, the English National Ballet School,
and the organising committee for the Marie
Curie Charity fundraiser. He graduated from
Princeton University with a BA in Economics
with Honours and a Certificate in Applied and
Computational Mathematics with Honours.
4. Tracy French
Group HR director
Skills and experience
Tracy has over 25 years’ experience in
Human Resources with expertise in the
area of transformation and change, M&A,
organisational effectiveness and talent
management. Before she joined Arrow, Tracy
held senior roles in a number of service and
retail organisations including Virgin Media,
Npower and Assurant, she was also director
and owner of Joint Resolutions Ltd. Tracy has a
broad background of private equity, listed and
privately-owned business experience from
retail banking, insurance, mobile, utilities
and food services. Tracy holds an Honours
degree in Business from the University of
Central England.
5. Dave Sutherland
Group chief operating officer
Skills and experience
Before joining Arrow, Dave was the UK
Managing Director at Neilson Financial
Services (NFS). Before joining NFS, he spent
four years as Chief Operating Officer at TD
Wealth International and was responsible
for Customer Services, Global Trading,
Operations, Technology, Shared Services
and Business Change.
He has also previously worked as COO for
Santander Cards UK, COO and Transformation
Director of GE Money’s UK Card Services, and
Regional Director for Boots plc.
Dave has an MSc. in IT and Management from
Sheffield Hallam University and an MBA from
the University of Leeds.
1. Lee Rochford
Group chief executive officer
Skills and experience
Before joining the Group, Lee was chief
financial officer at Virgin Money between
October 2013 and August 2015, seeing the
group through its successful IPO and into
life as a listed company. Prior to this he held
a number of roles at RBS between 2007 and
2013, culminating as managing director and
head of the Financial Institutions Group.
A significant amount of his focus from 2008
onwards was advising banks and non-bank
lenders on balance sheet restructuring after
the global financial crisis and subsequent new
capital regimes as well as working with funds
and other buyers of assets from the lending
industry. Earlier in his career, Lee was
managing director of Wachovia Securities’
Principal Finance team, managing director
and head of European asset finance at
Credit Suisse and head of Northern European
securitisation at BNP Paribas. Lee has a degree
in Philosophy, Politics and Economics from
Oxford University.
External appointments
None.
2. Paul Cooper
Group chief financial officer
Skills and experience
Paul has over 20 years’ experience in financial
services roles both in the UK and overseas.
He joins Arrow from leading global insurance
business Sompo Canopius Group, where he
has been in a variety of senior executive roles
since 2013. Previously, Paul was a partner at
Ernst & Young LLP in the Financial Services
division, following five years as a Finance
Director at the quoted insurer, Hiscox. Paul is a
Chartered Accountant, having trained at PwC.
3. Zachary Lewy
Founder and Group chief investment officer
Skills and experience
Zachary Lewy is the Founder and Group chief
investment officer of Arrow Global. He was the
CEO of the business from its inception until
2011 when Zachary changed the structure to
focus on running the investment business.
Prior to Arrow, Zachary was an Officer of Sallie
Mae, a Director at Vertex (the BPO division of
United Utilities), and a Founder and Executive
Director of 7C (a U.K. BPO company acquired
by Vertex). Zachary has previously chaired
SCOR and was also the Chair of the UK Debt
53
6. Stewart Hamilton
General counsel and company secretary
Skills and experience
Stewart has over 16 years’ experience as a
solicitor in corporate and commercial law.
He joined the Group from Addleshaw Goddard
in 2011, where he worked principally on private
company acquisitions and disposals and
public fund raising, as well as gaining direct
experience with the Clydesdale Bank plc and
FTSE-listed healthcare company, Assura
Group Limited.
Stewart holds an M.A. (Hons) in economics
and law from the University of Edinburgh and
previously worked at Linklaters LLP and Baker
& Mckenzie where he was based in London
and Tokyo.
7. Clodagh Gunnigle
Group chief risk officer
Skills and experience
Clodagh joins Arrow from GE Capital, where
she spent 17 years in variety of senior risk roles
including Chief Risk Officer of GE Capital’s
UK business and Chief Credit Officer across
GE Capital’s Global Consumer businesses.
Clodagh is a qualified Chartered Accountant
and has a depth of leadership experience
having managed all aspects of risk including
credit, conduct, operational, financial and
enterprise across European portfolios.
Arrow Global Annual Report and Accounts 2018
Governance 54
Corporate governance report
Corporate governance report
“The board
considers
regular, active
dialogue with its
shareholders,
bondholders and
revolving credit
facility providers
is vital to the
continued success
of the Group.”
Iain Cornish is the Group’s senior independent director.
The board is satisfied that Iain is independent in
character and judgment and has skills and experience
that meet the requirements of the role. The New Code
recommends that at least half of the board of directors,
excluding the chair, should be independent non-
executive directors. The Group currently has four
independent non-executive directors, excluding
me as Chair, and therefore complies with the
recommendations of the New Code.
Biographical details of all the directors are set on pages
50 to 51. The New Code recommends that all directors
should be subject to annual re-election, which the
board adopted at the first annual general meeting in
2014 and intends to continue this at the 2019 annual
general meeting.
Shareholder, bondholder and revolving credit
facility provider engagement
The board considers that regular, active dialogue with its
shareholders, bondholders and revolving credit facility
providers is vital to the continued success of the Group.
Further details regarding these engagements are set out
on page 57.
Jonathan Bloomer
Non-executive Chairman
28 February 2019
“The board is responsible for the
long-term success of the Group; its
strategy, values and governance.”
Compliance statement
This corporate governance report, together with
the reports of the audit committee, risk committee,
nomination committee and the directors’ remuneration
report, provides a description of how the main principles
of the UK Corporate Governance Code published by
the Financial Reporting Council (FRC) in April 2016 (the
‘Code’) have been applied by the Group in 2018. The
Code is available on the FRC website at www.frc.org.uk.
During the year, the Group was in compliance with
the relevant provisions of the Code and intends to
continue to comply with the requirements of the Code,
which sets out standards of good practice in relation
to board leadership and effectiveness, remuneration,
accountability and relations with shareholders. The
Group has begun working towards compliance with the
new UK Corporate Governance Code published by the
FRC in July 2018 (the ‘New Code’). A substantial amount
of the key principals are already addressed, and for any
areas where we are not already compliant, we are well
progressed, and we will be fully compliant in 2019.
The board currently comprises seven members,
including me, as Chair, two executive directors
(Lee Rochford and Paul Cooper) and four independent
non-executive directors (Iain Cornish, Lan Tu, Maria
Luís Albuquerque and Andrew Fisher). The board
regarded me, as Chair, as independent upon my
appointment and considers that I continue to
meet the independence criteria.
Arrow Global Annual Report and Accounts 2018
Leadership
The board
The board is responsible for the long-term success of the Group;
its strategy, values and governance. The board maintains a formal
schedule of matters for consideration, which include:
• establishing long-term strategic objectives;
• approving annual operating and capital budgets;
• reviewing and monitoring business performance and development;
• overseeing the Group’s risk management and internal
control systems;
• reviewing corporate governance arrangements;
• succession planning;
• approving shareholder return policy;
• ensuring appropriate resources are in place to enable the Group
to meet its objectives;
• ensuring appropriate oversight of portfolio investments; and
• approval of external reporting.
Specific key considerations of the board in 2018 also included:
• the acquisition of Europa Investimenti and Parr Credit in Italy;
• the acquisition of Norfin Investimentos S.A in Portugal;
• approval of the new five-year SMART Strategic plan; and
• approval of the sale of the non-core Belgian business.
Chair and Group chief executive officer
The positions of the Chair and Group chief executive officer are
held by separate individuals and the board has clearly defined their
responsibilities. The Chair is primarily responsible for the effective
working of the board and ensuring that each director, particularly the
non-executive directors, is able to make an effective and challenging
contribution. The Group chief executive officer has responsibility for
operational matters, which includes the implementation of the Group
strategy and policies approved by the board.
Non-executive directors
Non-executive directors are appointed for periods of three years,
subject to shareholder approval. Terms in excess of six years are subject
to a more rigorous review. The non-executive directors
meet periodically without the executive directors present.
Effectiveness
Time commitment
The individual letters of appointment set out the expected time
commitment for non-executive directors and are available for
inspection at our registered office. Other significant commitments
are disclosed to the board on each occasion that these
commitments change.
Undertakings are given that non-executive directors will have sufficient
time to meet the requirements of the role. Details of the Chair’s and
other directors’ commitments can be seen in the director biographies
on pages 50 to 51.
Board activity
The board discharges its responsibilities through an annual
programme of board and committee meetings which are held at the
various operational sites of the Group. The board visited the Zenith
business in Italy in March 2018, the Vesting offices in the Netherlands
in June 2018 and both the Whitestar and the Norfin offices in Portugal
in September 2018.
55
Board attendance
The board held 10 scheduled meetings in 2018. Details of board
attendance by all directors who held office during the year are set
out below:
Director
Jonathan Bloomer
Lee Rochford
Iain Cornish
Lan Tu
Maria Luís Albuquerque
Andrew Fisher
Paul Cooper
Eligible to attend
10
10
10
10
10
10
10
Attended
10
10
10
10
10
10
10
Ad hoc conference calls and meetings were also convened to deal with
specific matters which required attention between scheduled meetings.
Continued professional development undertaken during the year
Training is offered to all new directors as necessary. The Chair, together
with the Group chief executive officer and company secretary, ensures
new directors receive a full, formal and tailored induction upon joining
the board, including full briefing packs.
As part of a tailored induction programme, new directors receive
a comprehensive induction pack which includes background
information on the Group, material on matters relating to the board
and its committees, and governance-related information (including
the duties and responsibilities of directors). New directors meet with
key advisors and members of the executive team. Visits to operational
sites are arranged as well as meetings with the external and internal
auditors. Ongoing training was provided during the year for existing
directors. Major shareholders are welcome to meet newly appointed
non-executive directors should they express a desire to do so.
Paul Cooper undertook a thorough induction process leading up to his
appointment on 1 January 2018 and throughout the handover period
during January and February 2018 with Rob Memmott.
Access to independent advice
An approved procedure for all directors to take independent
professional advice, at the Group’s expense, is in place. The
committees are provided with sufficient resources, including the
ability to appoint external advisors when they deem it appropriate to
call upon a particular resource. All directors have access to the advice
and services of the company secretary and are entitled to rely on the
impartial and independent nature of such advice and services. The
company secretary is responsible to the board for both the proper
administration of procedures and arrangements established by the
board for the conduct of its own business, and the Group’s compliance
with internal and external rules and regulations. The board receives
agendas and supporting papers in advance of board meetings with
sufficient time given for consideration of the board papers.
Evaluation of the board and committees
An independent evaluation of the board, its performance and
effectiveness was carried out by SCT Consultants Limited during 2018.
A questionnaire was issued to board members and senior management
to review and complete. The report, following interviews with each
director and member of senior management and observing the board
in operation, it concluded that for a ‘young’ company, the board
worked well, had a clear strategy and was well led by the Chair who
encouraged the non-executive directors to challenge the executive
directors. The report made a series of recommendations including
broader engagement with stakeholders and further ‘deep dive’
review of the business operations. The recommendations were
discussed and agreed by the board and the Chair is working with the
company Secretary to monitor their implementation throughout 2019.
Arrow Global Annual Report and Accounts 2018
Governance 56
Corporate governance report continued
Iain Cornish, as senior independent director, led the meeting
of the non-executive directors (without the Chair being present)
to appraise the Chair’s performance. No actions were considered
necessary as a result of these evaluations. The board has confirmed
that its performance, as well as the contribution of each of the
executive and non-executive directors continues to be effective, that
they continue to demonstrate commitment to their respective roles
and that the board members’ respective skills complement one another
and enhance the overall operation of the board. The board, therefore,
recommends that shareholders approve the resolutions to be proposed
at the 2019 annual general meeting in relation to the re-election of
the directors.
Accountability
Adequacy of risk management and internal control systems
The Code requires that the board should monitor the Group’s risk
management and internal control systems and, at least annually,
carry out a review of their effectiveness and report on that review
in the annual report. The board complies with this Code provision
in line with the guidance published by the FRC, ‘Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting (September 2014)’. In this context, the board is responsible
for, and monitors, the Group’s systems of internal controls (which
include financial, operational and compliance controls) and risk
management systems. The risk management framework is designed to
identify and mitigate risks to an acceptable level based on the Group’s
appetite for risk, which takes into consideration the expectations of our
shareholders. The board has approved an appropriate suite of policies
on risk management and internal control and seeks regular assurance
that the systems of internal control are effective in managing risks in
line with its articulated risk appetite. The Group has a formal three lines
of defence model, with internal audit provided by Deloitte LLP together
with in-house internal audit functions. During the year, the board
carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model,
future performance, solvency or liquidity. These are documented
on pages 45 to 48 of the strategic report.
The following activities are considered to cover the most critical
business processes and associated risks:
• A disciplined underwriting process, overseen by the board,
with delegated authority to the executive committee for certain
transactions, based on the Group’s defined risk appetite. This process
ensures an objective, rigorous and consistent approach to pricing
and due diligence. Additionally, any transactions greater than £20
million in investment value or those that represent a new asset class
are escalated to the board for approval. The processes and controls
are documented in a portfolio acquisition policy.
• A strong risk and compliance framework supported by the enterprise
wide risk management framework, risk committees and maintaining
the Group, country and departmental risk registers.
• Regular monitoring of portfolio performance, overseen by
the portfolio review committees, which considers actual versus
forecast results, focusing on significant individual portfolio variances,
reforecasts cash flows on a six-monthly basis, signs off the latest ERC
forecast, assesses the carrying value of the portfolio assets and
reviews income recognition.
•
Internal controls exist over all key processes of the Group
that have an impact on business operations, the treatment of
customers, regulatory compliance, the Group’s reputation and
the financial results.
Comprehensive reporting to the audit and risk committees and the
board on the above activities took place throughout the year. The audit
committee carried out a review of the effectiveness of the Group’s
risk management and internal control systems, including financial,
operational and compliance controls. In carrying out this review,
the committee received a report from the Group chief risk officer
and the Group chief financial officer on the Group’s internal controls
(including financial, operational and compliance controls) and risk
management systems.
The assessment for 2018 provided a broad assessment of risk
management across the Group, including the Group’s operating
subsidiaries in the UK, Portugal, the Benelux countries, Ireland and Italy.
For 2019, there will be oversight of the respective risk management
and internal control systems within the recently acquired Norfin
Investimentos S.A. and Europa Investimenti.
No new or open high-risk observations were identified by the external
auditor, KPMG, during the interim audit for 2018. The risk management
framework provides assurance and evidence that the Group’s risks are
understood and are being appropriately managed. With continued
growth in both new and existing geographic territories, and exposure
to increasing levels of client expectation and regulatory scrutiny, the
expected standards of risk management continue to increase.
The audit committee monitored the Group’s risk management and
internal control systems and, following a review of their effectiveness,
concluded that they were adequate. There were no material failings
or weaknesses identified following the committee review, however,
the committee noted the need to continue to develop and embed a
consistent and robust approach across the Group for all categories of
risk. It was further noted that, as well as investment in second-line risk
resource across the Group, the Group’s culture is being matured to
support effective risk management and embed the Group’s values.
Based on the audit committee’s recommendation, the board
concluded that, overall, the Group’s risk management and
internal control systems were adequately effective.
Non-audit services provided by the external auditor
The provision of non-audit services by the external auditor is monitored
throughout the year; any such work must be authorised in accordance
with the Group’s non-audit services policy. Further detail of the
non-audit services policy is set out on page 60.
Non-audit services performed by the external auditor during the year
included audit-related services performed in relation to the issuance
of the €285 million senior secured notes due 2026. Additionally, the
external auditor performed a controls report for Vesting in its capacity
as a service organisation and, undertook monitoring work on a
securitisation issue on which a Group company acts as servicer and
administration agent. The level of non-audit fees and audit related
assurance services provided by the external auditor for the year can
be seen in note 9 on page 109.
The audit committee has concluded that the provision of non-audit
services to date has not compromised external auditor independence
and objectivity.
Internal audit function
The audit committee was responsible for monitoring and reviewing the
effectiveness of internal audit activities in 2018. The formerly combined
audit and risk committee approved the appointment of an outsourced
internal audit provider, Deloitte LLP, in October 2015, which has a
Group-wide remit. A Group Head of Internal Audit has recently been
appointed and there are also in-house internal audit teams at Whitestar
and Vesting.
Arrow Global Annual Report and Accounts 2018
57
Conflicts of interest
Group policy requires that if a director becomes aware that they have
a direct or indirect interest in an existing or proposed transaction with
the Group, they should notify the board at the next board meeting or
by providing a written declaration. Directors have a continuing duty
to update any changes in such interests. See also the related party
transactions note 22.
Approving significant transactions and investment decisions
The business acquires non-performing and non-core loan portfolios
as part of its ordinary course of business. The Group applies a multi-
stage approach to its underwriting and pricing process, with the aim
of achieving attractive risk-adjusted returns, based on the Group’s
underwriting models, analytical processes and servicing strategies.
The origination team reviews approximately 150 transactions per year,
with approximately 40 completed transactions. Transactions range
from repeat transactions with creditors and asset classes familiar to
the Group, through to more complex consortium trades with special
purpose vehicle structures.
An authority matrix sets out the delegated authority to the investment
committee and executive committee. The board retains authority for
any new asset classes or geography, complex deals over £10 million
and any transaction over £20 million. Based upon recent performance,
the board will be asked to consider circa four to five transactions per
annum. In 2018, the board approved, amongst others, the acquisition
of Norfin Investimentos S.A, Europa Investimenti and Parr Credit.
Bribery Act compliance
The Group has anti-bribery and corruption policies and standards
applicable to all its employees. There is a summary of the policy
complying with the provisions of the UK Bribery Act available on the
Group’s website, which is in line with Ministry of Justice (MOJ) Guidance
on the Bribery Act 2010 (‘MOJ Guidance’). The policy contains a gifts
and hospitality procedure and prohibits facilitation payments. Adequate
and regular training on the policy and the principles outlined therein is
provided to staff and directors.
The Group considers it to have adequate procedures within the
meaning of the MOJ Guidance. The Group chief risk officer has
primary and day-to-day responsibility for implementing this policy.
Remuneration
In line with the Code and the Directors’ Remuneration Disclosure
Regulations 2013, details on remuneration including the annual report
on remuneration to be approved at the 2019 annual general meeting,
can be seen on pages 66 to 81.
Dialogue with shareholders, bondholders and revolving credit
facility providers
In 2018, the Group held a Capital Markets Day for institutional investors
and analysts, which included presentations on results and information
on the Group’s activities. The capital markets presentation can be
accessed on the Group’s website at www.arrowglobalir.net
Following meetings or telephone conversations with brokers, the
Chair communicates to the entire board the views of shareholders,
bond holders and revolving credit facility providers (‘key stakeholders’).
The Group chief executive officer and the Group chief financial officer
regularly speak and meet with key stakeholders. The Chair is available to
discuss governance and strategy with key stakeholders. Non-executive
directors and the senior independent director have the opportunity to
attend meetings with key stakeholders and would attend if requested.
Following the announcement of the preliminary and interim results and
the executive directors’ presentations to analysts and shareholders, the
board receives a report on institutional feedback prepared by the
Group’s advisors.
The Group chief executive officer and the Group chief financial officer
also verbally report on their meetings with shareholders. Copies of
analysts’ and brokers’ briefings are circulated to the board.
Annual general meeting
The annual general meeting is an opportunity for all shareholders to
both vote on resolutions put forward and ask the board any questions
they may have. See page 85 for information on the 2019 annual
general meeting. The notice of meeting and annual report will be sent
out at least 20 working days before the meeting. Separate votes will
be held for each proposed resolution and a proxy count will be given
in each case.
The proxy forms will provide a ‘vote withheld’ option. The chairs of the
audit, risk, remuneration and nomination committees attend and are
available to answer questions.
Disclosure committee
The disclosure committee is made up of Lee Rochford, Paul Cooper
and Stewart Hamilton. The Chair of the meeting alternates between
Iain Cornish and Andrew Fisher depending on the subject matter.
The disclosure committee meets at such times as may be necessary
or appropriate.
The disclosure committee is responsible for monitoring, evaluating
and enhancing disclosure controls and procedures of the Group.
In particular, responsibilities set out in the terms of reference include
identification of inside information and maintenance of insider lists,
the design, implementation and evaluation of disclosure procedures
and the resolution of any questions concerning the materiality of
certain information. The disclosure committee is also required to help
the Company and the Group to make timely and accurate disclosure
of all information where disclosure is required to meet legal and
regulatory obligations.
Audit committee
Details regarding the audit committee and its responsibilities can be
seen on pages 58 to 61.
Risk committee
Details regarding the risk committee and its responsibilities can be seen
on pages 62 to 63.
Nomination committee
Details regarding the nomination committee and its responsibilities can
be seen on pages 64 to 65.
Remuneration committee
Details regarding the remuneration committee and its responsibilities
can be seen on pages 66 to 81.
The terms of reference for the disclosure committee, audit committee,
risk committee, nomination committee and remuneration committee
can be found on the Group’s website www.arrowglobalir.net
This report was approved by the board and signed on its behalf by:
Stewart Hamilton
Company secretary
28 February 2019
Arrow Global Annual Report and Accounts 2018
Governance 58
Audit committee report
Audit committee report
“The committee
continues to focus
on those matters
it considers to
be important
by virtue of their
size, complexity,
subjectivity
or impact.”
in-house head of internal audit, further strengthening
this Group function.
In accordance with best practice and the non-audit
services policy, the committee has continued to keep
the provision of non-audit services under review. Fees of
£397,000 were paid to our external auditor for non-audit
services in the year. Further details of the work carried
out can be seen on page 56. We anticipate the ratio of the
Group’s non-audit fees to audit fees to reduce in 2019
and to continue to be low in future reporting periods.
As part of the overall board evaluation review, a
number of areas for further improvement were identified
and will be acted upon. A common theme was that the
anticipated benefits, following the formal separation of
the audit and risk committees, had been realised. The
independent review of the board effectiveness carried
out during the year concluded that the audit committee
functioned well.
In relation to the financial statements, the committee
continues to focus on those matters it considers to be
important by virtue of their size, complexity, subjectivity
or impact, and these are set out in this report.
Andrew Fisher
Chair of the audit committee
28 February 2019
Dear Shareholder
I am pleased to provide a report of the audit
committee’s activities in 2018.
The committee continues to operate independently
from the risk committee which the board, supported
by the nomination committee, considered to be
appropriate in light of the Group’s increased geographic
footprint, the complex regulatory environments in
which the Group operates and the consequent impact
on risk exposures. The committee does, however,
continue to maintain close links with the risk committee,
with the chair of each committee being a member of
the other. This cross-membership facilitates effective
communication between both committees. The
committee also works with the remuneration committee
to ensure that risk is appropriately considered when
setting the Group’s remuneration policy. I am also
a member of the remuneration committee.
The principal issues on which the committee
focused in 2018 are set out in this report. They include
the measurement of purchased asset portfolios and
investments based on estimated future cash flows, the
valuation of goodwill, the implementation of IFRS 9 and
the introduction of segmental reporting. In addition, the
committee also reviewed the accounting with regards
to the three corporate acquisitions completed in the
year, focusing on the more judgmental areas of
those transactions.
A review of the performance of the internal audit
function took place during the year. Deloitte LLP
was appointed as the Group’s internal auditor in 2015,
supplemented by the in-house internal audit teams that
existed in the Portuguese and Benelux businesses. The
committee concluded that Deloitte LLP’s performance
as internal auditor was satisfactory. A further review of
the Group’s entire internal audit function took place in
mid-2018. This resulted in the appointment of an
Arrow Global Annual Report and Accounts 2018
The committee’s responsibilities are set out in its terms of reference.
They include responsibility for external and internal audit, financial
reporting and monitoring and assessing the effectiveness of the
Group’s internal controls and risk management systems. The terms
of reference also set out the authority of the committee to carry out
its responsibilities.
The committee focuses particularly on compliance with accounting
policies as well as monitoring and reviewing the Group’s external
auditor and internal audit function and reviewing and recommending
approval of the annual report and half-year statements to the board.
The committee met five times in 2018 at the appropriate times in the
financial reporting and audit cycle. The attendance of our members is
shown in the table below.
During 2018, the committee also met separately with representatives of
the external auditor, KPMG, and the head of the internal audit function
from Deloitte without any management present.
The Code recommends that, for companies outside the FTSE 350,
the audit committee comprises at least two members who are
independent non-executive directors and includes one member
with recent and relevant financial experience. The Code also requires
the audit committee to have competence relevant to the sector in
which the Group operates. In addition, the Disclosure Guidance and
Transparency Rules (DTR 7.1.1) provide that at least one member of the
audit committee must have competence in accounting or auditing,
or both.
For meetings held in 2018, the committee was comprised of the
following members:
Andrew Fisher as chair, Iain Cornish, Lan Tu and Maria Luís Albuquerque.
All are independent non-executive directors and, therefore, satisfy the
Code’s requirements. Andrew Fisher has recent and relevant financial
experience as well as having competence both in accounting and
auditing, gained as finance director of Provident Financial Plc until his
decision to step down in December 2018. Iain Cornish also has recent
and relevant experience, having held senior positions at Yorkshire
Building Society until his retirement in 2011 as well as a number of
other non-executive directorships as outlined on page 50.
Arrow has an experienced audit committee where all four members
have considerable expertise of the financial services sector. This can
be seen from the biographies set out on pages 50 to 51 and the Group’s
website. Following an assessment, the board, concluded that the audit
committee had competence relevant to the sector in which the
Group operates. The board based its conclusion on the experience
of the members of the audit committee and the practice at other
listed companies.
Committee members
Andrew Fisher (chair)
Iain Cornish
Lan Tu
Maria Luís Albuquerque
Eligible to attend
5
5
5
5
Attended
5
5
4
4
Finance team
Following the appointment of Paul Cooper as Group chief financial
officer at the beginning of the year, a review of the existing finance
team was undertaken. This resulted in several new senior appointments
designed to strengthen the finance structure to meet increasing
demands on the team from the rapid growth of the Group.
59
Significant areas considered by the committee
Significant areas discussed with the external auditor were:
Estimation of future cash collections from purchased
loan portfolios
The estimation of remaining collections from debt portfolios is complex
and requires management to make significant judgments in relation to
expected life, probability and value of related cash flows for each loan.
The committee considered the value of the loan portfolio by reference
to cash flow models. Management’s key assumptions were examined
carefully by the committee, including the profile of expected future
cash collection based on the Group’s historical collection experience
and changes in collection strategies. The committee also reviewed and
discussed with the external auditors their report on management’s
key assumptions.
Fair value of net assets acquired as part of business combinations
During the year, the Group completed three acquisitions, Parr Credit
and Europa Investimenti in Italy, and Norfin in Portugal.
Value of purchased loan portfolio assets and setting of the EIR
On acquisition of purchased loan portfolios, the initial EIR is set based
upon the initial best estimate of future cash flows arising from the
portfolios. The committee considered the basis of assessing the
EIR of portfolios acquired in the year and the judgments made by
management relating to the expected life and related cash flow of
portfolios. The portfolios are reviewed by management for any possible
indications of impairment gains/losses at the statement of financial
position date in accordance with IFRS 9 – Financial Instruments. The
committee considered the value of the loan portfolios by reference
to cash flow models, and considered the external auditor review on this.
Other areas of consideration by the committee
Goodwill impairment review
The year-end balance sheet includes goodwill of £263 million. The
committee reviewed the carrying value of goodwill with reference
to the values attributable to each cash generating unit, the expected
value-in-use based on projected cash flows and the key economic
assumptions related to growth rates and discount values. The
committee also considered the work undertaken by the external
auditor in testing the projections. The committee discussed the
appropriateness of the assumptions and challenged both the discount
rates and the factors used to consider whether a reasonable change in
assumptions may indicate impairment. After discussion, it was satisfied
that the assumptions were reasonable, and no impairment was required.
Accounting for material transactions
The Group is increasingly making equity investments in addition to
purchasing portfolios in different asset classes and geographies, which
can lead to new and sometimes complex transactions and accounting.
The buying process is a multi-stage approach. The underwriting
process includes a four-stage approval or gate process, before
presentation of the credit memorandum to the credit committee.
The investment committee then determines whether to recommend
the purchase to the board of material or complex portfolios in advance
of submission of a final bid. For material and complex transactions,
the finance team are also involved throughout the process and,
where appropriate, accounting papers are produced and disclosed
for discussions with the external auditor and approval by the
audit committee.
The committee also received reports on the Group’s implementation
of IFRS 9, covering the classification and measurement of the loan
portfolios and determination of loan portfolio impairment provisions
and approach to IFRS 16, bringing previously off balance sheet contracts
on balance sheet.
Arrow Global Annual Report and Accounts 2018
Governance 60
Audit committee report continued
Internal control and risk management systems
The committee is responsible for monitoring and reviewing the
effectiveness of the Group’s internal control and risk management
systems. Through monitoring the effectiveness of its internal controls
and risk management, the committee is able to maintain a good
understanding of business performance, key judgmental areas and
management’s decision-making processes. The committee considered
the adequacy of management’s response to matters raised and the
implementation of recommendations made. The committee carried
out the following in 2018:
• reviewed the framework and effectiveness of the Group’s system
of internal control and risk management, including financial,
operational and compliance controls;
• received regular updates from management on internal control
improvements and requested that KPMG report on progress as part
of their year-end work;
• reviewed comprehensive reports from the external auditor, KPMG, of
the results of their controls testing as part of the external audit; and
• reported to the board on its evaluation of the operation of the
Group’s internal control and risk management system, informed
by reports from Deloitte LLP as internal auditor, and KPMG as
external auditor.
External auditor
The committee carried out the following in relation to the
external auditor:
The policy is designed to ensure that neither the nature of the service
to be provided nor the level of reliance placed on the services could
impact the objectivity of the external auditor’s opinion on the
Group’s financial statements.
The policy precludes the appointment of the external auditor to
provide certain prohibited services as set out in the FRC Guidance on
Audit Committees 2016 and the FRC’s Revised Ethical Standard 2016, as
well as setting out where certain types of non-audit services for which
the use of the external auditor are pre-approved. New EU legislation
on permitted non-audit services came into effect from 17 June 2016,
which introduced a permitted non-audit services fee cap of 70%
of the average audit fee over a consecutive three-year period. This
cap will come into effect for the Group in the financial year ending
31 December 2020.
Internal audit
Following a comprehensive thorough and competitive tender, Deloitte
LLP was appointed by the board in October 2015 to provide an internal
audit function to the Group.
In 2018, the committee carried out the following:
• continued to oversee the activities of the internal audit function,
recognising that in the UK full FCA authorisation brings with it an
even higher expectation in terms of customer outcomes and
conduct risk;
• reviewed and approved the internal audit plan which defines
the scope of work that internal audit function will carry out;
• considered and approved the proposed materiality and audit
• reviewed results from audits performed, having scrutiny over
plan prepared;
unsatisfactory audit findings and related action plans;
• considered the quality and effectiveness of the external audit process
as part of an ongoing process of review throughout the year, with the
committee seeking assurances and understanding of the auditor’s
approach to the audit and the quality control processes applied on
a regular basis throughout the year. The committee considered the
FRC Audit Quality Review of KPMG and discussed the actions taken
by KPMG in light of the recommendations. The committee were
satisfied with KPMG’s performance and there was nothing of concern
that would impact on the effectiveness of the external audit process;
• reviewed the Group’s policy on the provision of non-audit services by
the external auditor; and
• having considered KPMG’s independence, compliance with
regulatory and ethical standards, and assessed its objectivity,
the committee unanimously recommended to the board that
a resolution for the re-appointment of KPMG LLP as the Group’s
external auditor be proposed to shareholders at the 2019 annual
general meeting.
The external auditor, KPMG LLP, was appointed in July 2014
following a comprehensive and competitive tender. The lead audit
partner changed in 2018 in accordance with the FRC’s Revised Ethical
Standard 2016 rotation rules of every five years to ensure independence.
The external audit contract will be tendered at least every 10 years as
prescribed by EU and UK legislation, with a change of auditor after
20 years.
Both the committee and the external auditor have in place safeguards
to avoid any compromise of the independence and objectivity of the
external auditor. The committee considers the independence of the
external auditor annually and the Group has a formal policy for the
engagement of its external auditor to supply non-audit services.
• reviewed open audit actions, together with monitoring progress
against the actions;
• reviewed the assurance map to ensure there is clear and
comprehensive risk and assurance coverage; and
• met with the lead internal audit partner on four occasions.
During the year, the committee monitored progress of the internal
audit function against that plan, ensuring that the internal audit
function had sufficient resource to carry out its duties effectively.
Reports on internal audit work have been received by the committee
and, where necessary, appropriate actions have been recommended
to the board. The results of this work, together with the committee’s
engagement with the management information of the Group and
the executive directors, have enabled them to conclude that the
statements given on pages 56 and 57 of the corporate governance
report relating to the Group’s systems of internal control and its
management of risk are appropriate.
Audit committee terms
The terms of reference can be found on the Group’s website at
www.arrowglobalir.net
Revisions to the UK Corporate Governance Code 2018 (the “Code”)
The Committee welcomes the revisions to the Code which applies
to accounting periods beginning on or after 1 January 2019. A working
party has been established to review the revisions and it is the intention
of the Committee to be (where it is not already) fully compliant with the
Code as soon as possible.
Arrow Global Annual Report and Accounts 2018
61
Separation of audit and risk committees
As stated in the audit committee chairman’s statement on page 58, separate audit and risk committees were set up with effect from
25 January 2017. Each committee has its own terms of reference which can be found on the Group’s website at www.arrowglobalir.net
Work of the committee
During the year under review, the following work was carried out:
Reporting
• Monitor the integrity and effectiveness of the financial reporting process, including the half-year and annual results, related
commentary and announcements and associated reports prepared by KPMG and make appropriate recommendations to
the board
• Continuing appropriateness of and changes to accounting policies and the use of estimates and judgments as noted in the
Group’s report and accounts
• Review key judgments and estimates included in preparation of the financial statements
• Going concern review and approval of longer-term viability statement for recommendation to the board
• Fair, balanced and understandable concept in respect of the 2018 report and accounts
• Reviewed accounting in respect of the three corporate acquisitions completed in the year
• Review and monitoring of IFRS 9 implementation plan and approval of methodologies and judgments
External audit
• KPMG’s annual external audit plan review and approval
• Effectiveness of the external audit process and reporting to the board on how the external auditor has discharged
its responsibilities
• Regular meetings with the external auditor (at planning and reporting stages) with further private meetings held without
executive directors and management present
• Changes to the regulatory framework in respect of external audit tendering and recommending reappointment of the
external auditor to the board
• Consideration of management letters from external auditors and review of representation letters requested by the
external auditor
Impact of new accounting standards
•
• Reviewing policy on the supply of non-audit services by the external auditor to avoid any threats to auditor objectivity and
independence and ensuring compliance with this policy
• Approving the terms of engagement of the external auditor at the start of the audit and agreeing its remuneration for both
audit and non-audit services
Risk
management
and internal
controls
• Monitoring and effectiveness review of risk management and internal control systems (including financial, operational
and compliance) across the Group and approving the statements to be included in the annual report regarding
such effectiveness
• Reviewing and approving the statements to be included in the annual report concerning the principal risks facing the
Group and how they are being managed along with the assessment of the Group’s prospects
Whistleblowing
and prevention
of bribery
• Reviewing Whistleblowing Policy
• Reviewing procedures for preventing bribery and fraud
Internal audit
• Review of the Group internal audit charter which sets out the objectives, accountability and independence, authority,
responsibilities, scope of work and standards and performance for internal audit
• Adequacy of the internal audit programme over the Group’s processes and controls, including coverage, prioritisation and
allocation of resource
• Updates on the activities of internal audit, including receipt of audit reports, to gain and provide assurance that the control
Other
environment continued to operate effectively
• Status reports on the implementation and follow-up of internal audit recommendations
• Effectiveness of the internal audit function
• The effectiveness of the committee
• The committee’s terms of reference and work programme
• FRC and governance update
• Reviewing and approving a new Group tax Policy
• Reviewing current and future funding structures
• Considering the implications of the GDPR measures which came into force in May
• The continuing threat of cyber security
This report was approved by the board and signed on its behalf by:
Andrew Fisher
Chair of the audit committee
28 February 2019
Arrow Global Annual Report and Accounts 2018
Governance 62
Risk committee report
Risk committee report
“The Group
continued to invest
in strengthening
and developing its
risk management
culture and
framework
during the year.”
Dear Shareholder
I am pleased to provide a report of the risk committee’s
activities in 2018.
The committee operates independently from the audit
committee in light of the Group’s diversified geographic
footprint and asset class mix, the increasing regulatory
scrutiny and uncertain political environments in which
the Group operates. The committee does, however,
maintain close links with the audit committee, with
the chair of each committee being a member of the
other, facilitating effective communication between
committees. The committee also works with the
remuneration committee, which I am also a member
of, to ensure that risk is appropriately considered
when setting the Group’s remuneration policy.
The Group continues to invest in strengthening and
developing its risk management culture and framework
in 2018, in line with the growing scale, diversity and
complexity of the business. Clodagh Gunnigle, who was
appointed as the Group’s chief risk officer in May 2017,
strengthened the risk team further in 2018 with senior
appointments in information security and portfolio risk
management. Additionally, existing internal expertise
has been added to the risk team operating model to
cover oversight of country risk and compliance and
external affairs – thereby strengthening alignment
across the regulatory agenda.
The committee’s agenda for the year has once again
been full. In addition to its primary role of reviewing
the Group’s risk management systems and assisting
the board in its oversight of risk across the Group, the
committee has overseen various activities undertaken
by management to further embed the systems of
risk management across the enlarged Group. The
committee visited the Group’s operations in the UK,
Italy, the Netherlands and Portugal during the year,
meeting with the local risk officers to gain deeper insight
into the risks and opportunities in each business, with
further visits scheduled to take place in 2019.
The risk profile of the Group has continued to change
as a consequence of both the significant expansion
and diversification of the Group geographically, into
different asset classes, and as a result of changes in
the external environment. The committee recognises
the importance of continuing to invest in the risk
management framework and resources of the Group to
ensure it is well placed to identify, manage and mitigate
the new risks which it faces. Inevitably it will take time for
the risk management processes to become fully mature,
but the committee is confident that through the
processes we have in place we have been able to identify
and manage risks appropriately. The board receives
accurate and timely reports on the risk environment,
which allows us to oversee risks and mitigants effectively.
During the year, the Group completed the acquisitions
of Parr Credit and Europa Investimenti in Italy and Norfin
in Portugal. The risk committee was actively involved in
overseeing the due diligence programmes in respect of
these acquisitions, and in ensuring that the respective
integration programmes include adequate focus on the
development of the local risk and control frameworks,
so that they will meet Group standards and integrate
effectively into the wider Group risk framework.
As part of the overall board evaluation review, the
committee reviewed the findings in relation to its own
performance. While confirming its overall effectiveness,
a number of areas for further improvement were
identified. These related principally to the committee
ensuring that it is continuing to receive appropriate
information aligned to the enhanced risk appetite
framework in light of the expansion of the Group.
These improvements are being addressed as part of
the wider risk framework development programme.
Iain Cornish
Chair of the risk committee
28 February 2019
Arrow Global Annual Report and Accounts 2018
63
The committee’s responsibilities and authority to carry out its
responsibilities are set out in its terms of reference, which are
published on the Group’s website at www.arrowglobalir.net.
The committee is responsible for advising the board on the Group’s
overall risk appetite and strategy, and for overseeing and advising the
board on the current risk exposures of the Group and the overall risk
management approach. As part of this, the committee reviews the
Group’s risk assessment processes and methodology and its capability
for identifying and managing risk. In addition, it considers material
proposed transactions and reviews reports on significant incidents
and position against risk appetite.
The committee met five times in 2018. The attendance of our
members is shown in the table opposite. For meetings held in 2018,
the committee comprised the following members:
Iain Cornish as Chair, Lan Tu, Maria Luís Albuquerque and Andrew
Fisher. All are independent non-executive directors.
Committee members
Iain Cornish (chair)
Lan Tu1
Maria Luís Albuquerque
Andrew Fisher
Eligible to attend
5
5
5
5
Attended
5
5
5
5
1. Lan Tu was only able to attend part of one meeting due to a prior commitment.
Biographies of the members of the committee are set out on
pages 50 to 51.
Work of the committee
The committee has a schedule of standing items that it reviews at each
meeting and a work programme including training and ‘deep dive’
sessions and also considers any specific matters highlighted to the
committee for consideration. The committee’s schedule is continuing
to evolve to reflect the Group’s ongoing expansion and diversification.
During the period under review, the following work was carried out:
Risk management • Updates on corporate risk assessment management activities, including risk registers and the robustness of assessment
and mitigation of the principal risks facing the Group
• Advising the board on the current risk exposures of the Group and future risk strategy
• Approval of appropriate policies
• Consideration of specific risk exposures and associated mitigations, including acquisitions, legal claims and litigation,
tax status and customer outcomes
• Review of half-yearly reports from money laundering reporting officer, including reports on protecting against fraud and
other forms of financial crime
• Review and challenge of due diligence on risk issues relating to material transactions and strategic proposals that are
subject to board approval
Review of
regulatory risk
• Review of the regulatory landscape and oversight of the management of regulatory issues
• Review of reports from management on the treatment of customers including complaints handling, vulnerable customers,
litigation and oversight of third-party servicers
• Review of reports on compliance issues including oversight of compliance monitoring activity and findings
• Training on specific regulatory topics to support effectiveness of the committee including forbearance, the General Data
Protection Regulation and the Senior Managers & Certification Regime
Italy integration
• Oversight of the Zenith integration activity and subsequent group development and integration following acquisitions of
Parr Credit and Europa Investimenti
• Consideration of the risks that exist in Italy and the Group’s response to them
Mars Capital
integration
• Oversight of the Mars Capital integration activity
New acquisitions • The acquisitions of Parr Credit and Europa Investimenti in Italy
• The acquisition of Norfin Investimentos S.A in Portugal
Political Risks
• Consideration of the probable risks and consequences of the UK leaving the EU without an agreed settlement and a
new coalition in Italy
Other
• Review of the effectiveness of the committee
• Review of the committee’s terms of reference and work programme
• Oversight of the development of the Group-wide risk management framework
Overview of committee’s activities for 2019
In 2019, the committee will work on ensuring that the acquisitions of Europa Investimenti and Norfin Investimentos S.A. are fully incorporated
into the risk management framework and will continue to develop the country risk functions. The committee will work on further developing
the financial risk management framework to encompass new asset classes, leverage and the funding environment, managing these through
political and economic uncertainty. Finally, the committee will continue to ensure good customer outcomes in an environment of intensifying
regulatory demand.
This report was approved by the board and signed on its behalf by:
Iain Cornish
Chair of the risk committee
28 February 2019
Arrow Global Annual Report and Accounts 2018
Governance 64
Nomination committee report
Nomination committee report
“A key focus
during the year
was to consider
the Combined
Code on Corporate
Governance
recommendations.”
A key area of focus for the committee includes reviewing
the composition of the board and the capabilities of all
directors to ensure that board membership is sufficiently
diverse and reflects a broad range of skills, knowledge
and experience to enable it to meet its responsibilities.
As mentioned earlier a Working Group has been
established to progress this matter throughout
the Group.
Further information regarding the committee’s activities
during the year and its roles and responsibilities are set
out in the remainder of this report.
Jonathan Bloomer
Chair of the nomination committee
28 February 2019
Dear Shareholder
I am pleased to provide a report of the nomination
committee’s activities in 2018.
The board is best placed to ensure the long-term
success of the Group. The committee works with the
board and plays an important role in ensuring that
the Group operates effectively in the context of
our strategic objectives.
The committee’s primary focus this year has been
reviewing the recommendations contained within
the 2018 Combined Code on Corporate Governance
(the “Code”). In particular the committee considered
in detail the Codes requirements regarding diversity –
not only at board level but throughout the Group’s
European workforce. A Working Group chaired by the
Group HR Director, Tracy French, with representatives
from across the Group has been established with a
detailed remit of ensuring compliance with the Codes
recommendations. Our aspirations are to go further
than the Code’s requirements since we recognise the
vital contribution of diversity to a flourishing business.
The committee continues to monitor board and
executive management succession throughout the
Group to ensure the correct and appropriate balance
of skills and experience, with due regard given to the
benefits of diversity, and that opportunities for talent
progression are identified and developed.
Arrow Global Annual Report and Accounts 2018
Committee membership and meetings
I chair the nomination committee and I was regarded as
independent on appointment. The committee also comprises two
other independent non-executive directors, Iain Cornish and Lan Tu.
I will not chair the committee when it is dealing with the matter of
succession to the chairmanship. The committee is compliant with
the provisions of the Code as the majority of the committee
members are independent non-executive directors.
Biographies of the members of the committee are set out on
pages 50 to 51.
The committee held two scheduled meetings during the year. Details
of attendance by all members who held office during the year are set
out below:
Committee members
Jonathan Bloomer (chair)
Iain Cornish
Lan Tu
Eligible to attend
2
2
2
Attended
2
2
2
Role
The committee’s responsibilities are set out in its terms of
reference. They include responsibility for considering and making
recommendations to the board in respect of appointments to
the board, the board committees and the chairmanship. It is also
responsible for keeping the structure, size and composition of the
board under regular review and for making recommendations to the
board with regard to any changes necessary. The committee also
manages the process for evaluating the performance of the board.
The work of the committee in 2018 has included:
• reviewing the recommendations of the 2018 Combined Code
on Corporate Governance;
• reviewing the terms of reference of the committee;
• continued monitoring of the structure, size, composition and
diversity of both the board and its committees;
• monitoring and overseeing the 2018 board and committee
performance evaluation and recommending that an externally
facilitated revaluation is conducted; and
• recommending to the board the re-election/election of the entire
board at the forthcoming annual general meeting.
Succession planning
The committee has considered the recommendations published by
the FRC (FRC Feedback Statement: UK Board Succession Planning
Discussion Paper (May 2016)) and recognises the importance of
strategic, thoughtful and practical succession planning as a key driver
in maximising board effectiveness and as an important contributory
factor to the Group’s long-term success. The committee has taken an
active interest in talent management and acknowledges that internal
candidates for senior management and board positions should be
given a broader experience of the business, with greater exposure
to the board and boardroom experience. The committee supported
the board in its initial review of talent progression opportunities across
the Group’s senior leadership team and will continue to work with
the relevant internal parties, and external executive search providers
where appropriate, to enhance the succession planning programme
throughout 2019.
65
Diversity
The board recognises the benefits that diversity can bring and
seeks to recruit directors from different backgrounds with a range
of experience, perspectives, personalities, skills and knowledge, in line
with the Group’s equality and diversity policy. The board supports, in
principle, the recommendations outlined in the Hampton-Alexander
Review published in November 2016, updated in 2017, particularly
in improving the representation of women both at board level and
below in senior leadership positions. The Group is a member of the
international women’s network, ‘Women on Boards’, which all senior
female leaders have been invited to join.
A key policy statement of the Group’s equality and diversity policy is
to promote equality of opportunity for all. The policy is applicable to
all colleagues within the Group and is made available to all colleagues.
Each colleague is responsible for upholding the policy and the roles
and responsibilities of the board, the executive committee, the human
resources department, management and colleagues are clearly defined.
The committee and the board have a fundamental obligation to
ensure that appointments are of the best candidates, selected on
merit against objective criteria. Subject to this, the availability of suitable
candidates and compliance with the requirements of the Equality Act
2010, the board is committed to strengthening female representation
at board and senior management level. The board has set a 30% female
representation in leadership target to be achieved by the end of 2020.
Although the Group is currently outside the FTSE 350, the committee
keeps under review the Hampton-Alexander Review recommendations
for female board representation in relation to FTSE 350-listed companies
as well as recommendations in relation to improvements on under-
representation on the executive committee and on the layer
immediately below for such companies.
The board currently has two female non-executive directors, Lan Tu
and Maria Luís Albuquerque, who together represent 29% (2017: 29%)
female board membership, just below the 33% target recommended
by the Hampton-Alexander Review for FTSE 350-listed companies.
The executive committee has two female members, who represent
29% (2017: 29%) of the committee’s membership.
Board evaluation
Although the Group currently sits outside the FTSE 350 and is therefore
not required to undertake an externally facilitated board evaluation, on
the recommendation of the committee, an externally facilitated review
took place in 2018. This focused on the effectiveness of the board and
its committees was carried out by SCT Consultants Limited. The review
concentrated on areas such as the operation of the board, strategic
development, culture and engagement. Development areas to be
actioned in 2019 include:
•
identifying and developing ‘top talent’ in the business as a whole;
• ensuring that each board and its committee has a structured
business plan to ensure that we achieve our Group strategy; and
• consider ways of encouraging stakeholder feedback,
particularly employees.
The board, based on the outcome of the evaluation exercise,
concluded that the committee was considered to be effective
in fulfilling its role throughout 2018.
This report was approved by the board and signed on its behalf by:
Jonathan Bloomer
Chair of the nomination committee
28 February 2019
Arrow Global Annual Report and Accounts 2018
Governance 66
Directors’ remuneration report
Directors’ remuneration report
“We remain
committed to
a responsible
approach to
executive pay.”
Dear shareholder
The report complies with the Large and Medium-
sized Companies and Groups (Accounts and Reports)
Regulations 2008 (as amended), the 2016 version of the
UK Corporate Governance Code (‘the Code’) and the
Financial Conduct Authority’s Listing Rules.
On behalf of the board, I am pleased to present our
directors’ remuneration report for the year ended
31 December 2018. Our directors’ remuneration
policy was approved by shareholders at the 2018 annual
general meeting and we were delighted with the strong
level of shareholder support reflected in over 95% of the
votes being cast in favour of it, along with over 95% of
the votes being cast in favour of the annual report on
remuneration. In 2019, we will apply the policy approved
at the 2018 annual general meeting, and further
information is set out across and on pages 77 to 81.
At the end of this statement, I have summarised how
key aspects of our directors’ remuneration policy
relate to our overall corporate strategy.
Annual statement
Our current directors’ remuneration policy was
approved by shareholders at the 2018 annual general
meeting, no changes are proposed to the policy and,
accordingly, the intention is to next present this to
shareholders for approval at the 2021 annual general
meeting. Therefore, this report is split into four sections:
our remuneration at a glance for our executive directors
and wider workforce, the annual report on remuneration,
the 2018 LTIP awards and then an extract from the
directors’ remuneration policy approved at the 2018
annual general meeting. The directors’ remuneration
report (excluding the directors’ remuneration policy)
will be subject to an advisory vote at the 2019 annual
general meeting.
Performance and variable pay outcomes for the
year ended 31 December 2018
As described in the strategic report, the Group
continues to perform strongly, delivering profitable
earnings growth and strong progress against our
strategy of diversifying by geography, asset class
and income stream, while driving strong returns
on investment, as summarised below:
Underlying profit after tax
Increased by 13.3% to £64.1 million
Underlying basic EPS
Increased to 36.6p, representing growth of 13.0%
Underlying ROE
34.8% underlying ROE delivered
Strategic developments
The executive directors and their teams have
successfully integrated the Zenith acquisition, and
the acquisition of the Mars Capital business in UK and
Ireland. In addition, acquisitions continued during 2018
with Europa Investimenti and Parr Credit in Italy, and
Norfin Investimentos S.A, all requiring the time and
commitment of the executive teams to integrate these
companies into the Group.
Taking into account the performance achieved during
the year, the executive directors have earned annual
bonuses as follows:
• Lee Rochford: £505,601; and
• Paul Cooper: £260,000.
Further rationale for these payments can be found on
pages 69 to 71.
Arrow Global Annual Report and Accounts 2018
67
33% of Paul Cooper’s bonus will be delivered in the form of deferred
shares. Deferral will apply to 40% of the bonus earned by Lee Rochford
recognising his greater bonus opportunity, as described in the 2017
directors’ remuneration report. Before approving the level of annual
bonus for 2018, the remuneration committee sought the views of
the Group chief risk officer and the risk committee chair on the
effectiveness of the executive’s management of conduct and risk
during the year.
LTIP awards granted in 2016 are scheduled to vest in April 2019 based on
performance to 31 December 2018 assessed against earnings per share
(EPS) as regards 50% of each award, underlying return on equity (ROE)
as regards 25% of each award and total shareholder return (TSR) as
regards 25% of each award. Neither Lee Rochford nor Paul Cooper
participates in these LTIP awards.
As set out in the 2017 directors’ remuneration report, the Company
agreed to compensate Paul Cooper for awards he forfeited as a result
of his resignation from his former employer. These buy-out awards are
subject to continued employment to the vesting date and malus/
clawback provisions consistent with the Company’s ordinary variable
remuneration arrangements and to a specific clawback provision if
Paul Cooper gives notice before 1 January 2020. The total value of these
awards is £426,254 as at the date of grant are shown in the single figure
table of remuneration on page 69. However, these awards vest over the
period April 2018 to April 2021 reflecting the vesting/payment dates of
the awards forfeited by Paul Cooper.
Executive director changes
Group chief financial officer
Rob Memmott stepped down as Group chief financial officer and as
a director of the Company on 1 January 2018 and left the business on
28 February 2018. Paul Cooper joined the Company as Group chief
financial officer on 1 January 2018. The remuneration arrangements
relating to Paul joining the business and Rob leaving the business
were set out in the 2017 directors’ remuneration report; where
relevant, further information is included in this report.
Looking forward to 2019
In line with our remuneration policy, Lee Rochford’s salary will be
increased by 3% in line with the average increase across the wider
workforce, to £450,883 with effect from 1 March 2019. Paul Cooper’s
salary was set at £365,000 on his appointment in January 2018 and
will not be increased in 2019.
No changes to the policy or the overall structure of remuneration are
proposed for 2019.
To increase alignment with the Group’s updated five-year strategy to
further develop the quality of our earnings and deliver consistently
strong returns for our shareholders, for LTIP awards to be granted
in 2019, underlying Free Cash Flow (FCF) is being introduced as a
performance measure. The board agreed to remove EPS as a core
financial metric underpinning our five-year strategic plan in October
2018. Therefore, the committee is of the view that while underlying
ROE and relative TSR remain relevant and appropriate LTIP performance
metrics, EPS is no longer aligned with our forward looking strategy.
25% of the award will be based on underlying FCF, 25% will continue to
be based on relative TSR and the underlying ROE element will increase
to 50%. Underlying FCF captures the profitability of the business while
also reflecting the cost to collect and cost effectiveness of the Group’s
activities. Strong underlying FCF performance enables the Company
to invest, pay dividends and enables the business to manage the
equity base and leverage. It is a measure that will be transparent
for our colleagues, directors and shareholders.
In line with the directors’ remuneration policy approved at the 2018
annual general meeting, subject to the continued strong performance
of the Group, the committee’s stated intention was to increase the
annual LTIP opportunity from 150% of salary to 200% of salary for Lee
Rochford and to 175% of salary for Paul Cooper in 2019. The Group
continues to perform strongly, delivering profitable earnings growth
and strong progress against our strategy of diversifying by geography,
asset class and income stream, while driving strong returns on
investment. The committee has carefully considered Arrow’s
consistently strong performance and investor confidence in the
delivery of our strategy together with the individual performance and
contribution of the executive directors. Accordingly, the committee
strongly believes that it is appropriate to increase the LTIP for Lee
Rochford to 200% of salary in line with the proposal set out in the
remuneration report last year. We have decided to defer increasing
the LTIP award for Paul Cooper until 2020. Therefore, his LTIP award will
be 150% of salary for 2019 with the intention that this will be increased
to 175% of salary for the 2020 LTIP, subject to the continued strong
performance of the Group. The whole of the awards will be subject to a
two-year holding period following the end of the performance period.
As disclosed in the remuneration report last year, we have reviewed
the level of stretch in the performance targets to ensure that they are
commensurate with the increased opportunity and have increased the
threshold underlying ROE target from 20% to 24%. Furthermore, the
amount that is paid for threshold performance (as a percentage of
salary) will not be increased. This will ensure executive directors do not
receive more for delivering threshold performance, notwithstanding
the proposed increase in the LTIP maximum in 2019.
No changes to the annual bonus plan are proposed for 2019.
Lee Rochford’s bonus opportunity for 2019 will be 140% of salary
and Paul Cooper’s bonus opportunity will be 125% of salary.
The new Corporate Governance Code published in 2018 (the ‘Code’)
introduced a number of new provisions relating to remuneration.
While we currently comply with the updated Code in a number of areas,
the committee will be considering its approach to compliance in the
remaining areas during 2019, including developing a post-employment
shareholding policy. We will report upon these provisions in the Group’s
2019 Annual Report and Accounts as required by the Code.
Committee evaluation
As part of the overall board evaluation review, the committee reviewed
the findings in relation to its overall effectiveness. A small number of
areas for further improvement were identified and will be acted upon.
None were considered material and overall committee members were
satisfied with the performance of the committee during the year.
We remain committed to a responsible approach to executive pay.
Overall, given the Group’s performance over the one and three-year
periods ended 31 December 2018, we believe that the remuneration
of the executive directors in respect of 2018 continues to reflect our
success in the delivery of our strategy and the drive for profitable and
sustainable long-term growth for our shareholders. The following pages
describe in further detail how we have implemented our remuneration
policy in respect of 2018, together with our plans for 2019.
Lan Tu
Chair of the remuneration committee
28 February 2019
Arrow Global Annual Report and Accounts 2018
Governance 68
Directors’ remuneration report continued
Remuneration at a glance
We take a disciplined approach to the implementation of our remuneration policy to
ensure that our remuneration framework rewards the right behaviours and supports the
strategic goals of the Group. We have set out below an overview of how our approach to
remuneration supports the strategic objectives of the business in relation to our executive
directors and our wider workforce.
Annual bonus
performance metrics
Annual bonus deferral
LTIP
We balance profit growth with other key financial and non-financial targets and specific personal objectives linked
to our strategic goals. The strategic goals are; protecting and enhancing our market-leading position, diversifying
the business, delivering strong risk-adjusted investment returns and developing our customer proposition.
We ensure that the strategic goals are specific, measurable and fairly assessed.
For our executive directors a proportion of any annual bonus is deferred into shares to ensure that executive
directors consider the longer-term impact of decisions and the sustainability of the business.
The LTIP is designed to encourage behaviours which facilitate the delivery of sustainable growth of the business,
while delivering value to stakeholders and promoting the long-term success of the Group. For 2019:
• 50% is based on underlying ROE, which is a key driver of shareholder value and reflects the importance of
purchasing debt of a suitable quality with an appropriate return;
• 25% is based on underlying FCF, this is linked directly to the cash generated from our operations, demonstrating
the shareholder value created from the asset portfolio; and
• 25% is based on TSR, maintaining a link to share price performance and assessing our performance to that of peers,
namely TSR currently relative to the constituents of the FTSE 350 Index (excluding investment trusts).
In addition to the performance conditions outlined above, awards will vest only to the extent that the committee
considers the vesting in accordance with those performance conditions reflects the underlying financial
performance of the company over the performance period.
In line with best practice, LTIP awards granted to our executive directors in 2019 will be subject to a two-year holding
period following the end of the performance period, further aligning the interests of the executive directors with
those of shareholders.
Variable remuneration targets are set at levels which reward high performance, but which do not encourage
inappropriate business risk.
Annual bonus payments determined by reference to the performance measures are subject to a review of the
executive directors’ management of conduct and risk during the year. The vesting of LTIP awards is subject to
a further underpin based on an assessment of risk management throughout the performance period.
All executive director annual bonus and LTIP awards are subject to both malus and clawback provisions.
Shareholding guidelines apply to all executive directors to align their long-term interests with those of shareholders.
These guidelines require each executive director to acquire shares with a value equal to 200% of salary.
During the course of 2019, we will formulate our policy on post-cessation shareholding requirements for
the executive directors in line with the updated Code, and we will report on this in the 2019 directors’
remuneration report.
Risk
Shareholding
requirements
UK wider workforce remuneration
The committee is well placed to take into account wider workforce remuneration and related policies when reviewing the remuneration policy for
executive directors.
Our remuneration structure is consistently applied throughout our workforce. The approach to annual bonus performance is equally split to
account for financial performance and individual performance against our strategic objectives. Remuneration outcomes were in line with the
core principles of our remuneration policy and an overview of the outcomes was presented to the committee.
Arrow Global Annual Report and Accounts 2018
69
Annual report on remuneration
Directors’ remuneration (audited information)
Details of the executive directors’ remuneration are as follows:
Director
Lee Rochford
Paul Cooper 5
Former director
Rob Memmott 6
Total
Salary
and fees
£000
Taxable
benefits1
£000
Performance-
related bonus2
£000
Long-term
incentives3
£000
Pension-related
benefits4
£000
Total
compensation
£000
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
436
365
53
854
424
N/A
318
742
4
3
–
7
2
N/A
3
5
506
260
–
766
452
N/A
289
741
–
426
–7
426
N/A
N/A
465
465
65
55
8
128
64
N/A
1,011
1,109
942
N/A
46
110
61
2,181
1,121
2,063
1. Private medical and dental cover.
2. Performance-related bonus is the value of the bonus earned in respect of the year, including the value of the deferred shares. Further information in relation to the performance
conditions applied for 2018 is provided on pages 69 to 71.
3. Long-term incentives reflect the value of the awards vesting by reference to performance where the performance period ended in the relevant year. In the 2017 directors’ remuneration
report, the value of the LTIPs scheduled to vest in June 2018, with performance criteria ended in 2017, was calculated, in accordance with the applicable regulations, by reference to the
average share price over the three-month period ending 31 December 2017 (£4.0687). In the table above, these values have been restated to reflect the share price on 14 June 2018, the
last dealing day before the date of vesting on 15 June 2018 (£2.67). Neither Lee Rochford nor Paul Cooper participated in the LTIP awards granted in 2016 which are scheduled to vest in
April 2019 based on performance to 31 December 2018. The 2018 LTIP awards for Paul Cooper relate to the value of the buy-out awards granted on 18 June 2018 (based on the share price
on the date of grant of £2.605). These buy-out awards are subject to continued employment to the vesting date and malus/clawback provisions consistent with the Company’s ordinary
variable remuneration arrangements and to a specific clawback provision if Paul Cooper gives notice before 1 January 2020. They are therefore disclosed above based on the value of
the awards as at the date of grant. However, these awards vest over the period April 2018 to April 2021 reflecting the vesting/payment dates of the awards forfeited by Paul Cooper.
Further details are set out on page 72.
4. Each executive received a monthly cash allowance of 15% of salary in lieu of participation in a pension arrangement. The cash allowance is not included in the annual bonus or LTIP allocation.
5. Paul Cooper was appointed as Group chief financial officer on 1 January 2018.
6. Rob Memmott stepped down from the board on 1 January 2018. Payments made to him in 2018 are described on page 74.
7. Rob Memmott’s LTIP award granted in 2016 and 2017 lapsed in 2018 when he left the business.
Additional disclosures
2018 annual bonuses (audited information)
For 2018, Lee Rochford was eligible for an annual performance-related bonus of up to 140% of salary and Paul Cooper was eligible for a bonus of up
to 125% of salary, subject to meeting stretching performance targets. These targets are:
• 50% of the bonus was based on Group underlying profit after tax (‘financial element’); and
• 50% was based on a balanced range of financial, strategic, personal and other key Group objectives (‘strategic business/personal objectives’).
The bonus pay-outs for 2018 are detailed in the table below. Further details on how the elements of the bonuses have been earned are
shown below:
Directors
The directors who served during the financial year were as follows:
Financial
element
out-turn
Monetary
out-turn based
on 75% of
opportunity
vesting for
financial
element
£229,819
£119,766
Strategic business/personal
objectives out-turn
Total bonus out-turn
Overall
performance
rating
Above and beyond
Exceeds expectations
% of
opportunity
vesting and
corresponding
monetary
out-turn
90%
61.5%
Monetary
out-turn for
strategic
business/personal
objectives
element
£275,783
£140,234
% of
maximum
opportunity
82.5%
57%
% of salary
115.5%
71.23%
£
505,601
260,000
Director
Lee Rochford
Paul Cooper1
1. For Paul Cooper, the committee exercised discretion to reduce the monetary out-turn based on 75% of the opportunity vesting for the financial element from £171,094 to £119,766.
For Lee Rochford, 40% of the bonus earned will be deferred into shares for a period of three years. For Paul Cooper, 33% of the bonus earned will be
deferred into shares for a period of three years.
Financial element – out-turn
The financial element of the 2018 annual bonus was based on achieving underlying profit after tax, in accordance with the schedule on the next page.
20% of the financial element of the bonus vests at threshold performance. 50% of this element vests for on-target performance. Taking into
account the level of stretch built into achieving an underlying profit after tax of £64.1 million (which represents year-on-year growth of 13.3% on
prior year underlying profit after tax of £56.6 million, and being an over 80% increase on our 2015 underlying profit after tax of £35.4 million), 75%
of the financial element vests for achieving this stretching target.
Arrow Global Annual Report and Accounts 2018
Governance
70
Directors’ remuneration report continued
For the maximum to vest under the financial element an underlying profit after tax of £67 million would need to have been achieved.
Performance level (£ millions)
Vesting (% of financial element)
1. Straight-line vesting between the points.
2. This is underlying profit after tax
Threshold 1
59.2
20
Target 1
61.6
50
Stretch Target 1
64
75
Maximum
vesting target 1
67
100
Actual 2
64.1
75
Strategic business/personal objectives element – out-turn
This element of the bonus was measured on achievement of clear personal objectives and targets which supported the strategic objectives of
the business.
The following factors were considered in the round by the committee in determining the executive directors’ level of performance in 2018 and
out-turn of the strategic business/personal objectives element:
• the relative importance and impact of each of the objectives;
• performance against the objectives, taking into account external market influences over the course of 2018; and
• the views of the Group chief risk officer and the risk committee chair on the effectiveness of the executive’s management of conduct and risk
during the year.
The objectives, targets and relevant achievements are summarised below.
Objective
Financial
Achievements
• Maintain credit rating of at least BB- to maintain weighted average
• Ba3 rating maintained from Moody’s
cost of debt
• Weighted average cost of debt remains below 4%
• Progressive dividend policy to budget
• Total 12.7p dividend for 2018 proposed, which is at the top end of our
guided pay-out ratio and a 12.4% uplift on 2017
• High-teens underlying basic EPS growth
• Underlying basic EPS continues to perform well and grew by 13.0%
in 2018
• Deliver underlying ROE in excess of 25%
• Underlying ROE similarly performed well and delivered 34.8% in 2018
• Build asset management revenue in line with strategic objective
• Third-party asset management income was ahead of budget and
28.9% up on 2017
• Deliver against our collection targets
• Collections were ahead of target
• Management of cost base according to budget
• The collection activity costs were below budget, however the other
operating expenses ended the year above the reforecast
Market
• Develop capability in secured and unsecured assets in all our core
markets. Build further presence in western Europe and continue
collaboration with credit funds in line with strategy
•
Invest in line with Group purchasing target, according to the agreed
purchasing profile and returns hurdle
• Develop asset management strategy
•
Italy continues to represent a significant market opportunity
for the Group. Following the Zenith acquisition in April 2017 our
operations were further strengthened by the acquisitions of Europa
Investimenti and Parr Credit. The Portuguese operation was further
strengthened with the acquisition of Norfin in December 2018. Entry
into the Irish secured market was a key step. Collaboration and
expansion of relationships with credit funds has continued in 2018
• Group purchasing target achieved, which was broadly in line with
returns hurdles, reflecting the diversified asset base and high-quality
books of debt acquired
• The focus on driving gross AMS income to 50% of gross total
income and increasing EBITDA margins towards 25% through
a shift in mix has been well received
Arrow Global Annual Report and Accounts 2018
71
Strategic business/personal objectives element – out-turn continued
Objective
Regulator/society
Achievements
• Develop and maintain constructive and transparent regulatory
• Positive progress has been made within the year in all
relationships across all key markets
• Further evolve risk culture
• Develop customer behaviour thought leadership across all countries
(e.g. Debt Britain)
• Create better financial futures through work in the community
Customer
countries, under-pinned by our commitment to transparent
and proactive communication
• Strong progress in many areas. We have established
comprehensive governance, improving transparency
and consistency of risk reporting
• A refreshed Debt Britain report was issued in Q3 2018 together with
media engagement led by the Group chief executive officer, which
has been positively received
•
In 2018, the Group began working with Junior Achievement Europe
to help provide education programmes for entrepreneurship, work
readiness and financial literacy
• Execute on plans for operational excellence
• The “BigThree” initiatives of Lean Automation and Digital
Transformation, Cross Group Procurement and Technology Synergy
are underway
• Continue to develop and build market leading digital strategy
• Good progress is being made across the Group in extending
our digital footprint. Ongoing IT change programmes across the
Group are also expected to deliver further improvements in 2019
• Develop and execute plans to put the customer at the heart of
• Country initiatives are taking shape such as the UK customer
the business
People
experience forum
• Create One Arrow culture and embed ‘building better financial
• Ongoing focus on culture reinforced through a programme of
futures’ and Group Values
events including a Group-wide leadership programme and CSR plan.
We have affiliated with Junior Achievers Europe to help us focus and
coordinate activities
• Embed the Group country structure, with effective M&A integration
• Group-country structure now in place
• Talent strategy to attract, retain and develop with attention on key/
•
early talent and gender
In 2018, we continued to implement a top talent development
programme, ‘Succeeding Together’, with participants drawn from
across the Group. We continue to work towards our ‘Women in
Management’ agenda, with a target of 30% female representation
in leadership roles by the end of 2020, which has seen progress
across the management levels
• Employee engagement levels of at least national benchmark across
the Group
• Group Values and recognition schemes have been communicated
to all parts of the Group. Work continues on the areas of focus
determined by the results of the Group-wide engagement survey
undertaken in December 2017
Arrow Global Annual Report and Accounts 2018
Governance
72
Directors’ remuneration report continued
LTIPs vesting by reference to performance in 2018 (audited information)
Neither Lee Rochford nor Paul Cooper has an LTIP award vesting by reference to performance in 2018. Rob Memmott’s LTIP award granted in 2016
and which was subject to a performance condition assessed to 31 December 2018 lapsed on his departure from the business as referred to in the
2017 directors’ remuneration report.
Non-executive directors’ remuneration (audited information)
Details of the non-executive directors’ remuneration are as follows:
Director
Jonathan Bloomer
Iain Cornish
Lan Tu
Maria Luís Albuquerque
Andrew Fisher
Total
Salary
and fees
£000
Taxable
benefits
£000
Performance-
related bonus
£000
Vesting
remuneration
£000
Pension-related
benefits
£000
Total
compensation
£000
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
170
75
65
55
65
430
170
75
65
55
65
430
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
170
75
65
55
65
430
170
75
65
55
65
430
There were no fee increases for non-executive directors in 2018.
2018 LTIP awards (audited information)
The table below outlines LTIP awards made to executive directors during 2018:
Date of grant
27 June 2018
27 June 2018
Participant
Lee Rochford 1
Paul Cooper 2
Basis of award
150% of salary
150% of salary
Number of shares
263,598
219,791
Face value
of award
£ 1
656,625
547,500
Performance period
1 January 2018 to 31 December 2020
1 January 2018 to 31 December 2020
1. Based on the average closing middle market quotation price during the five business days ending on the business day before the award date being £2.491.
2. Paul Cooper was also granted a tax advantaged option over 12,043 shares at a per share exercise price of £2.491. The option is subject to the same performance conditions as apply to the
LTIP award. If the tax advantaged option is exercised at a gain, the number of shares that may be acquired under the LTIP is reduced at exercise by the same value to ensure that the total
pre-tax value of the original LTIP award is not increased by the grant of the tax advantaged option.
The performance conditions attaching to the 2018 LTIP awards are the same as for the awards granted in 2017. The 2018 LTIP awards will not receive
a dividend equivalent.
Measure and alignment with strategy and shareholder value creation
Growth in underlying basic EPS
Underlying ROE (three-year average)
TSR relative to FTSE 350 (excluding investment trusts)
Weighting
(% of award)
50%
25%
25%
Threshold
Maximum
Threshold
Maximum
Threshold
Maximum
Performance
target
10% per annum
20% per annum
20%
30%
Median
Upper quartile
Vesting level (%
of maximum)
25%
100%
25%
100%
25%
100%
In each case, performance will be measured over three years with straight-line vesting between each point.
In addition to the performance conditions outlined above, awards will vest only to the extent that the committee considers the vesting in
accordance with those performance conditions reflects the underlying financial performance of the company over the performance period.
In addition to the LTIP awards, the Company also granted Paul Cooper awards to compensate him for awards he forfeited as a result of his
resignation from his former employer. The details of the buy-out awards are set out in the 2017 directors’ remuneration report, and they were
formally granted on 18 June 2018. These buy-out awards are subject to continued employment to the vesting date and malus/clawback provisions
consistent with the Company’s ordinary variable remuneration arrangements and to a specific clawback provision if Paul Cooper gives notice
before 1 January 2020. The total value of these awards £426,254 as at the date of grant are shown in the single figure table of remuneration on page
69. However, these awards vest over the period April 2018 to April 2021 reflecting the vesting/payment dates of the awards forfeited by Paul Cooper.
50% of the first award over 36,178 shares representing the value of the 2017 bonus that Paul Cooper forfeited vested in April 2018 and was exercised
on 18 June 2018.
Details of the outstanding awards are included in the ‘executive directors – share plan interests’ table on page 73.
Arrow Global Annual Report and Accounts 2018
73
Directors’ shareholdings (audited information)
The committee encourages share ownership by the executive directors in order to align their interests with those of shareholders. It does this by
ensuring that a significant proportion of remuneration is delivered in shares (as well as being subject to performance conditions).
Following shareholder approval of the new directors’ remuneration policy at the 2018 annual general meeting, the shareholding requirement has
increased to 200% of salary for all executive directors. Until such time as the required holding has been achieved, an executive director must retain
50% of all shares acquired under the LTIP or deferred bonus arrangements (in each case net of tax).
The actual shareholdings of our executive directors in office at the end of 2018 are: 111% of salary for Lee Rochford and 56% of salary for Paul Cooper.
a. Executive directors – share ownership
Director
Lee Rochford
Paul Cooper
1. Based on the closing share price on 31 December 2018 of £1.736.
2. Based on the salary applying as at 31 December 2018.
b. Executive directors – share plan interests
Shares owned
279,492
118,654
Shares
owned – value
£000 1
485,198
205,983
% of salary 2
111
56
Director
Lee
Rochford
Paul
Cooper
Plan
LTIP
LTIP
DSBP
SIP2
LTIP
Award
date
31 March
2017 1
27 June
2018
26 March
2018
–
27 June
20184
Buy-out
award5
Buy-out
award5
18 June
2018
18 June
2018
Buy-out
award5
18 June
2018
Buy-out
award5
18 June
2018
SIP10
–
Number
of shares at
1 January
2018
184,248
Granted
during
the year
–
Lapsed
during
the year
–
Exercised
during
the year
–
Number
of shares at
31 December
2018
184,248
Status
Unvested, subject
to performance
condition
Unvested, subject
to performance
condition
Unvested 3
Unvested
Unvested, subject
to performance
condition
Vested6
–
–
–
–
263,598
43,205
1,974
219,791
18,089
–
–
–
–
–
31,862 Unvested, subject to
continued
employment7
70,098 Unvested, subject to
continued
employment8
25,491 Unvested, subject to
continued
employment9
Unvested
1,068
Performance
period
1 January 2017–
31 December 2019
1 January 2018–
31 December 2020
N/A
N/A
1 January 2018–
31 December 2020
N/A
N/A
N/A
N/A
N/A
–
263,598
–
43,205
580
–
1,394
219,791
–
–
–
–
–
18,089
31,862
70,098
25,491
1,068
–
–
–
–
–
–
–
–
–
1. On the same day, Lee Rochford was granted a tax advantaged option subject to the same performance conditions over 8,670 shares at an exercise price of £3.46 per share on the basis
that if the tax advantaged option is exercised at a gain, the number of shares that may be acquired under the LTIP is reduced at exercise by the same value to ensure that the total pre-tax
value of the original LTIP award is not increased by the grant of the tax advantaged option.
2. Pursuant to a regular monthly instruction, Equiniti Share Plans Trustees Limited acquires Partnership shares using a fixed contribution from Lee Rochford’s gross salary. The Company gives
Lee Rochford one matching share for each Partnership share bought on his behalf. The matching shares are subject to a three-year forfeiture period. 152 shares have been allocated to
Lee Rochford under the SIP, from 1 January 2019 to 27 February 2019.
3. This award is scheduled to vest on 26 March 2021.
4. On the same day, Paul Cooper was granted a tax advantaged option subject to the same performance conditions over 12,043 shares at an exercise price of £2.491 per share on the basis
that if the tax advantaged option is exercised at a gain, the number of shares that may be acquired under the LTIP is reduced at exercise by the same value to ensure that the total pre-tax
value of the original LTIP award is not increased by the grant of the tax advantaged option.
5. These are the buy-out awards which were granted to Paul Cooper as disclosed on page 71 of the 2017 annual report and accounts and referred to on page 72 of this report.
6. This award vested on 18 June 2018.
7. This award is scheduled to vest on 30 April 2019.
8. This award is scheduled to vest on 30 April 2020.
9. This award is scheduled to vest on 30 April 2021.
10. Pursuant to a regular monthly instruction, Equiniti Share Plans Trustees Limited acquires Partnership shares using a fixed contribution from Paul Cooper’s gross salary. The Company gives
Paul Cooper one matching share for each Partnership share bought on his behalf. The matching shares are subject to a three-year forfeiture period. 152 shares have been allocated to
Paul Cooper under the SIP, from 1 January 2019 and 27 February 2019.
Arrow Global Annual Report and Accounts 2018
Governance
74
Directors’ remuneration report continued
Directors’ shareholdings (audited information) continued
c. Non-executive directors – share ownership
Non-executive directors
Jonathan Bloomer
Lan Tu
Andrew Fisher
Shares owned
50,896
23,309
30,000
There were no changes in the interests of executive or non-executive directors between 31 December 2018 and 1 March 2019, other than the SIP
allocation to Lee Rochford and Paul Cooper under their monthly allocation for January and February 2019 as referred to on page 73.
Payments to past directors and payments for loss of office (audited information)
Rob Memmott stepped down from the board on 1 January 2018 and left the business on 28 February 2018. His remuneration between 1 January
2018 and 28 February 2018 was £60,967 (consisting of salary, benefits and cash allowance in lieu of pension contributions). Rob Memmott’s bonus
for 2017 was disclosed in the 2017 Directors’ remuneration report, along with the vesting of his 2015 LTIP award (which vested on 15 June 2018).
TSR performance
The graph below shows TSR performance of the Company from IPO to 31 December 2018 compared with the FTSE SmallCap index. Throughout
the year ended 31 December 2018, the Company has been a constituent member of the FTSE SmallCap index, and, therefore, the committee has
selected this index for comparison purposes in this report.
260
240
220
200
180
160
140
120
100
80
Arrow Global Group Plc
FTSE SmallCap
(excluding investment trusts)
8 Oct 2013
31 Dec 2014
31 Dec 2015
31 Dec 2016
31 Dec 2017
31 Dec 2018
Chief executive officer disclosures
a. Group chief executive officer remuneration
The table below sets out the total pay of the Group chief executive officer since the IPO on 11 October 2013. The Company was only established
shortly before the IPO and, therefore, information prior to this does not exist.
Director
2018 (Lee Rochford)
2017 (Lee Rochford)
2016 (Tom Drury)
2015 (Tom Drury)
2014 (Tom Drury)
2013 (Tom Drury)
CEO single
figure
£000
1,009
942
1,421
722
631
154
CEO bonus
(as a % of
maximum)
£000
82.5
85.0
80.0
70.3
62.5
80.0
CEO LTIP
vesting (as a %
of maximum)
N/A1
N/A1
86
–
–
–
1. Lee Rochford became Group chief executive officer in 2017 and did not hold an LTIP which was capable of vesting by reference to performance in 2017 or 2018.
Arrow Global Annual Report and Accounts 2018
75
Chief executive officer disclosures continued
b. Percentage change in Group chief executive officer remuneration
The table below shows how the percentage change in the Group chief executive officer’s salary, taxable benefits and annual bonus pay-out
between 2017 and 2018 compared with the percentage change in the average of each of those components for the workforce as a whole.
Director
Group chief executive officer
Workforce
% change
in salary
and fees
3%
3%
% change
in taxable
benefits
81%1
-%
% change
in performance-
related bonus
12%
13%
1.
Increase in Lee Rochford’s medical insurance plan as referenced in the single figure table on page 69.
Relative importance of spend on pay
The table below illustrates the relative importance of spend on pay compared with distributions to shareholders:
Director
2018
2017
Difference
Total employee
remuneration 1
£000
53,346
42,954
10,392
Shareholder
distribution
21,158
16,797
4,361
1. For total employee remuneration, please see note 10.b in the notes to the financial statements.
Service agreements and letters of appointment
The service agreements of our executive directors and the letters of appointment of our non-executive directors are as summarised below:
Director
Lee Rochford
Paul Cooper
Jonathan Bloomer
Iain Cornish
Lan Tu
Maria Luís Albuquerque
Andrew Fisher
*
Subject to re-election at the 2019 annual general meeting.
1. As amended in an extension letter dated 27 July 2017
2. As amended in an extension letter dated 26 July 2017
3. As amended in an extension letter dated 23 February 2018
Implementation of remuneration policy in 2019
The approach to directors’ remuneration is as follows:
Date of service agreement/
letter of appointment
6 December 2016
18 October 2017
7 October 20131
5 October 20132
7 March 20163
7 March 2016
9 December 2016
Expiry
N/A*
N/A*
8 October 2019 *
8 October 2019 *
8 March 2021*
7 March 2019 *
9 December 2019 *
Notice period
12 months
12 months
1 month
1 month
1 month
1 month
1 month
(a) Base salaries
In line with our remuneration policy, Lee Rochford’s salary will be increased by 3% in line with the average increase across the wider workforce, to
£450,883 with effect from 1 March 2019. Paul Cooper’s salary was set at £365,000 on his appointment in January 2018 and will not be increased in 2019.
(b) Annual bonus
Lee Rochford’s bonus opportunity for 2019 will be 140% of salary. Paul Cooper’s bonus opportunity will be 125% of salary. As for 2018, the 2019 annual
bonus will be based on:
• underlying profit after tax as regards 50% of the opportunity; and
• an assessment against a balanced range of financial, strategic and other key Group objectives as regards 50% of the opportunity.
The directors consider the targets under the annual bonus plan to be commercially sensitive because they provide the Group’s competitors with
insight into the Group’s business plans, expectations and strategic actions. However, the committee will continue to disclose how the bonus
pay-out delivered relates to performance against the targets on a retrospective basis.
33% of any bonus earned by Paul Cooper for 2019 will be deferred into shares. 40% of any bonus earned by Lee Rochford will be deferred into shares.
(c) LTIP
As discussed in the annual statement from the chairman of the committee, to increase alignment with the Group’s updated five-year strategy to
further develop the quality of our earnings and deliver consistently strong returns for our shareholders, the 2019 LTIP awards will be subject to
amended performance measures, being underlying ROE, underlying FCF and relative TSR performance. The weightings for each measure have
been set to balance what the committee consider to be the direction of focus for management in its day to day direction of the business with
its ultimate responsibility to shareholders:
Arrow Global Annual Report and Accounts 2018
Governance 76
Directors’ remuneration report continued
Implementation of remuneration policy in 2019 continued
• 25% underlying FCF – aligns clearly to the Group’s strategy to focus on the quality of our earnings. Measures the profitability of the business
whilst also reflecting the cost to collect and cost effectiveness of the Group’s activities. Strong underlying FCF performance enables the Group to
invest, pay dividends and drives the gearing in the business. It is a measure that will be transparent for our colleagues, directors and shareholders.
• 25% relative TSR – used under the existing LTIP awards, clearly aligned to shareholders and maintains a direct link to share price performance.
• 50% underlying ROE – a key driver of shareholder value and reflects the importance of purchasing debt of a suitable quality with an appropriate
return. Underlying ROE continues to be a key and robust metric which fully supports Arrow’s strategy over the medium/long term and is a
mature internal KPI fully recognised and used in the day to day management of the business.
In line with the directors’ remuneration policy approved at the 2018 annual general meeting and as referred to in the 2017 directors’
remuneration report that, subject to the continued strong performance of the Group, the committee’s stated intention was to increase the
annual LTIP opportunity from 150% of salary to 200% of salary for Lee Rochford and to 175% of salary for Paul Cooper in 2019. The Group continues
to perform strongly, delivering profitable earnings growth and strong progress against our strategy of diversifying by geography, asset class and
income stream, while driving strong returns on investment. The committee has carefully considered Arrow’s consistently strong performance and
investor confidence in the delivery our strategy together with the individual performance and contribution of the executive directors. Accordingly,
the committee strongly believes that it is appropriate to increase the LTIP for Lee Rochford to 200% of salary in line with the proposal set out in the
remuneration report last year. We have decided to defer increasing the LTIP award for Paul Cooper until 2020. Therefore, his LTIP award will be 150%
of salary for 2019 with the intention that this will be increased to 175% of salary for the 2020 LTIP, subject to the continued strong performance of
the Group. The whole of the awards will be subject to a two-year holding period following the end of the performance period.
As disclosed in the remuneration report last year, recognising the increased opportunity, the percentage vesting for threshold performance
(as a percentage of salary) is not increased. This will ensure executives do not receive more for delivering threshold performance, notwithstanding
the proposed increase in the LTIP maximum in 2019. We have also reviewed the level of stretch in the performance targets to ensure that they are
commensurate with the increased opportunity and have increased the threshold underlying ROE target from 20% to 24%. Accordingly, the
performance conditions and vesting schedules will be as follows:
Performance measure
Underlying ROE (three-year average)
Underlying FCF
TSR relative to the FTSE 350 (excluding investment trusts)
Weighting
(% of award)
50%
25%
25%
Performance
target
24%
30%
Targets to be
determined
Median
Upper quartile
Threshold
Maximum
Threshold
Maximum
Threshold
Maximum
Vesting level
(% of max for Lee
Rochford)
21.42%
100%
21.42%
100%
21.42%
100%
Vesting level
(% of max for Paul
Cooper)
25%
100%
25%
100%
25%
100%
The committee recognises the importance of ensuring that the targets reflect the three-year direction of the business and demonstrate the
need for appropriately stretching delivery by management. The committee is in the process of adding underlying FCF performance targets to
the Group’s five-year plan. These will be disclosed at the earliest opportunity to the extent they are not considered to be commercially sensitive.
As with the 2018 LTIP awards, in addition to the performance conditions outlined above, awards will vest only to the extent that the committee
considers the vesting in accordance with those performance conditions reflective of the underlying financial performance of the Group over
the performance period.
The 2019 LTIP awards will not be entitled to dividend equivalents.
Arrow Global Annual Report and Accounts 2018
77
The remuneration committee
Throughout the year, the committee consisted of Lan Tu (as chair), Iain Cornish and Andrew Fisher, each of whom is an independent non-
executive director. In addition, the Company Chairman, Jonathan Bloomer, who was considered independent on appointment, is a member
of the committee.
The committee held three scheduled meetings during the year. Details of attendance by all members who held office during the year are set
out below:
Committee members
Lan Tu
Jonathan Bloomer
Iain Cornish
Andrew Fisher
Eligible to attend
3
3
3
3
Attended
3
3
3
3
The terms of reference of the committee are on the Group’s website at www.arrowglobalir.net.
Advisor
During the year, the committee was assisted in its work by Deloitte LLP, which was appointed as advisor in July 2014, following a comprehensive
competitive tender. Deloitte LLP is a member of the Remuneration Consultants Group and, as such, voluntarily operates under that Group’s Code
of Conduct in relation to executive remuneration consulting in the UK. The total fees paid to Deloitte LLP for providing remuneration advice were
£32,415 for the year ended 31 December 2018. Deloitte LLP also provided internal audit services and advice in relation to taxation during the year.
The committee will assess from time to time whether the appointment of Deloitte LLP remains appropriate or should be put out to tender.
The Group chief executive officer and the Group human resources director have also attended committee meetings to provide advice and respond
to specific questions, but is not in attendance when his own remuneration is discussed. The company secretary acts as secretary to the committee.
Statement of shareholder voting
At the 2018 annual general meeting, the directors’ remuneration policy was approved by shareholders with the following votes:
% of votes for
94.54%
% of votes against
5.46%
Number of votes withheld
3,841
At the 2018 annual general meeting, the annual report on remuneration was approved by shareholders with the following votes:
% of votes for
95.93%
% of votes against
4.07%
Number of votes withheld
3,841
Directors’ remuneration policy
The Company’s directors’ remuneration policy was approved by shareholders at the annual general meeting on 22 May 2018 and took effect
from the date of that meeting. We have set out below the ‘policy tables’ from the approved policy (except that we have updated date specific
provisions) and the associated notes. The full policy as approved at the 2018 annual general meeting is available on the Group’s website at
www.arrowglobalir.net
Arrow Global Annual Report and Accounts 2018
Governance 78
Directors’ remuneration report continued
Directors’ remuneration policy continued
Element and link
to business strategy
Salary
Provides core
remuneration for the
role at a level to recruit
and retain executive
directors with the
required skills and
experience.
Benefits
Provide a competitive
benefits package at
a level to recruit
and retain executive
directors with the
required skills
and experience.
Pension
Provides a competitive
level of long-term
retirement saving
for executives.
Annual bonus
Rewards the
achievement of
annual objectives
whilst encouraging
a long-term focus
through the use
of deferred shares,
awarded as nil-cost
share options,
conditional awards
or restricted shares.
Operation
• Positioned within a broad range around the
mid-market level for the role.
• Paid monthly and ordinarily reviewed annually.
Applicable performance measures
and maximum opportunity
• Base salaries are ordinarily reviewed annually, though
not necessarily increased, having regard to market
conditions and other relevant factors such as pay
increases for the Group’s employees, internal
relativities and individual performance.
• The maximum annual salary increase will not normally
exceed the average increase which applies across the
UK wider workforce (in percentage of salary terms).
Larger increases may be awarded in certain
circumstances including, but not limited to:
•
increase in scope or responsibilities of the role;
• to apply salary progression for a newly appointed
director; and
• significant market movement.
• Such increases may be implemented over such period
as the committee deems appropriate.
• Typically comprises private medical and dental cover,
• None.
life insurance and permanent health insurance.
• The cost of providing benefits is borne by the Group
• Reviewed from time to time to ensure market
and varies from time to time.
competitive and meet operational needs of the
business. Benefits may be extended in certain
circumstances (such as relocation expenses).
• Access to flexible benefits on same basis as the
wider workforce.
• Contribution to a defined contribution pension
arrangement or monthly cash allowance in lieu
of pension (or a combination of contribution
and cash allowance).
• 15% of basic salary.
• Performance targets set annually.
• Maximum bonus opportunity of 140% of annual
• Pay-outs determined by the committee following the
base salary.
end of the performance period.
• Split between financial and strategic/personal
• Up to 50% of the bonus earned is deferred into shares
for up to three years, subject, ordinarily, to continued
employment during the vesting period. Deferred
share awards may be settled in cash at the election
of the committee.
• The committee may make a dividend equivalent
payment to reflect dividends that have been paid
over the period of the shares vesting (and which may
assume the reinvestment of the dividend equivalents).
The payment may be in the form of additional shares
or a cash payment equal to the value of those
additional shares.
• Malus and clawback provisions apply, as described
following this table, on page 80.
performance measures in support of
business strategy.
• Bonus for achieving threshold financial performance
target is up to 20% of the maximum opportunity for
that element.
• Vesting of the bonus in respect of strategic or
personal measures will be between 0% and 100%
based on the committee’s assessment of the
extent to which the measure has been achieved.
Arrow Global Annual Report and Accounts 2018
79
Operation
Applicable performance measures
and maximum opportunity
• Nil-cost share options, conditional awards or
• Maximum award of 200% of annual base salary
Element and link
to business strategy
LTIP
Rewards the
achievement of
long-term objectives,
promotes and aligns
interests of executives
with those of
shareholders.
Share incentive
plan (SIP)
Promotes alignment
with shareholders
across Group’s entire
employee base.
restricted shares can be awarded. Share awards can
be settled in cash at the election of the committee.
• Three-year vesting period subject to
performance conditions.
• Awards granted from 2019 onwards will be subject
to an additional two-year holding period following
the end of the performance period and will only
be ‘released’ to the participant following the end of
that period. The holding period may be implemented
so that the participant is not entitled to acquire
shares until the end of it. Alternatively, it may be
implemented on the basis that shares can be acquired
following the vesting of the award but that, other than
as regards sales to cover tax liabilities and any exercise
price, the participant is not able to dispose of shares
acquired until the end of the holding period.
• The committee may, at its discretion, structure awards
as qualifying LTIP awards consisting of both an HMRC
tax-qualifying option and an LTIP award. Qualifying
LTIP awards enable the participant and the Company
to benefit from tax-advantaged treatment in respect
of part of the award without increasing the pre-tax
value delivered to participants. The qualifying LTIP
awards will be structured as a tax qualifying option
and an LTIP award with the vesting of the LTIP award
scaled back to take account of any gain made on
the exercise of the tax-advantaged option.
• The committee may make a dividend equivalent
payment to reflect dividends that would have been
paid, on shares that vest, over the period to vesting
and over any holding period. This payment may
assume the reinvestment of the dividend equivalents.
The payment may be in the form of additional shares
or a cash payment equal to the value of those
additional shares.
• Malus and clawback provisions apply, as described
following this table, on page 80.
•
In the UK, a tax qualifying plan permitting the award of
free, partnership or matching shares. Dividends paid
on plan shares may be delivered in the form of
additional dividend shares.
• Operated on a broadly equivalent basis for employees
(including, if relevant, any executive directors) outside
the UK.
• Minimum three-year vesting period.
• Open to all employees generally.
Save as you earn
plan (‘sharesave’)
Promotes further
alignment with
shareholders across
Group’s entire
employee base.
• The Group may consider the implementation up of
a sharesave in the future to complement the SIP.
•
In the event that a sharesave is introduced, the
executive directors will be eligible to participate
in the sharesave on the same terms as other
eligible employees.
per year.
• Tax qualifying options may be granted. Shares
subject to a tax qualifying option granted as part of
a qualifying LTIP award are not taken into account
for the purposes of the individual limits because,
as referred to in the operation column, the LTIP
award will be scaled back to reflect the gain made
on the exercise of the tax advantaged option.
• Performance targets based on financial measures
such as EPS growth, ROE and TSR.
• 25% of award vests for threshold performance rising
to 100% for maximum performance.
• No performance targets.
• Under the UK plan, maximum awards and matching
share ratio reflect the limits in the applicable tax
legislation from time to time (as at the date of
approval of this policy in any year up to £3,600
free share award; up to £1,800 partnership share
acquisition; and a matching share ratio of up to 2:1
based on partnership shares acquired, in each case).
• Broadly equivalent limits apply under the plan for
employees outside the UK.
• There would be no performance targets under
the sharesave.
• The limits will reflect those in the applicable tax
legislation from time to time (as at the date of this
policy a participant may save up to £500 per month
over three or five years to exercise an option granted
with an exercise price at a discount of up to 20% to
the value of a share when invited to participate).
Arrow Global Annual Report and Accounts 2018
Governance
80
Directors’ remuneration report continued
Notes to the policy table
Annual bonus – performance metrics
The annual bonus is assessed against both financial performance
measures and a balanced range of specific strategic, personal and
other key Group objectives determined by the committee. This
incentivises executives to focus on delivering the key financial goals of
the Group as well as specific strategic objectives which are aligned to
delivering the overall business strategy and to encourage behaviours
which facilitate profitable growth and the future development of
the business.
The LTIP and deferred bonus awards are subject to malus provisions
such that, at the discretion of the committee, unvested awards may
lapse where there has been a material inaccuracy or misleading results,
or there has been a loss to the Group’s business which could have been
reasonably risk managed by the participant. In addition, malus may take
place where there is conduct, capability or performance of a participant
which would make the operation of malus appropriate, or where the
committee deems there to be exceptional circumstances which appear
relevant. The committee will operate malus if there is a major regulatory
issue including significant regulatory risk failure.
The LTIP and deferred bonus include a clawback facility where, at the
discretion of the committee, during a three-year period post vesting,
shares acquired may be forfeited or unexercised awards may lapse
where there has been a material inaccuracy or misleading results, or
there has been a loss to the Group’s business which could have been
reasonably risk managed by the participant. In addition, clawback
may take place where there is conduct, capability or performance of a
participant which would make such transfer appropriate, or where the
committee deems there to be exceptional circumstances which make
such a forfeiture or lapse appropriate. The committee will operate
clawback if there is a major regulatory issue including significant
regulatory risk failure. In any of the above circumstances, in place of
pursuing clawback on the LTIP and deferred bonus, the committee has
discretion to operate malus provisions on share-based incentive plans
(other than any HM Revenue & Customs qualifying plans) operated
by the Group.
Clawback will apply to HM Revenue & Customs qualifying plans to the
extent permitted by HM Revenue & Customs.
Shareholding guidelines
To align the interests of executive directors with those of shareholders,
the committee has adopted formal shareholding guidelines. Each
executive director is required to acquire shares with a value equal
to 200% of salary. Until such time as the required holding has been
achieved, the director must retain 50% of all shares acquired under the
LTIP or deferred bonus arrangements (in each case net of tax). Shares
subject to awards which have vested but not been released (i.e. LTIP
awards which are subject to a holding period) or which are exercisable
but have not been exercised count towards the guidelines on a net of
assumed tax basis.
The precise choice of measures and the weightings between them will
be reviewed by the committee year on year. Performance targets will be
set at the beginning of each year, and bonus pay-outs are determined
by the committee after the end of the performance period, based on
performance against targets.
LTIP awards – performance metrics
Performance is based on financial performance targets, such as EPS
growth, return on equity and total shareholder return measured
over three years.
The committee will review these performance conditions when
determining LTIP awards in each year, in order to reflect changes
in the outlook of the sector and the Group, and to ensure that the
measures remain appropriate and that the targets remain challenging.
Performance measures are set in line with the key drivers of sustainable
performance. Targets are set by the committee at the start of the
performance period, taking into account external advice on market and
best practice. Performance is assessed at the end of the relevant period
to determine the extent to which awards may vest. The committee also
monitors progress against targets throughout the period.
Adjusting performance measures and operation of share plans
The committee retains the ability to adjust or set different performance
measures if events occur (such as a change in strategy, a material
acquisition and/or a divestment of a Group business or a change
in prevailing market conditions), which cause the committee to
determine that the measures are no longer appropriate and that
amendment is required so that the original purpose of the
performance measures is achieved.
Awards may be adjusted in the event of a variation of capital, demerger,
special dividend or other transaction which will materially affect the
value of shares.
The committee may exercise operational and administrative discretions
under the relevant plan rules as set out in those rules.
Malus and clawback
All cash bonuses paid are subject to potential malus and clawback, at
the committee’s discretion, for a period of three years from the date of
payment where there are exceptional circumstances, such as a material
misstatement of the published results of the Group, any error in the
calculation of any performance condition linked to the calculation of
a bonus, material risk failure or gross misconduct. The committee will
also operate malus and clawback if there is a major regulatory issue
including significant regulatory risk failure. In any of the above
clawback circumstances, the committee has discretion to operate
malus provisions on share-based incentive plans (other than any HM
Revenue & Customs qualifying plans) operated by the Group instead
of pursuing clawback on the cash bonuses.
Arrow Global Annual Report and Accounts 2018
81
Components and structure of remuneration – non-executive directors
The board reviews non-executive directors’ fees periodically in light of fees payable in comparable companies and the importance attached to
the retention and attraction of high calibre individuals as non-executive directors. This table sets out the elements which are included in the
remuneration package for non-executive directors and explains how they operate.
Element and purpose
Operation and link to business strategy
Maximum opportunity
• A base fee is paid for holding the office of
non-executive director or Chairman.
Fees are reviewed periodically to comparable
companies’ pay.
• Additional fees may be paid to reflect extra
responsibilities such as committee chair or SID.
• With the agreement of the Chairman of the Group,
non-executive directors can carry out specific project
work for the Group on fees to be agreed.
• Benefits are provided that are appropriate to the
performance of the role.
If benefits are provided to non-executive directors, they
are provided at an appropriate level taking into account
the individual circumstances.
Fees
To attract and
retain high calibre
non-executive
directors by offering
competitive fees.
Benefits
Non-executive
directors may be
eligible for benefits such
as the use of secretarial
support, travel costs
or other benefits.
This report was approved by the board and signed on its behalf by:
Lan Tu
Chair of the remuneration committee
28 February 2019
Arrow Global Annual Report and Accounts 2018
Governance 82
Report of the directors
Report of the directors
“Total dividends
of 12.7p per share
were declared
and proposed
for the year.”
The directors present their annual report on the affairs
of the Group, together with the financial statements and
auditor’s report, for the year ended 31 December 2018.
The corporate governance report set out on page 54
to 57 forms part of this report. The Company’s principal
subsidiaries are listed in note 23.
The following information is set out in the strategic
report on pages 1 to 49:
• particulars of post balance sheet events of the
Company and its subsidiaries; and
•
indication of likely future developments in the
business of the Company and its subsidiaries.
Results and going concern
The Group’s results are discussed in the Strategic report
starting on page 1, including the Chairman’s statement,
Group chief executive officer’s review and Group
chief financial officer’s review on pages 2, 6 and 26
respectively, which are incorporated into this report
by reference.
Consideration of going concern can be seen on
page 49. After making their assessment, the directors
are satisfied that the Company and the Group have
adequate and sufficient resources to continue to
operate as a going concern for a period in excess of
12 months from the date of signing. Thus, they continue
to adopt the going concern basis of accounting in
preparing the annual financial statements.
Fair, balanced and understandable
As required by the UK Corporate Governance Code
2016 Edition (the ‘Code’), the directors confirm that
they consider that this annual report and accounts,
taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders
to assess the Group’s position and performance,
business model and strategy.
The board came to this view following a rigorous
review process throughout the production schedule.
The annual report is drafted by appropriate members
of the reporting and leadership teams and is managed
by the investor relations co-ordinator to ensure
consistency. A series of planned reviews are undertaken
by the reporting team, leadership team and directors in
advance of final consideration by the board. The annual
report is also reviewed by the audit committee.
Dividends
The directors recommend the payment of a final
dividend of 8.7p per ordinary share for the financial
year ended 31 December 2018 (2017: 8.1p) to be paid
(assuming shareholder approval is obtained) on
12 July 2019 to ordinary shareholders on the register on
7 June 2019. The ex-dividend date for the final dividend is
6 June 2019 and the dividend reinvestment plan election
date is 21 June 2019. The recommended final dividend,
together with the interim dividend of 4p per share (2017:
3.2p) paid on 12 October 2018, brings the total dividend
declared and proposed for the year to 12.7p per share
(2017: 11.3p).
The Company held £183.7 million distributable reserves
at 31 December 2018, sufficient to pay the dividend.
Share capital
As at 31 December 2018, the Company had 176,263,343
ordinary shares in issue, of one class, with a nominal
value of 1p each. Full details of the share capital of the
Company are set out in note 20 to the Group financial
statements on page 115. The information in note 20
is incorporated by reference and forms part of this
directors’ report. On a show of hands at a general
meeting of the Company, each member present in
person or by proxy, and entitled to vote, shall have one
vote and, on a poll, every member shall have one vote
for every ordinary share held. There are no issued
shares in the Company with special rights with
regard to control of the Company.
Purchase of own shares
At the 2018 annual general meeting, shareholders
authorised the Company to make market purchases
of up to 17,526,662 ordinary shares representing 10% of
the issued share capital at that time, and to allot up to
an aggregate nominal amount of £584,222.08. These
authorities expire at the 2019 annual general meeting.
During the year ended 31 December 2018, no shares
were repurchased. Resolutions to renew these
authorities will be proposed at the 2019 annual
general meeting.
The Company operates an independent employee
benefit trust for future benefit to employees of the
Group. Estera Trust (Jersey) Limited is the trustee of
the Arrow Global Group 2016 Employee Benefit Trust
(the ‘Estera Trust’). On 15 June 2018, 996,719 shares were
allotted by the Company to the Estera Trust to satisfy
future share options granted to employees, which was
announced by RNS announcement on 15 June 2018. RNS
announcements will be made in accordance with the
Disclosure, Guidance and Transparency Rules when
future allotments occur.
During the financial year, the Estera Trust transferred
shares to LTIP participants and also to the trustee of the
Arrow Global Share Incentive Plan (the ‘SIP’) to satisfy
awards of shares to participating employees under
the SIP.
Arrow Global Annual Report and Accounts 2018
83
As at 31 December 2018, the Estera Trust held 1,030,766 ordinary
shares (2017: 257,337 shares) representing 0.58% (2017: 0.15%) of the
Company’s issued share capital. The Trust deed contains a dividend
waiver provision in relation to these shares. During the year, the Estera
Trust purchased 1,746,596 shares for future benefit to employees of
the Group.
Transfer of securities
There are no restrictions on the transfer of shares, limitations on
the holding of shares or requirements to obtain prior approval of the
Company, or of other holders of securities in the Company, to a transfer
of shares.
The board may decline to register a transfer of any share which is not
fully paid. Registration of a transfer of an uncertificated share may be
refused in the circumstances set out in the uncertificated securities
rules (as defined in the articles of association) and where, in the case
of a transfer to joint holders, the number of joint holders to whom
the uncertificated share is to be transferred exceeds four.
The board may decline to register a transfer of a certificated share
unless the instrument of transfer: (i) is duly stamped or certified or
otherwise shown to the satisfaction of the board to be exempt from
stamp duty and is accompanied by the relevant share certificate
and such other evidence of the right to transfer as the board may
reasonably require; (ii) is in respect of only one class of share; and (iii)
if joint transferees, is in favour of not more than four such transferees.
Further, the board may decline to register a transfer of a certificated
share where the transfer is requested by a person with more than a
0.25% interest in the issued share capital of the Company (excluding
treasury shares) if such a person has been served with a restriction
notice after failure to provide the Company with information
concerning interests in those shares required to be provided
under the Companies Act 2006, unless the transfer is shown to the
board to be pursuant to an arm’s length sale (as defined in the articles
of association).
The articles of association also contain certain restrictions on transfer
which are designed to ensure that the assets of the Company are not
deemed to constitute ‘plan assets’ within the meaning of the Plan Asset
Regulations (as defined in the articles of association) because the
directors have been advised that this could result in the Company
becoming subject to certain onerous obligations under US law.
Accordingly, the articles of association provide that the board may
refuse to register a transfer of shares, or compulsorily require the
transfer of shares, where a transfer of shares, or continued holding of
shares, would cause, or is likely to cause: (i) the assets of the Company
to be considered ‘plan assets’ under the Plan Asset Regulations; or
(ii) the Company to suffer any pecuniary disadvantage, including any
excise tax, penalties or liabilities, under ERISA or the IR Code (each as
defined in the articles of association).
No shares carry any special rights with regard to control of the
Company and there are no restrictions on voting rights except
that a shareholder has no right to vote in respect of a share unless
all sums due in respect of that share are fully paid. There are no
known agreements between holders of securities that may result
in restrictions on the transfer of securities or voting rights and no
known arrangements under which financial rights are held by a
person other than the holders of the shares.
Substantial shareholdings
As at 31 December 2018, the Company had been notified under
Rule 5 of the Disclosure, Guidance and Transparency Rules of the
Financial Conduct Authority, of the following holdings of voting
rights in its shares:
Shareholder
Jupiter Asset Management Limited
Schroders Plc
Lazard Asset Management LLC Group
Legal & General Investment Mgmt Ltd
M&G Investment Management Ltd
Odin Fortvaltning AS
Columbia Threadneedle Investments
No. of ordinary shares/voting
rights notified
34,515,394
11,416,231
9,926,960
8,360,851
7,654,113
6,522,836
6,157,261
% of ordinary share capital/
voting rights notified
19.58
6.47
5.63
4.74
4.34
3.70
3.49
Directors
The directors who served during the financial year were as follows:
Director
Jonathan Bloomer
Lee Rochford
Iain Cornish
Lan Tu
Maria Luís Albuquerque
Andrew Fisher
Paul Cooper
Position
Non-executive Chairman
Group chief executive officer
Senior independent non-executive director
Independent non-executive director
Independent non-executive director
Independent non-executive director
Group chief financial officer
Service in the year ended 31 December 2018
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Appointed 1 January 2018 and served throughout the year
Biographical details of the directors of the Company during the year and to the date of this report can be seen on pages 50 and 51.
Arrow Global Annual Report and Accounts 2018
Governance Disabled persons
The Group adopts a consistent, non-discriminatory approach to all
applicants, with due regard to their skills and abilities. In the event of
an employee becoming disabled, every effort is made to ensure that
their employment within the Group continues and that appropriate
training and where applicable ergonomic arrangements are arranged
where necessary. It is the policy of the Group that training, career
development and promotion of disabled persons should, as far
as possible, be identical to that of other employees.
Environmental policy
Due to the nature of its business activities, the Group’s environmental
impact is considered minimal. An environmental policy is in place to
increase employee awareness of environmental issues and complies
with all relevant regulatory requirements. The Group’s environmental
impacts are through resource use and business travel. Key areas of the
policy addressing the business’ environmental impact are as follows:
• minimising paper usage and the purchase of recycled paper and
packaging where possible;
• energy efficient office products;
• recycling office waste;
•
increased use of video and conference calls and Skype for
business facilities;
• supporting cycling to work through a cycle to work scheme; and
• travel should only be booked for essential business reasons.
Carbon reporting – methodology
We have followed the requirements of the GHG Protocol Corporate
Accounting and Reporting Standard (revised edition) and the Carbon
Trust conversion factors to measure and report greenhouse gas
emissions, as well as the disclosure requirements in Part 7 of the
Companies Act 2006 (Strategic report and Directors’ report)
Regulations 2013.
The financial control method, which captures the sources that fall
within our consolidated financial statements, has been used. Although
we operate an outsourced model working with partners, these partners
do not work exclusively for the Group and, therefore, it is not deemed
appropriate to include emissions outside of the Group consolidated
financial statements.
The reporting period aligns to the financial period (i.e. the year ended
31 December 2018) and the Group’s carbon reporting falls under
three scopes:
84
Report of the directors continued
Further details relating to board and committee composition are
disclosed in the corporate governance report and committee reports
on pages 54 to 81.
The directors are aware of the retirement by rotation provisions in
the Code that apply to FTSE 350 companies and have adopted these
provisions. All directors will offer themselves for re-election at the 2019
annual general meeting.
Directors’ interests
The directors’ interests in the share capital of the Company at
31 December 2018 are set out on pages 72 to 74.
Directors’ indemnities
During the financial year ended 31 December 2018 and up to the date of
this directors’ report, the Company has maintained appropriate liability
insurance for its directors and officers.
The Company has granted indemnities to each of its directors on
terms consistent with the applicable statutory provisions. Qualifying
third-party indemnity provisions for the purposes of section 234 of the
Companies Act 2006 were accordingly in force during the course of the
year and remain in force at the date of this report.
Interim report
Current regulations permit the Company not to send copies of its
interim reports to shareholders. Furthermore, the 2018 interim results
will not be sent to shareholders. Interim results and other information
about the Company will be available on the Company’s website at
www.arrowglobalir.net
Electronic and website communication with shareholders
The Company’s articles of association permit electronic
communication with shareholders as provided in the Companies Act
2006. The Company obtained authority from its shareholders at the
2014 annual general meeting to implement electronic communication.
It is intended that the 2018 annual report and notice of annual general
meeting 2019 will be distributed electronically again and via the
Company’s website to shareholders who have consented or deemed
to have consented. Shareholders who have requested shareholder
information in hard copy form will continue to receive this.
Employee consultation
Further information concerning employees is given on pages 36 to 37.
The Group places considerable value on the involvement of its
employees and uses a number of ways to engage with the team on
matters that impact them and the performance of the Group. These
include regular site-wide update meetings and email communication,
use of the employee engagement forum, the distribution of a weekly
newsletter, focus group meetings, employee surveys and regular
Company-wide business update meetings and workshops. Our people
managers carry out monthly one-to-one meetings with their direct
reports and the senior management team has an open-door policy,
which allows all employees to discuss any concerns or new initiatives.
Employees are encouraged to be involved in the Company’s
performance via the SIP, the detail of which is set out at note 27.
The Group also has a whistleblowing policy and employees are
made aware of this at induction and through regular ongoing
refresher training.
Arrow Global Annual Report and Accounts 2018
85
Scope
1
2
3
Type
Direct emissions by the Group
Indirect energy consumed but not owned by the Group
Other indirect emissions not included in scope 2
Reportable items
Air conditioning and refrigerated leaks*
Electricity usage
Business travel
* Considered under the screening method with an estimated 5% leakage.
Activities that the Group was responsible for led to 2,450.5 tonnes of annual CO2 emissions in 2018 (2017: 2,127.3 tonnes) as documented below:
Scope
1
2
Total scope 1 and 2
3
Total
Tonne of CO2 per employee (using average number of employees for the year)
C02 emissions (tonnes)
per annum 2018
465.3
1,403.1
1,868.4
582.1
2,450.5
1.4
C02 emissions (tonnes)
per annum 2017
438.6
1,194.4
1,633.0
494.3
2,127.3
1.5
Branches outside of the UK
The Company has no overseas branches. The Companies subsidiaries are detailed in note 23 to the financial statements.
Risk management
Please refer to the strategic report, on pages 42 to 48.
Statement of disclosure of information to the auditor
Each of the persons who is a director at the date of approval of the financial statements confirms that:
• so far as the director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and
• the director has taken all steps he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to
establish that the Company’s auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
Auditor
KPMG LLP has indicated its willingness to accept reappointment as auditor of the Company. Resolutions to reappoint KPMG LLP as independent
auditor to the Company and to authorise the directors to determine its remuneration will be proposed at the forthcoming annual general meeting.
Board effectiveness
In 2018, the board engaged SCT Consultants Ltd to conduct the first independent review of the board’s effectiveness. The review focused on
examining the way and manner the board conducted itself and how effective it was pursuing its business strategy. The report concluded that for
a relatively young company the board worked well, there was good engagement with key stakeholders, the Chairman managed meetings well
encouraging the non-executive directors to question the executive directors and had a clear developed strategy.
Corporate governance
The board considers that it has complied throughout the year under review with the requirements of the UK Listing Authority relating to the UK
Corporate Governance Code, details of which can be found on pages 54 to 57.
The board has begun implementing the provisions of the new UK Corporate Governance Code 2018 (the “2018 Code”) published by the Financial
Reporting Council (FRC) in July 2018, in order to be fully compliant in 2019. It should be noted that the Company is already compliant with the main
provisions of the 2018 Code.
Annual general meeting
The forthcoming annual general meeting of the Company will take place at The Cavendish Hotel, 81 Jermyn Street, St. James, London, SW1Y 6JF,
on Tuesday 4 June 2019 at 9.30am. Notice of the annual general meeting of the Company, which includes the business to be transacted and
resolutions to be considered at the meeting, appears in the document accompanying this annual report and accounts and will be available
on the Group website at www.arrowglobalir.net
This report was approved by the board and signed on its behalf by:
Stewart Hamilton
Company secretary
28 February 2019
Arrow Global Annual Report and Accounts 2018
Governance 86
Directors’ responsibilities statement
“We consider the
annual report and
accounts, taken
as a whole, is fair,
balanced and
understandable.”
Directors’ responsibilities statement
Under applicable law and regulations, the directors
are also responsible for preparing a strategic report,
directors’ report, directors’ remuneration report and
corporate governance statement that complies with
that law and those regulations.
The directors are responsible for the maintenance
and integrity of the corporate and financial information
included on the Company’s website. Legislation in
the UK governing the preparation and dissemination
of financial statements may differ from legislation in
other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with
IFRS, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company
and the undertakings included in the consolidation
taken as a whole; and
• the strategic report includes a fair review of the
development and performance of the business and
the position of the Company and the undertakings
included in the consolidation taken as a whole,
together with a description of the principal risks
and uncertainties that they face.
We consider the annual report and accounts, taken as a
whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the
Group’s position and performance, business model
and strategy.
By order of the board:
Paul Cooper
Group chief financial officer
28 February 2019
Lee Rochford
Group chief executive officer
28 February 2019
The directors are responsible for preparing the annual
report and the Group and Company financial statements
in accordance with applicable law and regulations.
Company law requires the directors to prepare
Group and parent company financial statements for
each financial year. Under that law, they are required to
prepare the Group financial statements in accordance
with IFRS as adopted by the EU and applicable law and
have elected to prepare the parent company financial
statements on the same basis.
Under company law, the directors must not approve
the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the
Group and parent company and of their profit or loss for
that period. In preparing each of the Group and parent
company financial statements, the directors are
required to:
• select suitable accounting policies and then apply
them consistently;
• make judgments and estimates that are reasonable,
relevant and prudent;
• state whether they have been prepared in accordance
with IFRS as adopted by the EU;
• assess the Group and parent company’s ability to
continue as a going concern, disclosing, as applicable,
matters related to going concern; and
• use the going concern basis of accounting unless
they either intend to liquidate the Group or the
parent company or to cease operations, or have
no realistic alternative but to do so.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the parent company’s transactions and disclose
with reasonable accuracy at any time the financial
position of the parent company and enable them to
ensure that its financial statements comply with the
Companies Act 2006. They are responsible for such
internal control as they determine is necessary to enable
the preparation of financial statements that are free from
material misstatement, whether due to fraud or error,
and have general responsibility for taking such steps
as are reasonably open to them to safeguard the assets
of the Group and to prevent and detect fraud and
other irregularities.
Arrow Global Annual Report and Accounts 2018
Independent auditor's report
87
Independent
Independent
auditor’s report
auditor’s report
to the members of Arrow Global Group plc
to the members of Arrow Global Group plc
1. Our opinion is unmodified
1. Our opinion is unmodified
We have audited the financial statements of Arrow
Global Group plc (“the Company”) for the year
ended 31 December 2018 which comprise the
Consolidated statement of profit or loss & other
comprehensive income, Consolidated & parent
company statement of financial position,
Consolidated & parent company statement of
changes in equity, Consolidated & parent company
statement of cash flows and the related notes,
including the accounting policies in note 3.
We have audited the financial statements of Arrow
Global Group plc (“the Company”) for the year
ended 31 December 2018 which comprise the
Consolidated statement of profit or loss & other
comprehensive income, Consolidated & parent
company statement of financial position,
Consolidated & parent company statement of
changes in equity, Consolidated & parent company
statement of cash flows and the related notes,
including the accounting policies in note 3.
In our opinion:
Overview
Coverage
Event driven
Materiality:
In our opinion:
— the financial statements give a true and fair
group financial
view of the state of the Group’s and of the
statements as a
— the financial statements give a true and fair
parent Company’s affairs as at 31 December
whole
view of the state of the Group’s and of the
2018 and of the Group’s profit for the year then
parent Company’s affairs as at 31 December
ended;
2018 and of the Group’s profit for the year then
ended;
— the Group financial statements have been
properly prepared in accordance with
— the Group financial statements have been
International Financial Reporting Standards as
properly prepared in accordance with
adopted by the European Union (IFRSs as
adopted by the EU);
International Financial Reporting Standards as
adopted by the European Union (IFRSs as
adopted by the EU);
— the parent Company financial statements have
been properly prepared in accordance with
IFRSs as adopted by the EU and as applied in
— the parent Company financial statements have
accordance with the provisions of the
been properly prepared in accordance with
Companies Act 2006; and
IFRSs as adopted by the EU and as applied in
accordance with the provisions of the
accordance with the requirements of the
Companies Act 2006; and
Companies Act 2006 and, as regards the Group
— the financial statements have been prepared in
financial statements, Article 4 of the IAS
Regulation.
— the financial statements have been prepared in
accordance with the requirements of the
Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS
Regulation.
We conducted our audit in accordance with
International Standards on Auditing (UK) (“ISAs
(UK)”) and applicable law. Our responsibilities are
described below. We believe that the audit
evidence we have obtained is a sufficient and
appropriate basis for our opinion. Our audit opinion
is consistent with our report to the audit
committee.
We conducted our audit in accordance with
International Standards on Auditing (UK) (“ISAs
(UK)”) and applicable law. Our responsibilities are
described below. We believe that the audit
evidence we have obtained is a sufficient and
appropriate basis for our opinion. Our audit opinion
is consistent with our report to the audit
committee.
Basis for opinion
Basis for opinion
Recurring risks
(Parent
company KAM)
Event driven
We were first appointed as auditor by the directors on
2 July 2014. The period of total uninterrupted
engagement is for the 5 financial years ended 31
December 2018. We have fulfilled our ethical
responsibilities under, and we remain independent of
the Group in accordance with, UK ethical requirements
including the FRC Ethical Standard as applied to listed
public interest entities. No non-audit services
prohibited by that standard were provided.
We were first appointed as auditor by the directors on
2 July 2014. The period of total uninterrupted
engagement is for the 5 financial years ended 31
December 2018. We have fulfilled our ethical
responsibilities under, and we remain independent of
the Group in accordance with, UK ethical requirements
including the FRC Ethical Standard as applied to listed
public interest entities. No non-audit services
prohibited by that standard were provided.
Recurring risks Estimation of future
Key audit matters
vs 2017
100% (2017: 100%) of group
profit before tax
Overview
£3.3m (2017:£2.8m)
Materiality:
4.4% (2017: 4.4%) of normalised
group financial
profit before tax
statements as a
whole
100% (2017: 100%) of group
profit before tax
Coverage
Key audit matters
▲
New: The impact of
uncertainties due to
Britain exiting the
European Union on our
audit
Event driven
cash collections from
portfolio investments
Fair value of
intangibles
acquired as part of
business combinations
Event driven
Recoverability of
parent company’s
investment in
subsidiaries and intra-
group debtor balance
due
Recurring risks
(Parent
company KAM)
4.4% (2017: 4.4%) of normalised
£3.3m (2017:£2.8m)
profit before tax
vs 2017
▲
◄►
◄►
◄►
New: The impact of
uncertainties due to
Britain exiting the
European Union on our
audit
◄►
◄►
cash collections from
portfolio investments
◄►
Fair value of
intangibles
acquired as part of
business combinations
Recoverability of
parent company’s
investment in
subsidiaries and intra-
group debtor balance
due
Recurring risks Estimation of future
88
Independent auditor's report continued
2. Key audit matters: including our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial
statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by
us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. We summarise below the key audit matters, in arriving at our audit opinion
above, together with our key audit procedures to address those matters and, as required for public interest entities, our results
from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of,
and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and
consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
The risk
Our response
The impact of uncertainties due
to the UK exiting the European
Union on our audit
Refer to page 44 (risk
management), 46 (principal risks)
and page 49 (viability statement).
Unprecedented levels of uncertainty:
All audits assess and challenge the
reasonableness of estimates, in
particular as described in Estimation of
future cash collections from portfolio
investments below, and related
disclosures and the appropriateness of
the going concern basis of preparation
of the financial statements (see below).
All of these depend on assessments of
the future economic environment and
the group’s future prospects and
performance.
In addition, we are required to consider
the other information presented in the
Annual Report including the principal
risks disclosure and the viability
statement and to consider the directors’
statement that the annual report and
financial statements taken as a whole is
fair, balanced and understandable and
provides the information necessary for
shareholders to assess the Group’s
position and performance, business
model and strategy.
Brexit is one of the most significant
economic events for the UK and at the
date of this report its effects are subject
to unprecedented levels of uncertainty
of outcomes, with the full range of
possible effects unknown.
We developed a standardised firm-wide
approach to the consideration of the
uncertainties arising from Brexit in planning and
performing our audits. Our procedures included:
— Our Brexit knowledge: We considered the
directors’ assessment of Brexit-related
sources of risk for the group’s business and
financial resources compared with our own
understanding of the risks. We considered
the directors’ plans to take action to mitigate
the risks;
— Sensitivity analysis: When addressing
Estimation of future cash collections from
portfolio investments and other areas that
depend on forecasts, we compared the
directors’ analysis to our assessment of the
full range of reasonably possible scenarios
resulting from Brexit uncertainty and, where
forecast cash flows are required to be
discounted, considered adjustments to
discount rates for the level of remaining
uncertainty;
— Assessing transparency: As well as
assessing individual disclosures as part of
our procedures on Estimation of future cash
collections from portfolio investments
together, including those in the strategic
report, comparing the overall picture against
our understanding of the risks.
Our results
— As reported under Estimation of future cash
collections from portfolio investments, we
found the resulting estimates and related
disclosures in relation of the impact of Brexit
to be acceptable. However, no audit should
be expected to predict the unknowable
factors or all possible future implications for
a company and this is particularly the case in
relation to Brexit.
2. Key audit matters: our assessment of risks of material misstatement (cont.)
89
Estimation of future cash
collections from portfolio
investments
(£1,087.0 million; 2017: £951.5
million)
Refer to page 59 (Audit
Committee Report), pages
105-106 (accounting policy)
and pages 113-114 (financial
disclosures).
The risk
Our response
Forecast based valuation:
Our procedures included:
The Group’s estimate of the future cash
collections (ERCs) from the loan
portfolios and loan notes is the key
variable in determining the Effective
Interest Rate (‘EIR’), any subsequent
revenue adjustments and the portfolio
carrying amount.
The Group uses cash flow forecasting
models to calculate an initial estimate of
future collections. The assumptions
used in the models include the value,
probability and timing of expected future
cash flows for each type of asset class
within a portfolio or at a portfolio level.
These estimates are subject to ongoing
review by management to assess
reasonableness, comparing actual
performance against previous forecasts.
Given the diverse nature of the Group’s
portfolio investments and loan note
investments, estimation of future cash
collections for more bespoke assets
involves a greater degree of
management judgement, whereas other
portfolio investments are valued using a
complex simulation model. The
simulation model increases the accuracy
of future cash collections, where outliers
are easily identified.
The ERCs are most sensitive to
management’s strategy in managing the
portfolios (e.g. changes in collection
policies or use of specialist collectors).
Due to the level of subjectivity inherent
in the assumptions used in the cash
flow forecasting models this is a key
judgement area for our audit.
— Controls design: We assessed the design
and operating effectiveness of UK controls
over data used in the cash flow forecasting
models including monitoring of debt servicer
collections, reconciliations of system cash
collected to actual receipts, and general IT
controls over the UK collection systems
driving the estimated future cash flows;
— Governance controls: We assessed the
design and implementation of approval
controls such as the portfolio review
committee that covers the outputs of the
models and manual adjustments to obtain
evidence that these have been authorised
by appropriate management personnel;
— Methodology implementation: We
assessed the UK simulation model and
methodology used in valuing loan portfolios
using our internal specialists to review the
modelling code and to test the stability of
forecasting model;
— Critical assessment of cash flows: We
assessed the modelled cash flows by
portfolio to identify those portfolios where
more judgement has been exercised (for
example due to changes in approach by
management to managing the portfolios)
and/or we consider greater risk existed (for
example due to under/over-performance
against historic forecasts). Taking into
account these risk factors, on a sample
basis we critically assessed the cash flow
forecasts and any manual adjustments
made by the Group with reference to actual
historic collections and our understanding of
the Group. We also considered the
methodology against our knowledge of
industry peers; and
— Assessing transparency: We assessed the
adequacy of the Group’s disclosures about
the degree of estimation involved in
forecasting cash collections.
Our results
— We found the resulting forecast based
valuation to be acceptable (2017 result:
acceptable).
90
Independent auditor's report continued
2. Key audit matters: our assessment of risks of material misstatement (cont.)
Fair value of net assets acquired
as part of business
combinations
(£15.3 million; 2017: £7.8 million)
Refer to page 59 (Audit
Committee Report), page 103
(accounting policy) and pages
136-140 (financial disclosures).
The risk
Our response
Forecast based valuation:
Our procedures included:
During the year ended 31 December
2018, the Group acquired Parr Credit
S.r.l and Europa Investimenti S.p.A. in
Italy, Norfin Investimentos S.A. in
Portugal and Bergen Capital
Management Limited in the UK with the
assets and liabilities purchased
accounted for at fair value at the date of
acquisition.
The Group prepared the acquisition
balance sheets based on its estimate of
the fair value of assets and liabilities
acquired. In particular, the Group
prepared discounted cash flow models
to arrive at its estimates of the acquired
intangible assets including customer
relationships. This required it to exercise
judgement in determining the expected
cash flows from the assets and the
discount rates to be applied.
This required them to exercise of
management judgement in determining
the expected cash flows from the
assets and the discount rates to be
applied.
— Accounting analysis: We assessed the
accounting policy adopted against the
requirements of the relevant accounting
standard;
— Our Sector experience: We challenged the
completeness of the acquired net assets
and associated assumptions with reference
to our business understanding of the
acquired entities and testing of the
Directors’ assessments. We challenged the
assumptions including value, probability and
timing of cash flows, made in calculating the
fair value assigned to acquired intangibles
with reference to the business plan, existing
customer contracts and actual performance
achieved.
— Sensitivity analysis: We performed
sensitivity analysis on the Group’s key
assumptions being the forecast future cash
flows and discount rate applied to help us
assess their reasonableness and identify
areas of potential additional focus including
any management bias in their judgement;
and
— Assessing transparency: We assessed the
adequacy of the Group’s disclosures about
the degree of estimation involved in arriving
at the fair value.
Our results
— We found the fair value of the
acquired net assets to be acceptable
(2017 result: acceptable).
2. Key audit matters: our assessment of risks of material misstatement (cont.)
91
Recoverability of parent
company’s investment in
subsidiaries and intra-group
debtor balance due from Group
entities
(Parent key audit matter)
(Investment in subsidiary £307.5
million; 2017: £307.5 million.
Intra-group debtors £202.7
million; 2017: £88.5 million)
Refer to page 104 (accounting
policy) and page 121
(financial disclosures).
The risk
Our response
Low risk, high value:
Our procedures included:
The carrying amount of the parent
company’s investments in subsidiaries
and intra-group debtor balance due from
group entities represents 100% (2017:
100%) of the company’s total assets.
Their recoverability is not at a high risk
of significant misstatement or subject to
significant judgement. However, due to
their materiality in the context of the
parent company financial statements,
this is considered to be the area that had
the greatest effect on our overall parent
company audit.
— Tests of detail: We compared the carrying
amount of the investments, representing
100% (2017: 100%) of the total investment
balance; with the relevant subsidiaries’ draft
balance sheet to identify whether their net
assets, being an approximation of their
minimum recoverable amount, were in
excess of their carrying amount and
assessing whether those subsidiaries have
historically been profit-making;
— We assessed 100% of group debtors to
identify, with reference to the relevant
debtors’ draft balance sheet, whether they
have a positive net asset value and
therefore coverage of the debt owed, as
well as assessing whether those debtor
companies have historically been profit-
making;
— Assessing subsidiary audits: We assessed
the work we performed on those
subsidiaries and considered the results of
that work, on those subsidiaries’ profits and
net assets; and
— Our sector experience: For the
investments where the carrying amount
exceeded the net asset value, we compared
the carrying amount of the investment with
the expected value of the business based
on the expected cash flows of the
underlying subsidiaries.
Our results
— We found the group’s assessment of the
recoverability of the parent company’s
investment in subsidiaries and intra-
group debtor balance to be
acceptable (2017 result: acceptable).
92
Independent auditor's report continued
3. Our application of materiality and an overview of
the scope of our audit
Normalised profit before tax
£73.4m (2017: £63.2m)
Group Materiality
£3.3m (2017: £2.8m)
£3.3m
Whole financial
statements materiality
(2017: £2.8m)
£2.6m
Range of materiality at 6
components (£1.6m-£2.6m)
(2017: £1.4m to £2.2m)
Normalised profit before tax
Group materiality
£0.16m
Misstatements reported to the
audit committee (2017:
£0.14m)
Group revenue
Group profit before tax
100%
(2017 100%)
100
100
100%
(2017 100%)
100
100
Group total assets
. 100%
(2017 100%)
100
100
Full scope for group audit purposes 2018
Full scope for group audit purposes 2017
Materiality for the group financial statements as a
whole was set at £3.3m (2017: £2.8m), determined
with reference to a benchmark of profit before tax,
normalised to exclude £14.7 million of costs in relation
to acquisitions and £18.7 million in relation to the
Group’s bond finance as set out on page 28. The
materiality represents 4.4% (2017: 4.4%).
We consider normalised profit before tax to be the
most appropriate benchmark as it provides a more
stable measure year on year than group profit before
tax.
Materiality for the parent company financial
statements as a whole was set at £1.6m (2017:
£1.4m), determined with reference to a benchmark of
total company assets, of which it represents 0.4%
(2017: 0.4%).
We agreed to report to the Audit Committee any
corrected or uncorrected identified misstatements
exceeding £165,000 (2017: £140,000), in addition to
other identified misstatements that warranted
reporting on qualitative grounds.
How we scoped our audit
Of the group's 10 (2017: 6) reporting components, we
subjected 6 (2017: 6) to full scope audits for group
purposes.
The group team performed procedures on the items
excluded from normalised group profit before tax.
The components within the scope of our work
accounted for the percentages illustrated opposite.
The Group team instructed component auditors as to
the significant areas to be covered, including the
relevant risks detailed above and the information to be
reported back.
The Group team approved the component
materialities, which ranged from £1.6m to £2.6m
(2017: £1.4m to £2.2m), having regard to the mix of
size and risk profile of the Group across the
components.
The Group team is based in the UK and is responsible
for the audit of the Group, UK operating and non-
operating subsidiaries and the Mars Capital Operating
and non-operating entities.
The Group team visited the component teams in
Portugal, Italy and Netherlands to assess the audit risk
and strategy. Telephone conference meetings were
also held with these component auditors. At these
visits and meetings, the findings reported to the
Group team were discussed in more detail, and any
further work required by the Group team was then
performed by the component auditor.
4. We have nothing to report on going concern
5. We have nothing to report on the other information in
93
The Directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the
Company or the Group or to cease their operations, and as
they have concluded that the Company’s and the Group’s
financial position means that this is realistic. They have also
concluded that there are no material uncertainties that
could have cast significant doubt over their ability to
continue as a going concern for at least a year from the
date of approval of the financial statements (“the going
concern period”).
Our responsibility is to conclude on the appropriateness of
the Directors’ conclusions and, had there been a material
uncertainty related to going concern, to make reference to
that in this audit report. However, as we cannot predict all
future events or conditions and as subsequent events may
result in outcomes that are inconsistent with judgements
that were reasonable at the time they were made, the
absence of reference to a material uncertainty in this
auditor's report is not a guarantee that the Group and the
Company will continue in operation.
In our evaluation of the Directors’ conclusions, we
considered the inherent risks to the Group’s and
Company’s business model and analysed how those risks
might affect the Group’s and Company’s financial resources
or ability to continue operations over the going concern
period. The risk that we considered most likely to adversely
affect the Group’s and Company’s available financial
resources over this period was significant reduction of cash
collections due to macroeconomic slow down impacting
the Group’s ability to comply with financing covenants.
As this was a risk that could potentially cast significant
doubt on the Group’s and the Company's ability to continue
as a going concern, we considered sensitivities over the
level of available financial resources indicated by the
Group’s financial forecasts taking account of reasonably
possible (but not unrealistic) adverse effects that could arise
from these risks individually and collectively and evaluated
the achievability of the actions the Directors consider they
would take to improve the position should the risks
materialise.
Based on this work, we are required to report to you if:
— we have anything material to add or draw attention to in
relation to the directors’ statement in Note 1 to the
financial statements on the use of the going concern
basis of accounting with no material uncertainties that
may cast significant doubt over the Group and
Company’s use of that basis for a period of at least
twelve months from the date of approval of the financial
statements; or
— the related statement under the Listing Rules set out on
page 66 is materially inconsistent with our
audit knowledge.
We have nothing to report in these respects, and we did
not identify going concern as a key audit matter.
the Annual Report
The directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does
not cover the other information and, accordingly, we do not
express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial
statements audit work, the information therein is materially
misstated or inconsistent with the financial statements or
our audit knowledge. Based solely on that work we have
not identified material misstatements in the other
information.
Strategic report and directors’ report
Based solely on our work on the other information:
— we have not identified material misstatements in the
strategic report and the directors’ report;
— in our opinion the information given in those reports for
the financial year is consistent with the financial
statements; and
— in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration
Report to be audited has been properly prepared in
accordance with the Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw
attention to in relation to:
— the directors’ confirmation within the statement of
viability page 49 that they have carried out a robust
assessment of the principal risks facing the Group,
including those that would threaten its business model,
future performance, solvency and liquidity;
— the Principal Risks disclosures describing these risks
and explaining how they are being managed and
mitigated; and
— the directors’ explanation in the statement of viability of
how they have assessed the prospects of the Group,
over what period they have done so and why they
considered that period to be appropriate, and their
statement as to whether they have a reasonable
expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the
period of their assessment, including any related
disclosures drawing attention to any necessary
qualifications or assumptions.
Under the Listing Rules we are required to review the
statement of viability. We have nothing to report in this
respect.
Our work is limited to assessing these matters in the
context of only the knowledge acquired during our financial
statements audit. As we cannot predict all future events or
conditions and as subsequent events may result in
outcomes that are inconsistent with judgments that were
reasonable at the time they were made, the absence of
anything to report on these statements is not a guarantee
as to the Group’s and Company’s longer-term viability.
94
Independent auditor's report continued
Corporate governance disclosures
7. Respective responsibilities
We are required to report to you if:
Directors’ responsibilities
— we have identified material inconsistencies between the
knowledge we acquired during our financial statements
audit and the directors’ statement that they consider
that the annual report and financial statements taken as
a whole is fair, balanced and understandable and
provides the information necessary for shareholders to
assess the Group’s position and performance, business
model and strategy; or
— the section of the annual report describing the work of
the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee;
or
— a corporate governance statement has not been
prepared by the company.
We are required to report to you if the Corporate
Governance Statement does not properly disclose a
departure from the eleven provisions of the UK Corporate
Governance Code specified by the Listing Rules for our
review.
We have nothing to report in these respects.
Based solely on our work on the other information
described above:
— with respect to the Corporate Governance Statement
disclosures about internal control and risk management
systems in relation to financial reporting processes and
about share capital structures:
– we have not identified material misstatements
therein; and
– the information therein is consistent with the
financial statements; and
— in our opinion, the Corporate Governance Statement has
been prepared in accordance with relevant rules of the
Disclosure Guidance and Transparency Rules of the
Financial Conduct Authority.
6. We have nothing to report on the other matters on
which we are required to report by exception
Under the Companies Act 2006, we are required to report
to you if, in our opinion:
— adequate accounting records have not been kept by the
parent Company, or returns adequate for our audit have
not been received from branches not visited by us; or
— the parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited are
not in agreement with the accounting records and
returns; or
— certain disclosures of directors’ remuneration specified
by law are not made; or
— we have not received all the information and
explanations we require for our audit.
We have nothing to report in these respects.
As explained more fully in their statement set out on page
86, the directors are responsible for: the preparation of the
financial statements including being satisfied that they give
a true and fair view; such internal control as they determine
is necessary to enable the preparation of financial
statements that are free from material misstatement,
whether due to fraud or error; assessing the Group and
parent Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and using the going concern basis of accounting unless
they either intend to liquidate the Group or the parent
Company or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or other
irregularities (see below), or error, and to issue our opinion
in an auditor’s report. Reasonable assurance is a high level
of assurance, but does not guarantee that an audit
conducted in accordance with ISAs (UK) will always detect
a material misstatement when it exists. Misstatements can
arise from fraud, other irregularities or error and are
considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could
reasonably be expected to have a material effect on the
financial statements from our general commercial and
sector experience, through discussion with the directors
and other management (as required by auditing standards)
and from inspection of the group’s regulatory and legal
correspondence and discussed with the directors and other
management the policies and procedures regarding
compliance with laws and regulations. We communicated
identified laws and regulations throughout our team and
remained alert to any indications of non-compliance
throughout the audit. This included communication from the
group to component audit teams of relevant laws and
regulations identified at group level.
The potential effect of these laws and regulations on the
financial statements varies considerably.
Firstly, the group is subject to laws and regulations that
directly affect the financial statements including financial
reporting legislation (including related companies
legislation), distributable profits legislation and taxation
legislation and we assessed the extent of compliance with
these laws and regulations as part of our procedures on the
related financial statement items.
95
Secondly, the group is subject to many other laws and
regulations where the consequences of non-compliance
could have a material effect on amounts or disclosures in
the financial statements, for instance through the
imposition of fines or litigation or the loss of the group’s
licence to operate. We identified the following areas as
those most likely to have such an effect: anti-bribery,
employment law and certain aspects of company
legislation, customer conduct, recognising the financial and
regulated nature of the group’s activities and its legal form.
Auditing standards limit the required audit procedures to
identify non-compliance with these laws and regulations to
enquiry of the directors and other management and
inspection of regulatory and legal correspondence, if any.
These limited procedures did not identify actual or
suspected non-compliance.
Owing to the inherent limitations of an audit, there is an
unavoidable risk that we may not have detected some
material misstatements in the financial statements, even
though we have properly planned and performed our audit
in accordance with auditing standards. For example, the
further removed non-compliance with laws and regulations
(irregularities) is from the events and transactions reflected
in the financial statements, the less likely the inherently
limited procedures required by auditing standards would
identify it. In addition, as with any audit, there remained a
higher risk of non-detection of irregularities, as these may
involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls. We
are not responsible for preventing non-compliance and
cannot be expected to detect non-compliance with all laws
and regulations.
8. The purpose of our audit work and to whom we owe
our responsibilities
This report is made solely to the Company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s
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 and the
Company’s members, as a body, for our audit work, for this
report, or for the opinions we have formed.
Alexander Simpson (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
One St Peter’s Square
Manchester
M2 3AE
28 February 2019
96
Financial statements
Consolidated statement of profit
or loss & other comprehensive income
For the year ended 31 December 2018
Continuing operations
Income from portfolio investments at amortised cost
Fair value gain on portfolio investments at FVTPL
Impairment gains on portfolio investments at amortised cost*
Total income from portfolio investments
Income from asset management and servicing
Other income
Total income
Operating expenses:
Collection activity costs
Other operating expenses
Total operating expenses
Operating profit
Finance income
Finance costs
Share of profit in associate net of tax
Gain on sale of associate
Profit before tax
Taxation charge on ordinary activities
Profit after tax
Other comprehensive income:
Items that are or may be reclassified subsequently to profit or loss:
FX translation difference arising on revaluation of foreign operations
Movement on hedging reserve
Items that will not be reclassified to profit or loss:
Remeasurements of the defined benefit liability
Total comprehensive income
Profit after tax attributable to:
Owners of the Company
Non-controlling interest
Basic EPS (£)
Diluted EPS (£)
Note
2018
£000
2017
£000
193,932
24,745
50,727
269,404
91,661
731
361,796
(119,041)
(135,972)
(255,013)
106,783
76
(66,868)
–
–
39,991
(10,022)
29,969
179,538
5,298
63,081
247,917
71,098
–
319,015
(118,468)
(94,603)
(213,071)
105,944
9
(71,669)
1,578
14,697
50,559
(10,644)
39,915
1,370
(241)
2,431
289
–
31,098
(25)
42,610
29,969
–
29,969
0.17
0.17
39,871
44
39,915
0.23
0.22
10
7
8
23
23
11
6
12
12
* The 2017 comparative was in the prior year included within total income, and represented the portfolio write-up, which was taken in 2017 on the Group’s portfolio investments.
Arrow Global Annual Report and Accounts 2018
97
Consolidated & parent company
statement of financial position
As at 31 December 2018
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investment in subsidiary undertakings
Deferred tax asset
Total non-current assets
Current assets
Cash and cash equivalents
Trade and other receivables
Portfolio investments
Total current assets
Total assets
Equity
Share capital
Share premium
Retained earnings
Hedging reserve
Other reserves
Total equity attributable to shareholders
Non-controlling interest
Total equity
Liabilities
Non-current liabilities
Senior secured notes
Trade and other payables
Deferred tax liability
Total non-current liabilities
Current liabilities
Trade and other payables
Derivative liability
Current tax liability
Revolving credit facility
Bank overdrafts
Other borrowings
Senior secured notes interest
Total current liabilities
Total liabilities
Total equity and liabilities
Group
2018
£000
Group
2017
£000
Company
2018
£000
Company
2017
£000
Note
13
14
15
23
19
17
16
20
20
28
18
19
18
26
28
28
28
28
262,679
44,264
7,761
–
8,113
322,817
152,779
43,493
10,168
–
7,780
214,220
92,001
94,206
1,087,030
1,273,237
1,596,054
35,943
56,885
951,467
1,044,295
1,258,515
1,763
347,436
116,589
(584)
(273,547)
191,657
601
192,258
1,753
347,436
118,710
(343)
(272,408)
195,148
173
195,321
920,798
52,476
14,930
988,204
145,181
502
7,915
242,121
2,696
11,635
5,542
415,592
1,403,796
1,596,054
763,740
16,569
21,940
802,249
81,790
2,865
4,528
153,036
1,332
10,724
6,670
260,945
1,063,194
1,258,515
–
–
–
307,500
–
307,500
8
222,579
–
222,587
530,087
1,763
347,436
183,740
–
(5,800)
527,139
–
527,139
–
–
–
–
2,251
–
697
–
–
–
–
2,948
2,948
530,087
–
–
–
307,500
–
307,500
9
88,544
–
88,553
396,053
1,753
347,436
47,333
–
(3,291)
393,231
–
393,231
–
–
–
–
1,405
–
1,417
–
–
–
–
2,822
2,822
396,053
Approved by the board of directors on 28 February 2019, signed and authorised for issue on its behalf by:
Paul Cooper
Group chief financial officer
Company number: 08649661
Lee Rochford
Group chief executive officer
Arrow Global Annual Report and Accounts 2018
Financial statements
98
Financial statements continued
Consolidated & parent company
statement of changes in equity
For the year ended 31 December 2018
Group
Balance at 1 January 2017
Profit after tax
Exchange differences
Recycled to profit after tax
Net fair value losses – cash flow hedges
Tax on hedged items
Remeasurements of the defined benefit liability
Total comprehensive income for the year
Share-based payments
Shares issued
Repurchase of own shares
Dividend paid
Dividend paid by NCI
Non-controlling interest on acquisition
Balance at 31 December 2017
Impact of adopting IFRS 9
Impact of adopting IFRS 15
Balance post IFRS adjustments at 1 January 2018
Profit after tax
Exchange differences
Recycled to profit after tax
Net fair value gains – cash flow hedges
Tax on hedged items
Total comprehensive income for the year
Shares issued
Repurchase of own shares
Share-based payments
Dividend paid
Dividend paid by NCI
Non-controlling interest on acquisition
Balance at 31 December 2018
Retained
Share
Ordinary
earnings
premium
shares
£000
£000
£000
92,327
1,744 347,436
39,871
–
–
–
–
–
–
–
–
–
–
(25)
– 39,846
3,334
–
–
–
–
–
– (16,797)
–
–
–
–
118,710
347,436
– (14,000)
(199)
–
104,511
347,436
– 29,969
–
–
–
–
–
–
–
–
– 29,969
–
–
–
–
3,267
–
– (21,158)
–
–
–
–
1,763 347,436 116,589
–
–
–
–
–
–
–
–
9
–
–
–
–
1,753
–
–
1,753
–
–
–
–
–
–
10
–
–
–
–
–
Hedging
reserve
£000
(632)
–
–
–
348
(59)
–
289
–
–
–
–
–
–
(343)
–
–
(343)
–
–
–
(291)
50
(241)
–
–
–
–
–
–
Own share
reserve 1
£000
(1,936)
–
–
–
–
–
–
–
–
–
(1,355)
–
–
–
(3,291)
–
–
(3,291)
–
–
–
–
–
–
–
(2,509)
–
–
–
–
(584) (5,800)
Translation
reserve 1
£000
5,413
–
4,301
(1,870)
–
–
–
2,431
–
–
–
–
–
–
Merger
reserve 1
£000
(276,961)
–
–
–
–
–
–
–
–
–
–
–
–
–
7,844 (276,961)
–
–
Total
£000
167,391
39,871
4,301
(1,870)
348
(59)
(25)
42,566
3,334
9
(1,355)
(16,797)
–
–
195,148
(14,000)
(199)
(276,961) 180,949
– 29,969
2,572
–
(1,202)
–
(291)
–
50
–
31,098
–
10
–
(2,509)
–
3,267
–
(21,158)
–
–
–
–
–
9,214 (276,961) 191,657
–
–
7,844
–
2,572
(1,202)
–
–
1,370
–
–
–
–
–
–
Non-
controlling
Total
interest
£000
£000
167,391
–
39,915
44
4,301
–
(1,870)
–
348
–
(59)
–
(25)
–
42,610
44
3,334
–
9
–
(1,355)
–
(16,797)
–
(58)
(58)
187
187
195,321
173
(14,000)
–
(199)
–
173
181,122
– 29,969
2,572
–
(1,202)
–
(291)
–
50
–
31,098
–
10
–
(2,509)
–
3,267
–
(21,158)
–
(43)
(43)
471
471
601 192,258
1. Other reserves total £273,547,000 deficit (2017: £272,408,000 deficit).
Company
Balance at 1 January 2017
Profit after tax
Total comprehensive income for the year
Shares issued
Repurchase of own shares
Share-based payments
Dividend paid
Balance at 31 December 2017
Profit after tax
Total comprehensive income for the year
Shares issued
Repurchase of own shares
Share-based payments
Dividend paid
Balance at 31 December 2018
Arrow Global Annual Report and Accounts 2018
Ordinary
shares
£000
1,744
–
–
9
–
–
–
1,753
–
–
10
–
–
–
Share
premium
£000
347,436
–
–
–
–
–
–
347,436
–
–
–
–
–
–
1,763 347,436
Retained
earnings
£000
37,509
23,287
23,287
–
–
3,334
(16,797)
47,333
154,298
154,298
–
–
3,267
(21,158)
183,740
Own share
reserve
Total
£000
£000
(1,936) 384,753
23,287
23,287
9
(1,355)
3,334
(16,797)
393,231
154,298
154,298
10
(2,509)
3,267
(21,158)
(5,800) 527,139
–
–
–
(1,355)
–
–
(3,291)
–
–
–
(2,509)
–
–
99
Consolidated & parent company
statement of cash flows
For the year ended 31 December 2018
Net cash (used in)/generated by operating activities
Investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from disposal of intangible assets and property, plant and equipment
Dividends received from associate
Disposal of associate
Acquisition of subsidiaries, net of cash acquired
Acquisition of subsidiary, deferred consideration
Net cash used in investing activities
Financing activities
Movements in other banking facilities
Proceeds from senior notes (net of fees)
Redemption of senior notes
Early repayment of bond
Repayment of interest on senior notes
Repurchase of own shares
Issue of share capital
Bank interest received
Bank and other similar fees paid
Payment of dividends
Payment of deferred interest
Net cash flow generated by/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of year
Note
32
Group
2018
£000
(19,021)
(2,367)
(11,077)
3,759
–
–
(57,022)
(11,612)
(78,319)
91,092
345,847
(203,467)
(13,623)
(36,522)
(2,509)
10
76
(6,248)
(21,201)
(257)
153,198
55,858
35,943
200
92,001
Group
2017
£000
(27,478)
Company
2018
£000
23,656
Company
2017
£000
18,144
(4,885)
(9,112)
1,319
7,233
18,143
(8,201)
(8,888)
(4,391)
66,327
340,546
(290,867)
(17,631)
(31,119)
(1,355)
9
9
(4,274)
(16,855)
(610)
44,180
12,311
23,203
429
35,943
–
–
–
–
–
–
–
–
–
–
–
–
–
(2,509)
10
–
–
(21,158)
–
(23,657)
(1)
9
–
8
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,355)
9
–
–
(16,797)
–
(18,143)
1
8
–
9
Arrow Global Annual Report and Accounts 2018
Financial statements
100
Notes to the financial statements
Notes to the financial statements
1. 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 and rounded to the
nearest thousand.
The Company’s subsidiaries, both direct and indirect, at this date are
listed in note 23.
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 and the Company’s financial statements for the year
ended 31 December 2018 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 transitional
arrangements as discussed in note 2.
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.
2. Accounting standards
New standards
The following new standards and interpretations are mandatory for the
year beginning 1 January 2018:
•
•
IFRS 15 Revenue from Contracts with Customers;
IFRS 9 Financial Instruments;
• Classification and Measurement of Share-based Payment
Transactions (Amendments to IFRS 2);
• Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
(Amendments to IFRS 4);
• Transfers of Investment Property (Amendments to IAS 40);
• Annual Improvements to IFRSs 2014-2016 Cycle (Amendments to
IFRS 1 and IAS 28); and
•
IFRIC 22 Foreign Currency Transactions and Advance Consideration.
During 2018, these new standards and interpretations had
an insignificant effect on the consolidated financial statements,
apart from IFRS 9 and IFRS 15 which are discussed in note 2.1 and 2.2.
2.1 IFRS 9 ‘Financial instruments’
The only material impact from the introduction of IFRS 9 on the
Group’s financial statements is associated with portfolio investments.
As discussed in the following paragraphs, the Group has taken the low
credit risk exemption for the remainder of its financial assets. IFRS 9
has not restated comparative information as a result of IFRS 9.
The classification and measurement of the Group’s financial liabilities
has also been considered under IFRS 9, and no material impact on the
classification or measurement of the Group’s financial liabilities arose
upon transition. For further details please refer to note 26.
Classification of portfolio investments
Under IFRS 9, the Group is required to classify all portfolio investments
into one of three principal classification categories for financial assets:
measured at amortised cost, fair value through other comprehensive
income and fair value through the profit or loss (FVTPL). Note 26
contains a category analysis of the Group’s portfolios.
A portfolio investment is measured at amortised cost if it meets both of
the following conditions and is not designated as at FVTPL:
•
•
It is held within a business model whose objective is to hold assets to
collect contractual cash flows; and
Its contractual terms give rise on specified dates to cash flows that
are solely payments of principal and interest (SPPI) on the principal
amount outstanding.
A portfolio investment is measured at fair value through other
comprehensive income only if it meets both of the following conditions
and is not designated as at FVTPL:
•
•
It is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets; and
Its contractual terms give rise on specified dates to cash flows that
are SPPI on the principal amount outstanding.
None of the Group’s portfolios are currently classified as fair value
through other comprehensive income (OCI). All portfolio investments
not classified as measured at amortised cost or fair value through other
comprehensive income as described above are measured at FVTPL.
All of the Group’s and Company’s financial assets, including cash and
cash equivalents, trade and other receivables and portfolio investments
have been assessed as being in a ‘hold to collect’ business model.
Therefore, the only reason why a financial asset would be classified
as FVTPL would be due to the failure of the SPPI test.
IFRS 9 largely retains the existing requirements in IAS 39 for the
classification of financial liabilities and hence there has not been a
significant change to this element of the Group’s accounting policy.
Income from portfolio investments
Income from portfolio investments primarily represents the yield from
acquired portfolio investments, and also includes profits from the sale
of Real Estate Owned (REO) assets in the period. Portfolio investments
are financial assets that are accounted for under IFRS 9 and recognised
at fair value at the purchase date that equals the price paid. Unless
measured at FVTPL they are subsequently measured at amortised cost.
The EIR method is a method of calculating the amortised cost of
a portfolio investment and of allocating interest income over the
expected life of the portfolio. The EIR is the rate that exactly discounts
the estimated future cash receipts of the purchased portfolio asset
to the net carrying amount at initial recognition (i.e. the price paid to
acquire the asset, inclusive of deal costs). Following implementation of
IFRS 9 the EIR is a credit-adjusted rate taking into account of expected
credit losses (ECLs).
Arrow Global Annual Report and Accounts 2018
101
2. Accounting standards continued
Portfolio investments measured at fair value
Following the introduction of IFRS 9, a greater value and proportion of
the Group’s portfolio investments are measured at fair value, as they will
not meet the SPPI test, as set out above. These investments are initially
recorded at their fair value, being their acquisition price, and are
subsequently measured at fair value using discounted cash flow models.
Each investment’s life varies as appropriate for each individual portfolio,
to include all anticipated economic benefits to be derived by the Group
from ownership of the asset.
Recognition of economic interests in portfolios
The Group purchases and holds economic interests in loan portfolio
assets in a variety of ways. This interest could either be a co-investment
alongside other third parties, or an individual economic interest in a
portfolio. The Group makes an assessment of the economic substance
of such holdings when determining how to classify and measure these
financial assets. Individual assessments of each structure are made
against the requirements of the relevant standards, but the general
accounting principles applied by the Group in such circumstances
are as follows:
• Where the arrangement entered into is materially economically
equivalent to holding a direct proportional share of the underlying
portfolio, the Group will account for its interest in the arrangement
on a basis equivalent to accounting for the Group’s share of the
underlying asset.
• Where the arrangement modifies the allocation of the cash flows
arising from the underlying asset, such as introducing levels of
subordination, the Group shall account for its holdings as loan notes.
These loans notes are then assessed against the various criteria of
IFRS 9 to determine whether they are accounted for as amortised
cost financial assets, or as FVTPL assets.
This results in the most appropriate accounting treatment being
applied to each deal.
Impairment of portfolio investments
Impairment of portfolio investments is assessed under the IFRS 9
forward-looking expected credit loss model. The estimation of ECLs
includes an assessment of forward-looking economic assumptions
which are determined on a probability-weighted basis based on
reasonable and supportable forecasts. The Group leverages off
its existing cash flow models to inform these ECLs.
The key concepts for IFRS 9 in relation to impairment include the
following categories:
• No significant increase in credit risk since origination (Performing)
• A significant increase in credit risk has occurred since origination
(Underperforming)
• Credit impaired where an incurred loss even has been observed
(Credit impaired)
• The asset is considered purchased or originated credit impaired on
initial recognition (POCI)
Due to the characteristics of the Group’s portfolio investments they are
classified as POCI as the assets are considered purchased or originated
credit impaired. ECL is not provided for on initial recognition. Instead,
lifetime ECL is incorporated into the calculation of the effective interest
rate. Any changes in lifetime ECL after initial recognition are recognised
in profit or loss. ECL calculation for POCI assets is based on an ECL over
84 months.
In determining ECLs the assessment of forward-looking economic
assumptions, which are sourced from an independent specialist
forecasting company, the Group considers a number of macroeconomic
scenarios, including assumptions on unemployment, GDP and CPI,
and where appropriate HPI. These scenarios are probability weighted
according to their likely occurrence. The scenarios include a central
scenario, based on the current economic environment, as well as
upside and downside scenarios. The estimation and application of
this forward-looking information requires significant judgment and
is subject to appropriate internal governance.
Impairment gains/losses are changes to carrying values, discounted at
the EIR rate, of the acquired debt portfolios as a result of reassessments
of their estimated future cash flows and are recognised in the line item
‘impairment gains on portfolio investments at amortised cost’. In the
income statement, a comparative representing the portfolio ‘write up’
has been presented, which was previously within ‘total revenue’.
As all of the Group’s amortised cost portfolio assets are POCI, the cash
flows are subject to reassessment each period. For any portfolios which
may be sold to a third party from time to time, these are first subject to
a cash flow reassessment. Expected cash flows in such a scenario would
be linked to the likely sale proceeds, meaning that all such assets would
be written to their expected selling price via an impairment gain/loss,
before being sold.
Others
The Group and Company have applied the low credit risk exemption
to cash and cash equivalents and the simplified approach to trade and
other receivables. See note 26 for further IFRS 9 transitional information.
Impact of IFRS 9
The line item ‘portfolio investments’ in the statement of financial
position was impacted by the introduction of IFRS 9, disclosed as
‘purchased loan portfolios’ and ‘loan notes’ in previous accounting
periods. The opening reserves reduction as a result of IFRS 9 was
£14,000,000 (pre-tax impact of £17,000,000) reducing the portfolio
value as a result of the pre-tax IFRS 9 impairment, as disclosed in note
16. There was no impact to the opening reserves of the Company.
The income statement sees the addition of the line items ‘fair value gain
on portfolio investments at FVTPL’ and ‘impairment gains on portfolio
investments at amortised cost’ included as part of total income,
which was previously known as ‘total revenue’. On the balance sheet,
‘portfolio investments’ now replaces and subsumes what was known
as ‘purchased loan portfolios’ and ‘loan notes’.
Hedge Accounting
IFRS 9 also incorporates new hedge accounting rules that intend to
align hedge accounting with risk management practices. The Group
has chosen not to defer the adoption of IFRS 9 hedge accounting
and has therefore discontinued with IAS 39 hedge accounting.
Arrow Global Annual Report and Accounts 2018
Financial statements 102
Notes to the financial statements continued
2. Accounting standards continued
Policy applicable before 1 January 2018
The policies which are materially different under IFRS 9 from the
previous accounting policies standard IAS 39 are disclosed below:
Essentially, where the risks and rewards of the loan portfolio assets sit
with the Group rather than the issuer of the loan notes, it is appropriate
for the entity issuing the loan notes to derecognise the underlying
asset, and the Group to recognise their proportionate share.
Revenue recognition and effective interest rate method (EIR)
Income from purchased loan portfolios
Income from purchased loan portfolios represents the yield from
acquired portfolio investments. Purchased loan portfolios are financial
instruments that are accounted for under IAS 39 and recognised at
fair value at the purchase date that equals the price paid. They are
subsequently measured at amortised cost using the EIR method.
The EIR method is a method of calculating the amortised cost of a
purchased loan portfolio and of allocating interest income over the
expected life of the portfolio. The EIR is the rate that exactly discounts
84 months of estimated future cash receipts of the purchased portfolio
asset to the net carrying amount at initial recognition (i.e. the price paid
to acquire the asset).
Upward revaluations (write-ups) are increases to carrying values,
discounted at the EIR rate, of the acquired debt portfolios as a result of
reassessments to their estimated future cash flows and are recognised
in the income from purchased loan portfolios line within revenue. Any
subsequent reversals to write-ups are also recorded in this line. If these
reversals (‘write-downs’) exceed any previously recognised cumulative
write-ups (i.e. a write-down reduces the portfolio carrying amount
below its initial purchase price) then impairment is recognised as
a separate line in the statement of profit or loss and other
comprehensive income.
Unallocated cash is held as a liability in the statement of financial
position until it is reconciled. Unallocated cash is held as liability
until all reasonable steps have been taken to show that it has been
extinguished, only being released to the consolidated statement
of profit or loss and other comprehensive income at this point.
Where the Group acquires purchased loan portfolios via forward flow
agreements, being contracted multiple future purchases, there is no
difference in accounting treatment from that described above.
Recognition of loan notes as portfolios
When the Group purchases loan notes in entities that in turn have
legal ownership of underlying loan portfolios, the Group has assessed
the substance of the loan notes under the criteria set out in IAS 39 to
determine whether to account for the underlying portfolio loan assets
or to recognise an investment in the loan note asset in the entity that
has issued the loan notes.
The decision is based on whether the circumstances meet the
requirements of IAS 39, paragraph 19, which deems that the Group
would recognise its proportionate share of the asset on balance sheet
as portfolio loan assets, where the following criteria are met:
• the loan note issuing entity has no obligation to pay amounts to the
Group unless it collects equivalent amounts from the original asset;
• the loan note issuing entity is prohibited by the terms of the transfer
contract from selling or pledging the original asset other than as
security to the Group for the obligation to pay them cash flows; and
• the loan note issuing entity has an obligation to remit any cash flows
it collects on behalf of the Group without material delay.
If these criteria are met, the Group recognises its appropriate share
of the underlying loan portfolios and if criteria are not met, then the
Group recognises an investment in the loan notes.
Impairment of purchased loan portfolios and loan notes
The portfolios are reviewed for indications of impairment at the
statement of financial position date, such as variances to historical
cash curves, in accordance with IAS 39. This is considered on a portfolio
basis. Where portfolios exhibit objective evidence of impairment, an
adjustment, being the difference between the current carrying value
and the net present value of future estimated cash flows, is recorded to
the carrying value of the portfolio. Objective evidence of impairment
is considered to be where the carrying value is less than the original
purchase price less revenue recognised.
2.2 IFRS 15 ‘Revenue from contracts with customers’
The Group’s asset management income is within the scope of IFRS 15.
The Group recognises asset management income on portfolios
managed for third parties. The key contractual obligations include
debt collection servicing and master servicing. The nature of the
compensation for debt collection services and subsequent income
recognised is contingency collection fees, which are received either
as a fixed fee, a percentage of collections or a percentage of the
outstanding portfolio asset value. The nature of the compensation
for master servicing is an agreed upon fee for the provision of
various services that are available on demand.
The Group considered the revenue recognition policies in the
context of the requirements of IFRS 15. As a result of the assessment,
it concluded there was no material change resulting from the
implementation of IFRS 15.
The following is a summary of some of the more significant
considerations that are important in understanding the impact of
the implementation of IFRS 15 on the Group:
i) Asset management and servicing income – portfolio servicing
for Group and third parties
Under IFRS 15, income is recognised over time with the relevant
measure of progress against performance obligations being the
collections calculation at the end of each period. Based on the
Group’s assessment, previous revenue recognition policies were
consistent with this approach.
ii) Asset management and servicing income – master servicing
Under IFRS 15, income is recognised over time with the relevant
measure of progress against performance obligations being time, due
to these services being on demand for when customers require them.
Based on the Group’s assessment, previous revenue recognition
policies were consistent with this approach.
iii) Transition
The Group adopted IFRS 15 using the cumulative effect method, with
the effect of initially applying this standard recognised at the date of
initial application (i.e. 1 January 2018). As a result, the Group did not
apply the requirements of IFRS 15 to the comparative period presented.
The above accounting policies form the basis of the Group’s significant
accounting policies for asset management income.
Arrow Global Annual Report and Accounts 2018
103
2. Accounting standards continued
2.3 Standards issued but not yet effective
A number of new standards and amendments to standards are effective
for annual periods beginning after 1 January 2019 and earlier application
is permitted; however, the Group has not early adopted the new or
amended standards in preparing these consolidated financial statements.
a. IFRS 16 – Leases
Of the standards issued but not yet effective, IFRS 16 Leases is likely to
have the most significance for the Group. The standard is effective for
annual periods beginning on or after 1 January 2019 and it introduces a
single, on-balance sheet lease accounting model for lessees. A lessee
recognises a right-of-use asset representing its right to use the
underlying asset and a lease liability representing its obligation
to make lease payments. IFRS 16 replaces the old standard, IAS 17.
So far, the most significant impact identified is that the Group will
recognise new assets and liabilities for the operating leases of office
buildings occupied by the Group. The Group will calculate the IFRS 16
impact on a lease-by-lease basis as they are incepted in the future.
The Group has completed an initial assessment of the potential impact
on its consolidated financial statements that IFRS 16 is expected to have
on implementation. From initial work carried out, a number of property
and car contracts will gross up the balance sheet with approximately £18
million additional assets and liabilities, opening reserves will be adjusted
by an expected £0.6 million of charge and the 2019 impact versus the
previous accounting standard is expected to be less than £0.1 million.
Given the fact that IFRS 16 will increase the assets and liabilities of the
Group, management have considered whether there will be any impact
on the Group’s banking covenants. Given the move away from LTV
covenants, and the fact the lease liabilities will not be included within
secured net debt, no impact is expected.
The Group has applied the modified retrospective approach when
calculating the expected IFRS 16 impact, and as if IFRS 16 had been
applied when measuring the liability. The transition rules include the
option to apply ‘grandfathering’ to all IAS 17 judgments previously made
by an entity regarding whether a contract was indeed a lease or not,
and the Group have applied this option in the IFRS 16 considerations
made. There is also an exemption for short-term leases, i.e. 12 months
or less (and not containing a purchase option) and low value assets to
be expensed and the Group has taken this option.
The Group has calculated the incremental borrowing rate for each
material class of operating leases and has applied these rates in the IFRS
16 calculations. The discount rates used have been tested for sensitivity
and the opening adjustment was not materially sensitive to changes in
discount rates. No IFRS 16 impact is expected to systems or processes.
b. Other standards
The following new and revised standards and interpretations have
been issued but are not yet endorsed or effective for these financial
statements and have not been early adopted:
•
IFRIC 23 Uncertainty over Tax Treatments
• Prepayment Features with Negative Compensation
(Amendments to IFRS 9)
• Long-term Interests in Associates and Joint Ventures
(Amendments to IFRS 9)
The Group is assessing the potential impact on its consolidated
financial statements resulting from the new and revised standards
and interpretations. So far, the Group does not expect any
significant impact.
3. Significant accounting policies
Basis of preparation
The financial statements have been prepared in accordance with IFRS
adopted by the European Union and the Group financial statements
also comply with EU IAS Regulation.
The financial statements of the Group have been prepared under
the historical cost convention other than the fair value of derivative
contracts and certain portfolio investments and the amortised cost
value of portfolio investment assets.
Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
(its subsidiaries) made up to 31 December 2018 and comparative period.
Control is achieved where the Company is exposed, or has rights, to
variable returns from its involvement with its investee entity and has the
ability to affect these returns through its power over the investee entity.
The results of subsidiaries acquired or disposed of during the year
are included in the consolidated statement of profit or loss and other
comprehensive income from the effective date of acquisition or up
to the effective date of disposal, as appropriate. Where necessary,
adjustments are made to the financial statements of subsidiaries to
bring the accounting policies used in line with those used by the Group.
All intra-Group transactions, balances, income and expenses are
eliminated on consolidation. Also see the accounting policy
‘shares held in an employee benefit trust’ (EBT).
Going concern
The directors have undertaken a thorough review of forecast cash flow
models and scenarios for a period in excess of 12 months from the date
of approval of these accounts. These forecasts have been subject to
stress testing, and downside scenarios have been considered including
several hard-Brexit scenarios. This is set out in more detail on page 44.
In all reasonable scenarios, and in a severe stress situation, after taking
management actions as required, the Group maintains sufficient cash
and banking covenant headroom to continue as a going concern.
Following this review, and in the light of current cash availability,
economic conditions and information available about future risks
and uncertainties, the directors have concluded that it is appropriate
to prepare the Group financial statements on a going concern basis.
Business combinations
The acquisition of subsidiaries is accounted for using the acquisition
method. The cost of the acquisition is measured at the aggregate of the
fair values, at the date of exchange, of assets given, liabilities incurred or
assumed, and equity instruments issued by the Group in exchange for
control of the acquiree. The acquiree’s identifiable assets, liabilities and
contingent liabilities that meet the conditions for recognition under
IFRS 3 (2008) (Business Combinations) are recognised at their fair value
at the acquisition date, except that of deferred tax assets or liabilities
and liabilities or assets related to employee benefit arrangements that
are recognised and measured in accordance with IAS 12 (Income Taxes)
and IAS 19 (Employee Benefits) respectively.
• Plan Amendment, Curtailment or Settlement (IAS 19 Amendments)
• Annual Improvements to IFRS Standards 2015-2017 Cycle – (Various)
IFRS 3 allows a measurement period of up to one year after acquisition
to reflect any new information obtained about facts and circumstances
that were made available to the Group at the acquisition date.
Arrow Global Annual Report and Accounts 2018
Financial statements 104
Notes to the financial statements continued
3. Significant accounting policies continued
Goodwill
Goodwill arising on a business combination is measured as the excess
of the sum of the consideration transferred, the amount of any
non-controlling interest in the acquiree and the fair value of the
acquirer’s previously held equity interest (if any) in the entity over the
net of the acquisition date amounts of the identifiable assets acquired
and the liabilities assumed. If, after reassessment, the Group’s interest
in the net fair value of the acquiree’s identifiable assets, liabilities and
contingent liabilities exceeds the cost of the business combination,
the excess is recognised immediately in profit or loss.
Goodwill is not amortised but is tested for impairment on an annual
basis, or more frequently if events or changes in circumstances indicate
that it might be impaired e.g. financial performance of the respective
acquired entity/CGU is significantly below expectations. Determining
whether goodwill is impaired requires an estimation of the value in use
of the CGUs to which goodwill has been allocated. Calculation of the
value in use requires an estimate of the amount and timing of future
cash flows expected to arise from the CGU, which are discounted by an
appropriate discount rate to calculate a present value of the future cash
flows. The discount rate applied is the Group’s weighted average cost of
capital with an adjustment to reflect the specific risk characteristics of
the CGU.
This calculation inherently involves a number of judgments in that cash
flow forecasts are prepared for periods that are beyond the normal
requirement of management reporting, and the appropriate discount
rate relevant to the CGU is an estimate.
Sensitivities and identification of CGUs have been considered in note 13.
On a business combination, the portfolio investments are remeasured
to fair value using an appropriate discount rate at the date of acquisition,
calculated based on actual performance and forecasts at that date.
On disposal of a subsidiary, the goodwill attributable to that subsidiary
is included when calculating the profit or loss on disposal.
Associates
Associates are those entities in which the Group has significant
influence, but not control, over the financial and operating policies.
Significant influence is presumed to exist when the Group holds
between 20% and 50% of the voting power of another entity, or can
demonstrate significant influence, or evidence through a number of
aspects such as representation on the board of directors, participation
in policy making and decisions, material transactions between the
entity and investee, interchange of managerial personnel or provision
of essential technical information. Associates are accounted for using
the equity method and are initially recognised at cost. The consolidated
financial statements include the Group’s share of the total
comprehensive income and equity movements of the associate
from the date that significant influence commences until the date
that it ceases.
Retirement benefit costs
Payments to defined contribution retirement schemes are charged as
the employees provide services to the Group.
The Group has, for the period covered by these financial statements,
made contributions to defined contribution plans to provide pension
benefits for employees upon retirement, and otherwise, has no residual
obligation or commitments in respect of any defined benefit scheme.
Foreign currency translation
The individual financial statements of each Group company are
presented in the currency of the primary economic environment
in which it operates (its functional currency). For the purpose of the
consolidated financial statements, the results and financial position
of each Group company are expressed in pounds Sterling, which is the
functional currency of the Company and the presentation currency for
the consolidated financial statements.
In preparing the financial statements of the individual companies,
transactions in currencies other than the entity’s functional currency
(foreign currencies) are recognised at the rates of exchange prevailing
on the dates of the transactions. At each statement of financial position
date, monetary assets and liabilities that are denominated in foreign
currencies are retranslated at the rates prevailing on that date.
Non-monetary items carried at fair value that are denominated in
foreign currencies are translated at the rates prevailing on the date
when the fair value was determined. Non-monetary items that are
measured in terms of historical cost in a foreign currency are
not retranslated.
Exchange differences are recognised in profit or loss in the year in
which they arise except for exchange differences on transactions
entered into to hedge certain foreign currency risks.
For the purpose of presenting the consolidated financial statements,
the assets and liabilities of the Group’s foreign operations are translated
at exchange rates prevailing on the statement of financial position date.
Income and expense items are translated at the average exchange rates
for the year, unless exchange rates fluctuate significantly during that
year, in which case the exchange rates at the date of transactions are
used. Exchange differences arising, if any, are recognised in other
comprehensive income.
Leases
Assets leased are classified as finance leases if the lease agreements
transfer substantially all the risks and rewards of ownerships to
the lessee, but not necessarily legal title. The leased asset is initially
measured at an amount equal to the lower of its fair value and the
present value of the minimum lease payments. Subsequent to
initial recognition, the asset is accounted for in accordance with
the accounting policy applicable to that asset. All other leases are
classified as operating leases.
Minimum lease payments made under finance leases are apportioned
between the finance expense and the reduction of the outstanding
liability. The finance expense is allocated to each period during the
lease term so as to produce a constant periodic rate of interest on
the remaining balance of the liability.
Operating lease payments are recognised as an expense on a straight-
line basis over the lease term, except where another systematic basis
is more representative of the time pattern in which economic benefits
from the leased asset are consumed.
Intercompany receivables
The Company holds material intercompany receivables on its balance
sheet. These have been assessed under IFRS 9 ECL criteria, taking into
account guidance specific to intercompany assets. The Company has
concluded that these assets have no material ECL.
Arrow Global Annual Report and Accounts 2018
105
3. Significant accounting policies continued
Taxation
Income tax expense represents the sum of the tax currently payable
and deferred tax.
Current tax
Current taxation, including UK corporation tax and foreign tax, is based
on the taxable profit for the year and is provided at amounts expected
to be paid or recovered using the tax rates and laws that have been
enacted or substantively enacted at each reporting date. Taxable profit
differs from the net profit as reported in the statement of profit or loss
and other comprehensive income because it excludes items of income
or expense that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible. Current taxation
is charged or credited in the statement of profit or loss and other
comprehensive income, except when it relates to items charged or
credited to equity, in which case the corporation taxation is also dealt
with in equity.
payment is measured to reflect such conditions and there is no true-up
for differences between expected and actual outcomes. Where the
Company grants rights to its equity instruments to employees of its
subsidiaries, the costs are recharged to the subsidiary in line with the
requirements of IFRS 2 ‘Share-based payments’.
Shares held in an employee benefit trust (EBT)
Transactions of the Company sponsored EBT are treated as being
those of the Company and are therefore, reflected in these
financial statements.
Property, plant and equipment and other intangibles
Property, plant and equipment and other intangibles, as discussed
below, are stated at cost less accumulated depreciation and
accumulated impairment losses.
Depreciation is recognised so as to write off the cost or valuation
of assets less their residual values over their useful lives, using the
straight-line method on the following basis:
Deferred tax
Deferred taxation is the tax expected to be payable or recoverable
on differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit. Deferred tax liabilities are provided,
using the liability method, on all taxable temporary differences at each
reporting date.
Furniture
Computer equipment
Leasehold improvements
Software licences
IT platform
five years
three years
five years
shorter of contractual life
and useful economic life
useful economic life
Such assets and liabilities are not recognised if the temporary difference
arises from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a transaction
that affects neither the taxable profit nor the accounting profit.
Deferred taxation liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries and interests in joint
ventures, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference
will not reverse in the foreseeable future. Deferred taxation is measured
at the average tax rates that are expected to apply in the years in which
the temporary timing differences are expected to reverse based on tax
rates and laws that have been enacted or substantively enacted at each
reporting date. The carrying amount of deferred taxation assets is
reviewed at each reporting date and reduced to the extent that it is no
longer probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered. Deferred taxation is charged or
credited in the statement of profit or loss and other comprehensive
income, except when it relates to items charged or credited to equity,
in which case the deferred taxation is also dealt with in equity.
Share-based payment transactions
Share-based payments transactions in which the Group receives
goods or services as consideration for its own equity instruments
are accounted for as equity settled share-based payments.
The grant date fair value of the share-based payment granted
to employees is recognised as an employee expense, with a
corresponding increase in equity, over the period that the employee
becomes unconditionally entitled to the awards. The fair value of the
options granted is measured using an option valuation model, taking
into account the terms and conditions upon which the options were
granted. The amount recognised as an expense is adjusted to reflect
the actual number of awards for which the related service and
non-market vesting conditions are expected to be met, such that the
amount ultimately recognised as an expense is based on the number of
awards that do meet the related service and non-market performance
conditions at the vesting date. For share-based payments with
non-vesting conditions, the grant date fair value of the share-based
The estimated useful lives, residual values and depreciation method are
reviewed at each year end, with the effect of any changes in estimate
accounted for on a prospective basis.
The gain or loss arising on the disposal or retirement of an item of
property, plant and equipment and other intangibles is determined as
the difference between the sales proceeds and the carrying amount of
the asset and is recognised in the consolidated statement of profit or
loss and other comprehensive income.
Acquired licences, such as software licences, are capitalised at cost and
amortised over the shorter of contractual life and useful economic life.
Financial instruments
Financial assets and financial liabilities are classified and measured
according to the outcome of the business model and SPPI tests,
which have been explained in section 2.1.
Portfolio investments measured at amortised cost
The Group’s amortised cost portfolio investments are non-derivative
financial assets with fixed or determinable payments that are not
quoted in an active market. Under IFRS 9, such assets are classified
as ‘amortised cost’ and are measured at amortised cost using the
EIR method less any impairment.
These portfolios investments are acquired at a deep discount and as
a result the estimated future cash flows reflect the likely credit losses
within each portfolio. The portfolio investments are initially recorded
at their fair value, being their acquisition price, and are subsequently
measured at amortised cost using the EIR method.
The portfolio asset is analysed as current in the statement of financial
position as part of the Group’s normal operating cycle.
Portfolio investments also include a small element of Real Estate Owned
(REO) assets, which are acquired when possession is taken of the real
estate security underlying a secured loan asset, or when an element
of REO assets already exist in a purchased portfolio.
Arrow Global Annual Report and Accounts 2018
Financial statements 106
Notes to the financial statements continued
3. Significant accounting policies continued
Portfolio investments measured at fair value
Other portfolio investments are non-derivative financial assets and
measured at fair value. Under IFRS 9, such assets are classified as ‘FVTPL’,
due to the fact that they have failed the SPPI test. This will usually be due
to either a clause in the underlying loans in the purchased portfolio
meaning their cash flows are not SPPI, or the manner in which the
Group has invested in the portfolio leads to the asset not being SPPI.
The portfolio investments are initially recorded at their fair value, being
their acquisition price, and are subsequently measured at fair value
using a discounted cash flow model.
Fair value measurements
The fair value of financial instruments is determined in accordance with
IFRS 13 and IFRS 9 in the manner described in note 25.
Derecognition of financial assets
The Group derecognises a financial asset when the contractual rights
to the cash flows from the financial asset expire, or it transfers the
rights to receive the contractual cash flows in a transaction in which
substantially all the risks and rewards of ownership of the financial
asset are transferred or in which the Group neither transfers nor
retains substantially all of the risks and rewards of ownership and
it does not retain control of the financial asset.
On derecognition of a financial asset, the difference between the
carrying amount of the asset (or the carrying amount allocated
to the portion of the asset derecognised) and the sum of (i) the
consideration received (including any new asset obtained less any
new liability assumed) and (ii) any cumulative gain or loss that had
been recognised in OCI is recognised in the statement of profit or loss
and other comprehensive income. Any interest in transferred financial
assets that qualify for derecognition that is created or retained by the
Group is recognised as a separate asset or liability.
Provisions
Provisions are recognised when the Group has a present obligation
(legal or constructive) as a result of a past event and it is probable
that the Group will be required to settle that obligation. Provisions are
measured at the directors’ best estimate of the consideration required
to settle that obligation at the date of the consolidated statement of
financial position and are discounted to present value where the effect
is material.
All derivative financial instruments are assessed against the hedge
accounting criteria set out in IFRS 9. The majority of the Group’s
derivatives are cash flow hedges of highly probable forecast
transactions and meet the hedge accounting requirements of IFRS 9.
Derivatives are initially recognised at the fair value on the date a
derivative contract is entered into and are subsequently remeasured at
each reporting date at their fair value. Where derivatives do not qualify
for hedge accounting, movements in their fair value are recognised
immediately within the profit or loss. For derivatives that are designated
as cash flow hedges and where the hedge accounting criteria are met,
the effective portion of changes in the fair value is recognised in other
comprehensive income. The gain or loss relating to the ineffective
portion is recognised immediately in profit or loss as part of finance
costs. Amounts accumulated in equity are recognised in profit or loss
when the income or expense on the hedged item is recognised in
profit or loss.
The Group discontinues hedge accounting when:
• the hedging derivative expires, or is sold, terminated or exercised; or,
• the hedge no longer meets the criteria for cash flow hedge
accounting; or,
•
if the hedge designation is revoked, the hedge is
discontinued prospectively.
Borrowings
Borrowings are recognised initially at fair value, being their issue
proceeds net of any transaction costs incurred. Borrowings are stated
subsequently at amortised cost; any difference between proceeds
net of transaction costs and the redemption value is recognised in the
statement of profit or loss and other comprehensive income over the
expected life of the borrowings using the EIR. Borrowings are classified
as current liabilities unless the Group has an unconditional right to defer
settlement of the liability for at least 12 months after the statement of
financial position date.
Cash and cash equivalents
Cash and cash equivalents comprise demand deposits and other
short-term highly liquid investments that are readily convertible to a
known amount of cash and are subject to an insignificant risk of change
in value. Cash and cash equivalents are carried at amortised cost in the
statement of financial position.
Financial liabilities and equity instruments
Debt and equity instruments are classified as either financial liabilities,
or as equity in accordance with the substance of the contractual
arrangement and in conjunction with the application of IFRS.
For amounts held in bank accounts which are controlled and therefore
consolidated into the Group financial statements, but are not able to be
freely used as cash or cash equivalents by the Group, such balances are
classified as ‘other receivables’.
Financial liabilities are held at amortised cost using the EIR method.
The EIR is calculated by estimating the cash flows arising from the
contractual terms of the instrument over its expected life. Transaction
costs are included within the EIR and deducted from the initial carrying
value of the financial liabilities.
The Group derecognises financial liabilities when the Group’s
obligations are discharged, cancelled or they expire.
Derivative financial instruments
The Group uses derivative financial instruments, principally interest rate
swaps and forward currency contracts, to manage the interest rate and
currency risks arising from the Group’s underlying business operations.
No transactions of a speculative nature are undertaken.
Legal transaction fees
Legal transaction fees associated with the purchase of portfolios are
allocated to the purchase price of the portfolio and included within the
EIR applied against the asset value.
Operating expenses
Operating expenses relate to administration and costs associated with
collection activities. All operating costs are accounted for on an
accruals basis.
Other reserves
Other reserves include the own share reserve, the translation reserve
and the merger reserve. These reserves are further explained in the
glossary on pages 144 to 146.
Arrow Global Annual Report and Accounts 2018
107
4. Critical accounting judgments and estimates
In the application of the Group’s accounting policies, which are described in notes 2 and 3, the directors are required to make judgments, estimates
and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated
assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which
the estimate is revised.
a. Fair value of net assets acquired as part of business combinations
The Group capitalises goodwill on the acquisition of entities as discussed in the significant accounting policies. Goodwill is the excess of the
consideration paid over the fair value of its net assets, therefore the fair value of assets acquired directly impacts the amount of goodwill recognised
on acquisition. The determination of the fair value of acquired net assets requires the exercise of management judgment, particularly for those
financial assets or liabilities for which there are no quoted prices, or assets such as acquired portfolio investments and customer intangibles
where valuations reflect estimates and timing of future cash flows. Different valuations would result in changes to the goodwill arising and to
the post-acquisition performance of the acquired entities. Further detail on the valuation of acquired loan portfolios is given in section b. below.
Note 30 provides further detail on acquisitions in the period and the net assets acquired on each.
b. Carrying value of portfolio investments
The carrying value of portfolio investments is £1,087,030,000 at 31 December 2018. The majority of these portfolio investments are measured at
amortised cost, and the remainder at FVTPL. The carrying value of the portfolio investments are based on cash flow forecasts that are prepared for
each portfolio. Typically, these forecasts cover an 84-month period, except in the case of a small number of FVTPL portfolios where it is necessary
to forecast cash flows over a 120-month period. The 84-month period is deemed to be the most appropriate timeframe over which expected cash
flows are measured, as this is the point that modelling accuracy begins to fall below a supportable threshold. These forecasts are generated using
statistical models incorporating a number of factors, including predictions of probability to pay, which is informed by customer and account level
data, credit agency data and our historical experience with accounts which have similar key attributes. A further key model input is previous
payments made by a customer. Additionally, estimates are made of the movement of accounts from non-paying to paying, and vice-versa, either
through breakdown of the account or settlement/pay down of the balances due. In relation to non-paying accounts, assumptions will be made as
to which operational strategy is the most appropriate to move the account to paying status, this may include placing these accounts into litigation.
Operational factors, that may impact future estimated cash flows, are also considered such as improved collections processes and systems.
Management also review the model on a portfolio basis to take into account external factors, which have impacted historical, or will impact future
performance and where necessary portfolios are calibrated to take into account these known factors. Known or estimated factors such as HPI
increases/decreases, or planned litigation action are examples of key assumptions which are made that impact management’s forecast of ERCs.
The assumptions and estimates made are specific to the particular characteristics of each portfolio.
The ERCs created from the ERC forecasting models are regularly benchmarked at a portfolio level against actual performance, and this helps to
inform the decision as to whether an impairment gain/loss may be required. Furthermore, with the introduction of IFRS 9 in 2018, ERCs now
include specific consideration of multiple economic scenarios and the impact these are likely to have on collections in the future.
The estimated future cash flows generated by the above process are the key estimate/judgment 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 2018 by +/- £10,870,000
(2017: +/- £9,515,000). Flexing the expected future gross cash flows by +3/-3% would impact the closing carrying value of the portfolio investments
as at 31 December 2018 by +/- £32,611,000 (2017: +/- £28,544,000).
c. Impairment assessment of goodwill balances
The carrying amount of goodwill is £262,679,000 at 31 December 2018. In line with the Group’s accounting policies, the goodwill balance is assessed
for impairment at each annual reporting date. The impairment assessment is carried out on a value in use basis, using discounted cash flow models
for each cash generating unit (CGU) to determine whether the ongoing value in use of each CGU is higher than its carrying amount. No impairment
was recognised as a result of the assessment performed as at 31 December 2018. This assessment is sensitive to the discount rate applied, and
management’s forecast future cash flows for each CGU. Further information about the methodology applied and sensitivities to these factors
are disclosed in note 13.
5. Segmental reporting
From 2018, the Group started to report under three separable reportable segments. The prior period is still considered to be one segment as prior
to the current financial period, the information by segment was not available.
Segmental information has been provided in line with what is received on a regular basis by the chief operating decision maker, which is the board
of directors collectively, as defined in IFRS 8. The principal business categories are as follows:
Investment Business
Asset Management
and Servicing Business
Group functions
All portfolio investments that the Group owns, and the income and costs associated with them
Income and costs associated with managing debt portfolios on behalf of the Group
and external servicers
Costs not directly associated with either the Investment or Asset Management and Servicing Business, but to
overall oversight and control of the Group’s activities
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.
Arrow Global Annual Report and Accounts 2018
Financial statements 108
Notes to the financial statements continued
5. Segmental reporting continued
Total income
Collection activity costs
Gross margin
Gross margin %
Other operating expenses excluding
depreciation, amortisation and forex
EBITDA
EBITDA margin %
Depreciation, amortisation and forex
Operating profit
Net finance costs
Refinancing costs
Share of profit in associate net of tax
Gain on sale of associate
Profit before tax
Asset
Management
and Servicing
Business
£000
132,306
(63,989)
68,317
52%
Investment
Business
£000
269,404
(94,617)
174,787
65%
Group
functions
£000
731
–
731
Intra-
segment
elimination
£000
(40,645)
40,645
–
Total
year ended
31 December
2018
£000
361,796
(119,041)
242,755
Total
year ended
31 December
2017
£000
319,015
(118,468)
200,547
Adjusting
items
–
(1,080)
(1,080)
(20,715)
154,072
57%
–
154,072
–
–
–
–
154,072
(41,613)
26,704
20%
–
26,704
–
–
–
–
26,704
(36,733)
(36,002)
(14,235)
(50,237)
(48,134)
–
–
–
(98,371)
–
–
–
–
–
–
–
–
–
(22,676)
(23,756)
(121,737)
121,018
(83,485)
117,0622
–
(23,756)
–
(18,658)
–
–
(42,414)
(14,235)
106,783
(48,134)
(18,658)
–
–
39,991
(11,118)
105,944
(44,308)
(27,352)
1,578
14,697
50,559
Other operating expense inclusive of depreciation, amortisation and forex totals £135,972,000. See page 142 for further detail of adjusting items as
part of the reconciliation of reported to underlying results.
Geographical information
Non-current assets
Geographical information
Non-current assets
6. Profit after tax
Profit after tax has been arrived at after crediting/(charging):
Net foreign exchange gains
Operating leases – properties
Depreciation and amortisation
Staff costs
7. Finance income
Bank interest
Finance income
8. Finance costs
Interest and similar charges on bank loans
Interest on senior secured notes
Interest rate swap and forward exchange contract hedge costs
Other interest
Bond refinancing costs
Total finance costs
Arrow Global Annual Report and Accounts 2018
UK
entities
2018
£000
243,887
UK
entities
2017
£000
203,701
Foreign
entities
2018
£000
78,930
Intra-group
trading
2018
£000
–
Foreign
entities
2017
£000
10,519
Intra-group
trading
2017
£000
–
Total
2018
£000
322,817
Total
2017
£000
214,220
Note
14, 15
10.b
2018
£000
2
(5,570)
(14,235)
(53,346)
2017
£000
611
(2,531)
(11,729)
(42,954)
2018
£000
76
76
2018
£000
7,168
37,458
1,568
2,016
18,658
66,868
2017
£000
9
9
2017
£000
6,047
34,616
2,095
1,562
27,349
71,669
109
8. Finance costs continued
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.
In 2017, bond refinancing costs comprised £27,349,000 incurred on the early redemption of the €335 million notes due 2021, of which £17,631,000
was a cash cost related to the call premium and cancellation of interest rate hedging linked to the 2021 Notes. The remaining £9,718,000 was due
to a non-cash write-off of related transaction fees, related to the 2021 Notes.
9. Auditor’s remuneration
The analysis of auditor remuneration is as follows:
Fees payable for audit services – Company
Fees payable for audit services – subsidiaries
Total fees payable for audit services
Fees payable for audit-related assurance services – Company
Total fees payable for audit-related assurance services
Fees payable for other assurance services
Fees payable for transaction services
Total fees payable for non-audit services
Total fees payable
10. Staff costs and other operating expenses
a. Other operating expenses
Staff costs
Other staff related costs
Premises
IT
Depreciation and amortisation
Net foreign exchange gains
Acquisition related expenses
Other operating expenses
Total other operating expenses
Note
10.b
In 2018, £7,537,000 of the other staff-related costs relates to temporary labour, recruitment and training (2017: £7,240,000).
b. Staff costs
Wages, bonuses and salaries
Pension costs
Social security costs
Share-based payments
Staff restructuring
2018
£000
55
1,072
1,127
88
88
209
100
397
1,524
2018
£000
53,346
8,625
8,242
11,520
14,235
(2)
14,717
25,289
135,972
2018
£000
40,804
1,313
4,715
3,267
3,247
53,346
2017
£000
65
820
885
52
52
211
–
263
1,148
2017
£000
42,954
7,255
7,353
9,213
11,729
(611)
2,444
14,266
94,603
2017
£000
33,352
2,154
3,674
3,334
440
42,954
The total executive and non-executive directors’ remuneration during the year was £2,611,000 (2017: £2,720,000), including £128,000 in relation to
pension costs (2017: £110,000). See the remuneration report for more disclosure of directors’ remuneration. Staff costs included in other operating
expenses are all indirect with all direct staff costs included in the consolidated statement of profit or loss caption ‘collection activity costs’.
The average monthly number of employees (including executive directors) are analysed below:
Operations
Investments, data and analytics
Finance and legal
IT and change
Management
Risk
Support services
2018
1,084
120
204
147
13
47
115
1,730
2017
828
86
214
142
16
47
131
1,464
Arrow Global Annual Report and Accounts 2018
Financial statements
110
Notes to the financial statements continued
11. Tax
The Group’s activities are predominantly UK based. The analysis below therefore uses the UK rate of corporation tax. The effective tax rate for
the year ended 31 December 2018 is higher than the standard rate of corporation tax in the UK at 19% (2017: 19.25%). The differences are as follows:
Profit before tax
Tax charge at standard UK corporation tax rate
Adjustment in respect of prior years
Expenses not deductible for tax purposes
Share in profit in associate reported net of tax
Differences in corporate tax rates
Differing overseas tax rates
Movements in unrecognised deferred tax
Chargeable gains
Tax charge
Effective tax rate relating to continuing operations
Standard UK corporation rate for the year
Effective tax rate higher/lower than standard UK corporation rate for the year
Tax charge for the year consists of:
Current tax charge:
UK and foreign corporation tax based on profit after tax
Adjustment in respect of prior years
Total current tax charge
Deferred tax charge:
Origination and reversal of temporary differences
Adjustment in respect of prior years
Movement in deferred tax previously not recognised
Differences in tax rates
Total tax charge
2018
£000
39,991
7,598
(933)
768
–
(17)
2,606
–
–
10,022
25.1%
19.0%
Higher
2018
£000
13,328
(849)
12,479
(2,373)
(84)
–
–
10,022
2017
£000
50,559
9,733
(724)
454
(304)
186
1,327
(572)
544
10,644
21.1%
19.25%
Higher
2017
£000
8,947
(825)
8,122
2,806
102
(572)
186
10,644
In 2018, the tax charge is inflated by an increase in expenses not deductible for tax purposes largely due to current year subsidiary acquisition costs
and a higher level of taxable income from overseas countries with higher tax rates. This is offset by the movement through deferred tax of GAAP
differences on overseas subsidiaries.
Deferred tax
The Group has not recognised a deferred tax asset in respect of £859,000 (2017: £11,455,000) 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.
The rate of UK corporation tax, as enacted under previous Finance Acts, reduced from 20% to 19% from 1 April 2017 and is expected to reduce to 17%
from 1 April 2020. Deferred taxation is measured at the tax rates that are expected to apply in the periods in which the temporary timing differences
are expected to reverse based on tax rates and laws that have been enacted or substantively enacted at the statement of financial position date.
Accordingly, deferred tax balances have generally been calculated using a rate of 17% in these accounts, apart from balances on overseas
companies that are recognised at the relevant rate applicable in the appropriate jurisdictions.
See note 19 for a breakdown of deferred tax assets and liabilities.
12. Earnings per share (EPS)
Profit after tax attributable to shareholders
Weighted average ordinary shares
Potential exercise of share options
Weighted average ordinary shares (diluted)
Basic earnings per share (£)
Diluted earnings per share (£)
Refer to table of alternative performance measures on page 28 for details of underlying earnings per share.
Arrow Global Annual Report and Accounts 2018
2018
£000
29,969
174,939
4,515
179,454
0.17
0.17
2017
£000
39,871
174,768
4,344
179,112
0.23
0.22
13. Goodwill
Cost
At 1 January 2017
Additions
Exchange rate differences
At 31 December 2017
Additions
Exchange rate differences
At 31 December 2018
Amortisation and impairment
At 31 December 2017 and 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
111
£000
130,390
20,911
3,787
155,088
107,984
1,916
264,988
2,309
262,679
152,779
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).
Change in goodwill CGU allocation
In relation to goodwill, the four CGUs identified are UK & Ireland, comprising all group companies acquired in the Capquest acquisition, Arrow
Global Receivables Management Limited, Mars Capital and Bergen; 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 & 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 expansion of the Group in recent years, it has been deemed appropriate to combine a number of CGUs for impairment testing purposes,
which were previously assessed separately. 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.
For the purposes of impairment testing, goodwill is allocated to the Group’s CGUs as follows:
UK & Ireland
Portugal
Benelux
Italy
2018
£000
64,312
73,061
43,132
82,174
262,679
2017
£000
58,415
41,225
42,614
10,525
152,779
An impairment review was carried out at 31 December 2018 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 are those regarding the discount rate and forecast cash collections net of direct collection costs, and allowable forecast synergies.
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. 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. As a result
of applying the various risk factors noted above to the Group’s WACC, a market participant rate of 8.5% (2017: 6.1%) was determined for the UK &
Ireland CGUs, a rate of 8.9% (2017: 8.5%) was determined for the Portuguese CGU, a rate of 8.2% (2017: 6.0%) was determined for the Benelux CGU
and a rate of 8.9% (2017: 6.6%) for the Italian CGU.
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 the 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.
Arrow Global Annual Report and Accounts 2018
Financial statements
112
Notes to the financial statements continued
13. Goodwill continued
The Group has conducted a sensitivity analysis on the impairment test of the CGU’s carrying value. The CGUs would become impaired based on an
unlevered post-tax cash flow noted below or based on an increase in the discount rate noted below.
Customer
intangibles
£000
Contractual
rights
£000
IT
platform
£000
Software
licences
£000
A cash flow
reduction of
30%
25%
51%
50%
A discount
rate
increase of
2%
2%
5%
4%
Total
£000
52,042
5,528
1,347
9,112
–
(1,567)
66,462
1,946
437
11,077
–
(1,320)
78,602
12,898
506
9,813
–
(248)
22,969
214
11,967
–
(812)
34,338
21,807
444
139
6,738
873
–
30,001
–
93
8,751
–
(619)
38,226
3,903
24
2,746
674
–
7,347
35
4,485
(22)
(226)
11,619
8,117
74
208
2,358
(873)
(53)
9,831
191
50
1,841
(7)
(701)
11,205
5,252
279
2,282
(674)
–
7,139
31
2,146
22
(586)
8,752
26,607
22,654
2,453
2,692
44,264
43,493
19,773
5,010
903
–
–
–
25,686
1,718
282
–
–
–
27,686
3,274
184
4,540
–
–
7,998
151
5,120
–
–
13,269
14,417
17,688
2,345
–
97
16
–
(1,514)
944
37
12
485
7
–
1,485
469
19
245
–
(248)
485
(3)
216
–
–
698
787
459
UK & Ireland
Portugal
Benelux
Italy
14. Intangible assets
Cost
At 1 January 2017
Assets acquired on acquisition of a subsidiary
Exchange differences
Additions
Reclassifications
Disposals
At 31 December 2017
Assets acquired on acquisition of a subsidiary
Exchange differences
Additions
Reclassifications
Disposals
At 31 December 2018
Accumulated amortisation
At 1 January 2017
Exchange differences
Amortisation charge for the year
Reclassifications
Disposals
At 31 December 2017
Exchange differences
Amortisation charge for the year
Reclassifications
Disposals
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
Arrow Global Annual Report and Accounts 2018
15. Property, plant and equipment
Cost
At 1 January 2017
Assets acquired on acquisition of a subsidiary
Exchange differences
Additions
Reclassifications
Disposals
At 31 December 2017
Assets acquired on acquisition of a subsidiary
Exchange differences
Additions
Disposals
At 31 December 2018
Accumulated depreciation
At 1 January 2017
Exchange differences
Disposal
Reclassifications
Charge for the year
At 31 December 2017
Exchange differences
Charge for the year
Disposal
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
113
Total
property,
plant and
equipment
£000
6,908
3,249
344
4,885
–
(48)
15,338
505
52
2,367
(3,762)
14,500
3,324
(30)
(40)
–
1,916
5,170
35
2,268
(734)
6,739
7,761
10,168
Land &
Buildings
£000
Leasehold
improvements
£000
Computer
equipment
£000
Furniture
£000
Vehicles
£000
–
2,976
132
6
–
–
3,114
–
(128)
1
(2,987)
–
–
3
–
–
60
63
2
46
(111)
–
–
3,051
3,007
53
57
3,402
(2)
–
6,517
103
56
701
(128)
7,249
1,080
(92)
–
(2)
1,034
2,020
14
1,050
(106)
2,978
4,271
4,497
2,381
177
114
955
2
(8)
3,621
127
93
1,309
(43)
5,107
1,545
42
–
2
492
2,081
11
780
(36)
2,836
2,271
1,540
1,479
41
37
522
–
–
2,079
93
16
356
(604)
1,940
672
14
–
–
319
1,005
7
386
(481)
917
1,023
1,074
41
2
4
–
–
(40)
7
182
15
–
–
204
27
3
(40)
–
11
1
1
6
–
8
196
6
In the prior year, the Group leased a property under a finance lease, which was held within Zenith at the date of acquisition (see note 30, prior year
acquisitions (a)) and had a net carrying amount of £3,051,000 at 31 December 2017. During 2018, the Group no longer leased the property.
16. Portfolio investments
Split of portfolio investments by period:
Expected falling due after one year
Expected falling due within one year
Total
2018
£000
841,890
245,140
1,087,030
2017
£000
758,113
193,354
951,467
Arrow Global Annual Report and Accounts 2018
Financial statements
114
Notes to the financial statements continued
16. Portfolio investments continued
Purchased loan portfolios
The Group recognises income from portfolios investments in accordance with IFRS 9 from 1 January 2018.
The movements in portfolio investments was as follows:
As at the year brought forward
Impact of adopting IFRS 9 at 1 January 2018
Brought forward after impact of adopting IFRS 9 opening adjustment
Portfolios purchased during the year
Portfolio additions from acquired entities
Collections in the year
Income from portfolio investments at amortised cost
Fair value gain on portfolios at FVTPL
Net impairment gain
Exchange and other movements
Purchase price adjustment relating to prior year
2018
£000
951,467
(17,000)
934,467
263,350
11,853
(411,588)
193,932
24,745
50,727
19,544
–
1,087,030
2017
£000
804,107
–
804,107
223,949
–
(342,210)
179,538
5,298
63,081
18,178
(474)
951,467
The impact of IFRS 9 shown above is pre-tax. The post-tax impact is £14,000,000 and can be seen in the statement of changes in equity. 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. See page 127 for a reconciliation of portfolio investments measured at FVTPL,
which are included within the overall purchased loan portfolios balance.
17. Trade and other receivables
Trade receivables
Other receivables
Due from subsidiary undertakings
Prepayments
Bank balances not classified as cash and cash equivalents
18. Trade and other payables
Current
Trade payables
Deferred consideration on acquisition of subsidiaries
Deferred consideration on portfolio investments
Taxation and social security
Due to subsidiary undertaking
Accruals
Other liabilities
Group
2018
£000
45,436
2,672
–
5,427
40,671
94,206
Group
2018
£000
24,133
11,119
12,031
163
–
53,954
43,781
145,181
Group
2017
£000
32,780
4,355
–
3,233
16,517
56,885
Group
2017
£000
19,634
6,618
10,830
152
–
28,793
15,763
81,790
Company
2018
£000
–
–
222,371
208
–
222,579
Company
2018
£000
198
–
–
–
2,053
–
–
2,251
Company
2017
£000
–
–
88,430
114
–
88,544
Company
2017
£000
–
–
–
–
1,405
–
–
1,405
In December 2017, Vesting Finance vacated an office building as part of its office consolidation. The property had an unexpired lease term of six
years and a provision of £1,169,000 was included in trade and other payables at 31 December 2017. During 2018, the rental obligation was settled,
with no provision needed or included as at 31 December 2018.
Non-current
Trade payables
Deferred consideration on acquisition of subsidiaries
Deferred consideration on portfolio investments
Arrow Global Annual Report and Accounts 2018
Group
2018
£000
3,673
48,803
–
52,476
Group
2017
£000
3,509
8,581
4,479
16,569
Company
2018
£000
–
–
–
–
Company
2017
£000
–
–
–
–
115
18. Trade and other payables continued
Italian subsidiaries
The employees in the Italian business’ are part of statutory indemnity schemes, compulsory by law, that entitles them to deferred pay, typically at
the end of their employment, the ‘Trattamento di fine rapport’ (TFR). A liability is recognised to reflect that the indemnity will be paid in the future
when the employees leave employment. As at 31 December 2018 the estimated liability was €1,970,000 (£1,771,000) (31 December 2017: €715,000
(£635,000)) and is included within non-current trade and other payables on the statement of financial position. The liability is calculated by an
independent expert through an actuarial valuation, the key assumptions used are detailed below:
Discount rate
Annual inflation rate
Wage inflation
Probability of leaving employment for reasons other than retirement
(employees aged 18-60)
19. Deferred tax
Fixed assets
IFRS transitional adjustments
Share schemes
Hedging reserve
Other temporary differences
Losses
Fair value adjustment on acquisition of subsidiaries
2018
1.3% to 1.6%
1.5%
2.0% to 3.5%
2017
1.3%
1.5%
3.5%
2.6% to 10.0% per annum
10.0% per annum
Assets
£000
463
–
704
120
1,144
5,682
–
8,113
2018
Liabilities
£000
–
(1,416)
–
–
(316)
–
(13,198)
(14,930)
Total
£000
463
(1,416)
704
120
828
5,682
(13,198)
(6,817)
Assets
£000
303
–
1,225
70
–
5,432
750
7,780
2017
Liabilities
£000
–
(1,748)
–
–
–
–
(20,192)
(21,940)
Total
£000
303
(1,748)
1,225
70
–
5,432
(19,442)
(14,160)
The following table reconciles from the 2017 to the 2018 net deferred tax position:
Fixed assets
IFRS transitional adjustments
Share schemes
Hedging reserve
Losses
Other temporary differences
Fair value and IFRS 9 transitional adjustments
1 January
2018
£000
(303)
1,748
(1,225)
(70)
(5,432)
(750)
20,192
14,160
IFRS 9
£000
–
–
–
–
–
–
(3,000)
(3,000)
Transferred in
on acquisition
£000
–
–
–
–
(1,004)
310
(1,305)
(1,999)
Recognised in
statement of
profit or loss
and other
comprehensive
income
£000
(160)
(332)
328
(50)
796
(523)
(2,566)
(2,507)
Recognised
in statement
of changes
in equity
£000
–
–
193
–
–
–
–
193
Fair value of net assets acquired as part of business combinations is considered in note 4.
20. Share capital
Issued, fully paid and authorised
176,263,343 (2017: 175,266,624) ordinary shares of 1p each
Offset by own shares
Foreign
exchange
£000
–
–
–
–
(42)
135
(123)
(30)
31 December
2018
£000
(463)
1,416
(704)
(120)
(5,682)
(828)
13,198
6,817
2018
£000
1,763
(10)
1,753
2017
£000
1,753
(3)
1,750
Total consideration for the shares was £349,180,000 (2017: £349,180,000), giving rise to a share premium of £347,436,000 (2017: £347,436,000).
£41,680,000 was raised as part of the IPO, net of £8,420,000 of IPO costs, which were netted against the share premium account in accordance
with the Companies Act 2006, section 610. The Company’s ordinary shares carry the right to receive dividends and distributions paid by
the Company.
The shareholders have the right to receive notice of and to attend and vote at all general meetings of the Company.
Arrow Global Annual Report and Accounts 2018
Financial statements
116
Notes to the financial statements continued
21. Operating leases
At the statement of financial position date, the Group had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
Less than one year
Between one and five years
More than five years
22. Related party transactions
Group
Related party balances as at each year end were as follows:
As at 31 December 2018 and 2017:
Trade
2018
£000
3,517
15,032
9,440
27,989
2017
£000
3,688
12,780
8,297
24,765
Key
management
personnel
£000
–
–
Total
£000
–
–
Remuneration for directors has been disclosed in note 10 along with the statement of profit or loss and other comprehensive income charges in
the year and in the remuneration report. The statement of profit or loss and other comprehensive income charges for other balances are disclosed
in note 6.
Summary of transactions
Key management, defined as permanent members of the executive committee, were awarded the following compensation for the financial year:
Remuneration
Salaries and performance-related bonus
Pension-related benefits
The number of key management during the year was 7 (2017: 10).
Company
Related party balances as at each year end were as follows:
As at 31 December 2018
Due from subsidiary undertakings
Due to subsidiary undertakings
As at 31 December 2017
Due from subsidiary undertakings
Due to subsidiary undertakings
2018
£000
3,836
214
4,050
2017
£000
4,555
222
4,777
Arrow Global
Group
Holdings
Limited
£000
Arrow Global
Limited
£000
Arrow Global
One Limited
£000
Vesting
Finance
Detachering
B.V.
£000
Total
£000
–
(1,367)
(1,367)
–
(686)
(686)
222,331
–
222,331
40
–
40
222,371
(2,053)
220,318
Arrow Global
Group
Holdings
Limited
£000
Arrow Global
Limited
£000
Arrow Global
One Limited
£000
Vesting
Finance
Detachering
B.V.
£000
–
(1,358)
(1,358)
–
(50)
(50)
88,390
–
88,390
40
–
40
Total
£000
88,430
(1,405)
87,025
Balances relate to intercompany loans that are repayable on demand and are therefore held as current liabilities or assets. No other transactions
occurred between the related parties, excluding those disclosed above.
During the year there were no other related party transactions other than discussed above.
Arrow Global Annual Report and Accounts 2018
23. Investments in subsidiaries and associate
Details of the Company’s subsidiaries at 31 December 2018 are as follows:
Name
Arrow Global (Holdings) Limited (AG(H)L)
Place of incorporation
(or registration) and operation
UK – England and Wales
Arrow Global Accounts Management Limited
UK – England and Wales
Arrow Global Europe Limited
UK – England and Wales
Arrow Global Finance Plc
UK – England and Wales
Arrow Global Guernsey Limited
UK – England and Wales
Arrow Global Investments Holdings Limited
(AGIHL)
Arrow Global Legh Limited
UK – England and Wales
UK – England and Wales
Arrow Global Limited (AGL)
UK – England and Wales
Arrow Global Luna Limited
UK – England and Wales
Arrow Global Management Limited
UK – England and Wales
Arrow Global Massey Limited
UK – England and Wales
Arrow Global One Limited (AGOL)
UK – England and Wales
Arrow Global Portugal Limited
UK – England and Wales
Arrow Global Portugal Investments Limited
UK – England and Wales
Arrow Global Receivables Management Limited
UK – England and Wales
Capquest Asset Management Limited
UK – England and Wales
Capquest Debt Recovery Limited (CDRL)
UK – England and Wales
Capquest Debt Recovery Services Limited
UK – England and Wales
Capquest Group Limited (CGL)
UK – England and Wales
Capquest Investments Limited
UK – England and Wales
Capquest Investments 2 Limited
UK – England and Wales
Capquest Limited
UK – England and Wales
Capquest Mortgage Servicing Limited
UK – England and Wales
Capquest UK Limited
UK – England and Wales
Care Debt Management Limited
UK – England and Wales
Data Verification Services Limited
UK – England and Wales
Erudio Customer Management Limited
UK – England and Wales
117
Proportion
of ordinary
shares
ownership
(%)
100
Current
status
Trading
Parent
company
AGIHL
100
Trading
AGL
100
Trading
AGIHL
100
Trading
AGIHL
100
Dormant
AG(H)L
100
Trading
AGGHL
100
Dormant
AG(H)L
100
Trading
AG(H)L
100
Trading
AG(H)L
100
Dormant
AG(H)L
100
Dormant
AG(H)L
100
Trading
AGGP
100
Trading
AG(H)L
100
Trading
AGL
100
Trading
AG(H)L
100
Dormant
100
Trading
100
Dormant
CGL
CGL
CGL
100
Trading
QNL
100
Trading
100
Dormant
100
Dormant
100
Trading
100
Dormant
100
Dormant
100
Dormant
CGL
CGL
CGL
CGL
CGL
CGL
CGL
100
Dormant
AG(H)L
Registered
office
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Arrow Global Annual Report and Accounts 2018
Financial statements 118
Notes to the financial statements continued
23. Investments in subsidiaries and associate continued
Name
Quest Bidco Limited (QBL)
Place of incorporation
(or registration) and operation
UK – England and Wales
Quest Newco Limited (QNL)
UK – England and Wales
Quest Topco Limited (QTL)
UK – England and Wales
Western Acquisition Holdings Limited
UK – England and Wales
Mars Acquisition Limited (MAL)
UK – England and Wales
Mars Capital Management Limited
UK – England and Wales
Mars Capital Finance Limited
UK – England and Wales
Bergen Capital Management Limited
UK – England and Wales
Mars Capital Management Ireland DAC
Republic of Ireland
Mars Capital Finance Ireland DAC
Republic of Ireland
Arrow Global Debt Limited (AGDL)
Arrow Global Guernsey Limited
Arrow Global Guernsey Holdings Limited
(AGGHL)
Guernsey
Guernsey
Guernsey
Arrow Global Guernsey Management Limited
Guernsey
Arrow Global Investments Holdings Italia S.R.L.
(AGIHIS)
Zenith Service S.p.A. (ZSS)
Structured Finance Management – Italy S.R.L.
Arrow Global Italia S.R.L. (AGIS)
VAR Reoco S.r.l.
Europa Investimenti Spa (EIS)
Europa Investimenti Trading Srl (EITS)
Marine d’Italia Srl
Fieramosca Dieci Srl
Vegagest SGR Spa
Europa Investimenti Aziende Srl (EIAS)
Europa Investimenti Gestione Attivi Srl
Lanzone Due Srl
Lanzone Cinque Srl
Arrow Global Annual Report and Accounts 2018
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Registered
office
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Belvedere, 12 Booth Street,
Manchester M2 4AW
Grand Canal House,
1 Grand Canal Street Upper,
Dublin 4 D04Y7R5
Grand Canal House,
1 Grand Canal Street Upper,
Dublin 4 D04Y7R5
First Floor, Albert House,
South Esplanade,
St Peter Port, Guernsey
First Floor, Albert House,
South Esplanade,
St Peter Port, Guernsey
First Floor, Albert House,
South Esplanade,
St Peter Port, Guernsey
First Floor, Albert House,
South Esplanade,
St Peter Port, Guernsey
Via V. Betteloni 2,
20131 Milan
Via V. Betteloni 2,
20131 Milan
Via V. Betteloni 2,
20131 Milan
Via V. Betteloni 2,
20131 Milan
Via V. Betteloni 2,
20131 Milan
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Via della Posta 10, 20123 Milan
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Proportion
of ordinary
shares
ownership
(%)
100
Current
status
Trading
Parent
company
QTL
100
Trading
QBL
100
Trading
AGIHL
50
Trading
AGL
100
Trading
AGIHL
100
Trading
100
Trading
100
Trading
100
Trading
MAL
MAL
MAL
MAL
100
Trading
MAL
100
Dormant
AGGHL
100
Dormant
AGIHL
100
Trading
AGOL
100
Dormant
AGDL
100
Trading
AGIHL
100
Trading
AGIHIS
50
Trading
ZSS
100
Trading
AGIHL
100
Trading
71.80
100
100
100
72.13
100
100
100
100
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
AGIS
AGIS
EIS
EITS
EIS
EIS
EIS
EIS
EIS
EIS
23. Investments in subsidiaries and associate continued
Name
Europa Investimenti Corporate Finance Srl
Lanzone Diciannove Srl
Lanzone Quattordici Srl
Lanzone Dodici Srl
Conserve Srl
PARR Credit S.R.L. (PCS)
Place of incorporation
(or registration) and operation
Italy
Italy
Italy
Italy
Italy
Italy
New Call S.R.L.
PARR SH. P.K.
Strzala Sp. z o.o.
Italy
Albania
Poland
Capquest Debt Recovery S.A (pty) Limited
South Africa
AGHL Portugal Investments Holdings, S.A.
(AGHLPIH)
Gesphone – Serviços de Tratamento e
Acquisição de Dívidas, S.A.
Redrock Capital Partners, S.A.
Sandalgreen, Assets, S.A.
Whitestar Asset Solutions, S.A.
Hefesto STC, S.A.
Norfin Investimentos, S.A.(NISA)
Norfin SGFII
Norfin – Serviços, S.A
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Amstelveste Vastgoed B.V.
the Netherlands
119
Proportion
of ordinary
shares
ownership
(%)
100
100
51
100
100
100
Current
status
Trading
Trading
Trading
Trading
Trading
Trading
100
Trading
20
Trading
Parent
company
EIS
EIS
EIS
EIS
EIS
AGIS
PCS
PCS
100
Dormant
100
Dormant
AG(H)L/
AGL
CDRL
100
Trading
AGIHL
100
Trading
AGIHL
100
Trading
AGHLPIH
100
Trading
AGHLPIH
100
Trading
AGHLPIH
100
Trading
AGHLPIH
100
Trading
AGHLPIH
100
Trading
NISA
100
Trading
NISA
100
Trading AGIHB/VFS
Registered
office
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Via Lanzone 31, 20123 Milan
Via Pieve Torina, 44–46/a,
00156 Rome
Via Pieve Torina 44,
00156 Rome
Kryqezimi i Rruges Irfan
Tomini me Bulevardin
Gjergj Fishta – Tirana
Al. Jerozolimskie nr 148,
02–326, Warszawa
Office Suite 15, Canal Edge 1,
Tyger Waterfront,
Carl Cronje Drive,
Bellville, Western Cape,
7530, South Africa
Av. da República, nº 25,
1º andar, Lisbon, Portugal
Edifício Dom Sebastião,
Rua Quinta do Quintã,
nº 6, Quinta da Fonte,
Oeiras, Portugal
Edifício Q54 D. José,
Rua Quinta do Quintã, nº1,
Piso 0, Fracção B,
Quinta da Fonte,
Oeiras, Portugal
Edifício Dom Sebastião,
Rua Quinta do Quintã,
nº 6, Quinta da Fonte,
Oeiras, Portugal
Edifício Dom Sebastião,
Rua Quinta do Quintã,
nº 6, Quinta da Fonte,
Oeiras, Portugal
Edifício Dom Sebastião,
Rua Quinta do Quintã,
nº 6, Quinta da Fonte,
Oeiras, Portugal
Avenida da República,
nº 35, 4º, 1050–186
Lisboa–Portugal
Avenida da República,
nº 35, 4º, 1050–186
Lisboa–Portugal
Avenida da República,
nº 35, 4º, 1050–186
Lisboa–Portugal
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Arrow Global Annual Report and Accounts 2018
Financial statements 120
Notes to the financial statements continued
23. Investments in subsidiaries and associate continued
Name
Arrow Global Investments Holdings Benelux B.V.
(AGIHB)
Place of incorporation
(or registration) and operation
the Netherlands
Focum Groep B.V. (FG)
the Netherlands
Focum Solutions B.V.
the Netherlands
Fiditon Holding B.V. (FH)
the Netherlands
Focum Commerce B.V.
the Netherlands
Focum Finance B.V.
the Netherlands
Incassobureau Fiditon B.V.
the Netherlands
Universum Inkasso B.V. (UI)
the Netherlands
Vesting Finance Detachering B.V.
the Netherlands
Vesting Finance Holding B.V. (VFH)
the Netherlands
Vesting Finance Incasso B.V.
the Netherlands
Vesting Finance Servicing B.V. (VFS)
the Netherlands
Arrow Global Benelux (Holdings) B.V. (AGBH)
the Netherlands
Spark Hypotheken B.V.
the Netherlands
KU88 B.V.
the Netherlands
Arrow Global Luxembourg (Holdings) S.á.r.l.
(AGLH)
Principal Residential Operating Platform
Evaluating Receivables 1 S.á.r.l.
Focum Belgium (BVBA)
Luxembourg
Luxembourg
Belgium
Proportion
of ordinary
shares
ownership
(%)
100
Current
status
Trading
Parent
company
AGIHL
100
Trading
AGIHB
100
Trading
FG
100
Trading
AGIHB
100
Trading
100
Trading
100
Trading
FG
FG
FH
100
Non–
Trading
AGIHB
100
Trading
VFH
100
Trading
AGIHB
100
Trading
VFH
100
Trading
AGIHB
100
Trading
AGIHB
100
Trading
AGLH
100
Trading
AGLH
100
Trading
AGBH
100
Trading
AGLH
100
Trading AGIHB/FG
Registered
office
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
Asch van Wijckstraat 55F,
3811 LP Amersfoort,
the Netherlands
15 Boulevard Friedrich
Wilhelm Raiffeisen,
L–2411 Luxembourg
15 Boulevard Friedrich
Wilhelm Raiffeisen,
L–2411 Luxembourg
Bellevue 1–3 9050 Gent,
Belgium
All subsidiaries are included in the Group consolidation, including where the Group does not own 100% of the ordinary shares of the company. This
may arise where the Group exercises control over the relevant activity of the entity, and can use this control to impact the variability of returns from
the company.
Arrow Global Annual Report and Accounts 2018
23. Investments in subsidiaries and associate continued
Company: investment in subsidiaries
At 31 December 2017 and 31 December 2018
121
Arrow Global
One Limited
£000
307,500
Total
£000
307,500
The investments in subsidiaries are all stated at cost less accumulated impairment.
The 15% interest in the Company’s associate, Promontoria MCS Holding SAS (MCS), was sold on 18 October 2017. The Group had acquired
an indirect 15% economic interest in MCS through a participation agreement on 15 December 2014. The terms of the participation agreement
meant that the Group demonstrated significant influence over the MCS group. The associate was accounted for using the equity method.
Summarised below is a reconciliation of the movements in the carrying value of the Group’s interest in MCS during 2017 until the date of disposal:
Interest in the net assets of the associate as at 1 January 2017
Foreign exchange differences
Share of profit in associate during the year
Dividends received from associate
Interest in the net assets of the associate as at 18 October 2017
The sale generated a gain, which was calculated as follows:
Interest in the net assets of the associate as at 18 October 2017
Proceeds
Foreign exchange gain
Disposal costs
Gain on disposal
£000
10,371
497
1,578
(7,233)
5,213
£000
(5,213)
18,143
1,870
(103)
14,697
24. Risks arising from financial instruments
Risk management
Treasury related risks
The board approves treasury policies and the treasury function manages the day-to-day operations. The board delegates certain responsibilities
to the treasury and tax committee, which will be superseded by a board approved assets and liabilities committee in 2019. During 2018, the treasury
and tax committee, which is chaired by the Group chief financial officer, was empowered to take decisions within that delegated authority. Treasury
activities and compliance with treasury policies are reported to the board on a regular basis and are subject to periodic independent reviews and
audits, both internal and external. Treasury policies are designed to manage the main financial risks faced by the Group in relation to funding and
liquidity risks, counterparty credit risk and market risks being interest rate risk and foreign currency risk. This is to ensure the Group is properly
funded, that financial counterparties are of appropriate credit quality and that interest rate and currency risk is managed within set limits. Policies
also set out the specific instruments that can be used for risk management.
The treasury function enters into derivative transactions, principally interest rate swaps, currency swaps and forward currency contracts. The
purpose of these transactions is to manage the interest rate and currency risks arising from the Group’s business operations. No transactions of a
speculative nature are undertaken, and written options may only be used when matched by purchased options. No written options were entered
into during 2018 (2017: £nil).
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by cash
or another financial asset.
The Group is subject to the risk that it will not have sufficient borrowing facilities to fund its existing business and its future plans for growth.
The treasury policy adopted by the Group serves to reduce this risk by setting a specific policy parameter that there are sufficient committed
debt facilities to cover forecast borrowings plus operational headroom plus appropriate stress testing for the next 18 months on a rolling basis.
Further, the aim is to ensure that there is a balanced refinancing profile with phased maturity dates, diversification of debt funding sources and
no over-reliance on a single or small group of lenders. At 31 December 2018, the Group’s senior secured notes and revolving credit facility had
an average period to maturity of 5.8 years (2017: 6.1 years). Total undrawn facilities as at 31 December 2018 were £39,413,000 (2017: £60,575,000).
The treasury function monitors cash through daily reporting, the management accounts and periodic review meetings. Management has well
established models used to predict collectability of cash receipts and this represents a key performance indicator of the business. The Group
is highly cash generative with weekly cash receipts and portfolio purchases (except forward flows) are discretionary, which helps to mitigate
liquidity risk.
Arrow Global Annual Report and Accounts 2018
Financial statements
122
Notes to the financial statements continued
24. Risks arising from financial instruments continued
The table below includes both interest and principal cash flows, payable over the contractual life of the non-derivative financial liabilities.
Group
As at 31 December 2018
Amounts due to:
Non-interest bearing
Trade and other payables
Interest bearing
€400 million secured senior note (2.875% plus 3-month EURIBOR)
€285 million secured senior note (3.75% plus 3-month EURIBOR)
£320 million secured senior note (5.125%)
Non-recourse facility
Bank overdrafts
Revolving credit facility1
Total
1. Reflects all drawings at 31 December 2018 being held to the facility maturity date of 02 January 2023.
Group
As at 31 December 2017
Amounts due to:
Non-interest bearing
Trade and other payables
Interest bearing
€400 million secured senior note (2.875% plus 3-month EURIBOR)
€230 million secured senior note (4.75% plus 3-month EURIBOR)
£220 million secured senior note (5.125%)
Non-recourse facility
Finance lease
Bank overdrafts
Revolving credit facility1
Total
1. Reflects all drawings at 31 December 2017 being held to the facility maturity date of 30 March 2022.
Company
As at 31 December 2018
Amounts due to:
Non-interest bearing
Trade and other payables
Company
As at 31 December 2017
Amounts due to:
Non-interest bearing
Trade and other payables
Within
1 year
£000
1-2 years
£000
3-5 years
£000
More than
5 years
£000
Total
£000
145,181
26,255
12,426
13,795
197,657
10,566
9,800
16,400
8,978
2,696
9,446
203,067
11,964
10,803
16,400
2,978
–
10,195
78,595
43,643
37,912
49,200
–
–
268,317
411,498
379,833
287,804
331,616
–
–
–
1,013,048
446,006
346,319
413,616
11,956
2,696
287,958
1,706,208
Within
1 year
£000
1-2 years
£000
3-5 years
£000
More than
5 years
£000
Total
£000
81,790
4,999
10,450
1,120
98,359
10,352
9,835
11,275
4,560
171
1,332
5,997
125,312
Within
1 year
£000
2,251
Within
1 year
£000
10,439
9,884
11,275
4,805
171
–
6,730
48,303
39,598
34,425
33,825
–
514
–
172,361
291,173
390,616
208,318
239,261
–
1,377
–
–
840,692
451,005
262,462
295,636
9,365
2,233
1,332
185,088
1,305,480
1-2 years
£000
3-5 years
£000
More than
5 years
£000
Total
£000
–
–
–
2,251
1-2 years
£000
3-5 years
£000
More than
5 years
£000
Total
£000
1,405
–
–
–
1,405
The analysis above includes the contractual cash flow for borrowings and the total amount of interest payable over the life of the loan. Where
borrowings are subject to a floating rate, an estimate of interest payable is taken. The rate is derived from interest rate yield curves at the statement
of financial position date.
In addition to the above, the Group has entered in to certain forward flow agreements to which it has committed to pay £6,257,000
(2017: £2,506,000) over the next five years.
Arrow Global Annual Report and Accounts 2018
123
24. Risks arising from financial instruments continued
The following analysis shows the gross non-discounted contractual cash flows in respect of foreign currency contract derivative assets and
liabilities, and interest rate swap derivative liabilities, which are all designated as cash flow hedges:
Not later than one month
Later than one month and not later than six months
Later than six months and not later than one year
Later than one year and not later than two years
Later than two years and not later than five years
2018
2017
Outflow
£000
63,392
48,254
57
4
–
111,707
Inflow
£000
63,512
48,224
5
3
–
111,744
Outflow
£000
46,644
74,450
55,072
342
–
176,508
Inflow
£000
46,361
72,139
54,343
220
–
173,063
When the amount payable or receivable is not fixed, the amount disclosed has been determined with reference to the projected interest rates
as illustrated by the interest rate yield curves existing at the statement of financial position date.
The above table shows the gross cash flows receivable and payable on our derivative financial instruments. Our derivative financial instruments
are held across a number of counterparties; the largest net cash flow exposure to a single counterparty at 31 December 2018 is £0.3 million
(2017: £1.2 million).
A maturity analysis of the Group’s receivables and borrowing facilities is presented below:
As at 31 December 2018
Less than one year
Later than one year
As at 31 December 2017
Less than one year
Later than one year
Portfolio
investments
£000
245,140
841,890
1,087,030
Portfolio
investments
£000
193,354
758,113
951,467
% of total
£000
22.6
77.4
100.0
Borrowing
£000
262,510
938,515
1,201,025
% of total
£000
20.3
79.7
100.0
Borrowing
£000
168,080
785,750
953,830
% of total
£000
21.9
78.1
100.0
% of total
£000
17.6
82.4
100.0
This demonstrates the headroom on the Group’s borrowings at 31 December 2018 in comparison to the current portfolio investment’s estimated
collections over an 84-month period. The value of portfolio investments shown above represents the carrying amount. The equivalent
undiscounted ERC at 31 December 2018 is £1,634.8 million (2017: £1,516.9 million).
Market risk
Market risk is defined as the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices.
Market risk principally comprises interest rate risk and currency risk considered further below.
Interest-rate risk
The Group has an exposure to interest rate risk arising on changes in interest rates on its borrowings, principally on the floating rate senior secured
notes, and therefore seeks to limit this exposure. This is achieved by the use of techniques to fix interest rate costs, including fixed rate funding
(predominantly longer-term bond funding), bank borrowing loan draw down periods and interest rate hedging instruments. These techniques
are used to hedge the interest rate costs on a proportion of borrowings over a certain period of time. Most hedging is for up to three years.
Exposure to interest rate risk
The interest rate profile of the Group’s interest-bearing financial instruments as reported to the management of the Group is as follows:
Fixed-rate instruments
Financial liabilities
Variable-rate instruments
Financial assets
Financial liabilities
Effect of interest-rate swaps
Net-variable rate
2018
£000
2017
£000
320,000
320,000
220,000
220,000
(92,001)
861,153
(453,811)
315,341
(35,943)
715,104
(399,538)
279,623
Arrow Global Annual Report and Accounts 2018
Financial statements
124
Notes to the financial statements continued
24. Risks arising from financial instruments continued
If interest rates across all countries of operation increased by 50 basis points this would have the following impact:
Increase in fair value of derivatives taken to equity
Reduction in profit before taxation
This sensitivity analysis is based on the following assumptions:
2018
£000
1,134
(849)
2017
£000
1,048
(874)
• the change in market interest rates occurs in all countries where the Group has borrowings and/or derivative financial instruments;
• where financial liabilities are subject to fixed interest rates or have their interest rate fixed by hedging instruments it is assumed that there is no
impact from a change in interest rates; and
• changes in market interest rates affect the fair value of derivative financial instruments.
Currency risk
The Group is subject to three types of currency risk; cash flow exposure, net asset exposure and income statement exposure.
Cash flow exposure
The Group is subject to currency risk in respect of future cash flows which are denominated in foreign currency. The policy of the Group is to
hedge a large proportion of this currency risk in respect of cash flows which are expected to arise in the following 12 months. Where cash flow
hedges have been entered into, they are designated as cash flow hedges on specific future transactions.
Net asset exposure
A proportion of the Group’s net assets are denominated in Euro. The Group limits its exposure to currency risk on non-functional funding through
forward currency contracts. The statement of financial position is reported in Sterling and this means that there is a risk that a fluctuation in foreign
exchange rates will have an impact on the net assets of the Group. The Group aims to minimise the value of net assets denominated in Euro by
funding portfolio assets with Euro denominated borrowings where possible.
Income statement exposure
As with net assets, a proportion of the Group’s profit is denominated in Euro, but translated into Sterling for reporting purposes. The result for the
period is translated into Sterling at the average exchange rate. A risk therefore arises that a fluctuation in the exchange rate relative to the Euro will
have an impact on the consolidated result for the period.
If foreign exchange rates had been 10% stronger than Sterling than those at the statement of financial position date and all other variables were
held constant, the Group’s net assets and net profit for each significant denomination of currency would increase/(decrease) as follows:
Equity and net assets
Currency
Euro (EUR)
Net profit
Currency
Euro (EUR)
2018
£000
10,097
10,097
2018
£000
6,837
6,837
2017
£000
6,728
6,728
2017
£000
2,932
2,932
The above assumes that there is no impact on retained earnings or equity arising from those items which are naturally hedged (where the currency
asset is exactly equal to the currency liability).
If foreign exchange rates had been 10% weaker than Sterling at the statement of financial position date and all other variables were held constant,
the Group’s net assets and net profit for each significant denomination of currency would increase/(decrease) as follows:
Equity and net assets
Currency
Euro (EUR)
Net profit
Currency
Euro (EUR)
2018
£000
2017
£000
(8,261)
(8,261)
2018
£000
(5,594)
(5,594)
(5,505)
(5,505)
2017
£000
(2,399)
(2,399)
The above assumes that there is no impact on retained earnings or equity arising from those items which are naturally hedged (where the currency
asset is exactly equal to the currency liability).
Arrow Global Annual Report and Accounts 2018
125
24. Risks arising from financial instruments continued
Credit risk
The Group’s principal activity is the acquisition and management of non-performing and non-core consumer and commercial secured and
real estate portfolios. Most portfolios by their nature are impaired at acquisition and the Group continually monitors cash collections that in turn
inform the ERC’s on which the portfolio carrying value is calculated. The ongoing risk is managed through a portfolio valuation process including
modelling current expectations of recoverability based on historical information on debt types, also factoring in recoveries from collateral held on
the secured portfolios and sales. Further details of the forecasting process are given in note 4 b.
A pricing credit committee is in place which includes at least two members of the executive board as well as other key members from appropriate
areas of the business, including oversight by the risk management function. The Group also monitors its exposure to geographic concentration of
assets. This process exists to scrutinise all aspects of a portfolio acquisition from reputational and regulatory risk through to the financial
assumptions and maximum bid price.
Where portfolio investments are measured at amortised cost using the EIR method, as part of the regular monitoring process, the future cash flows
in the ERCs are updated, with impairment gains/losses as a result of changes to the estimated cash flows discounted at the EIR rate. Where portfolio
investments are measured at FVTPL, they are measured using a discounted cash flow model.
With the introduction of IFRS 9 in 2018, the Group’s management of credit risk is now further enhanced through the modelling of multiple
economic scenarios and the impact this is expected to have on future collections performance. All of the Group’s portfolio investments have
been classified as POCI, due to their credit-impaired nature at the date of purchase. Therefore, no consideration has been given to the staging
requirements of IFRS 9 for the Group’s portfolio assets. The transition to IFRS 9 led to an opening provision of £17,000,000 on the Group’s
assets existing at the date of transition to IFRS 9, and a lower, credit-adjusted EIR being used for new purchases post-transition.
The Group’s most significant credit risk exposure is to debt portfolios. At 31 December 2018 the carrying value by geography is shown below:
UK
Ireland
Portugal
Netherlands
Italy
2018
£000
438,103
29,017
308,843
166,652
144,415
1,087,030
2017
£000
481,900
–
299,100
124,900
45,567
951,467
In the UK, the Group constructed its own proprietary data repository in 2005 and has added additional historic data on credit performance in the
markets in which it operates. It now has tens of millions of records. This is used to inform collections strategies and to help establish affordable
repayment plans and settlements with our customers across all geographies.
As part of credit risk, the Group is subject to counterparty risk in respect of the cash and cash equivalents held on deposit with banks and foreign
currency and derivative financial instruments. Counterparty risk with debt sellers is managed through contractual arrangements and warranties.
The Group generally deposits cash and undertakes currency and derivative transactions with highly rated banks, with strict limits on the level of
exposure to any one institution. Institutions with lower credit ratings can only be used with board approval.
No collateral or credit enhancements are held in respect of any financial derivatives. The maximum credit risk on derivatives and trade receivables is
the full carrying amount. The maximum exposure to counterparty risk is as follows:
Cash and cash equivalents
2018
£000
92,001
92,001
2017
£000
35,943
35,943
The table represents a worst-case scenario of the counterparty risk that the Group is exposed to. The 31 December 2018 balance is spread across
a number of counterparties with the top five accounting for 72% of the total (2017: 58%). The maximum exposure to one counterparty is £47 million
(2017: £7.1 million).
The key risks and uncertainties faced by the Group are managed within an established risk management framework. The Group’s day-to-day
working capital is funded by its cash and cash equivalents.
Capital risk management
The Group is subject to the risk that its capital structure will not be sufficient to support the growth of the business. The Group is currently not
required to hold regulatory capital.
The Group aims to maintain appropriate capital to ensure that it has a strong statement of financial position but at the same time is providing
a good return on equity to its shareholders. The Group’s long-term aim is to ensure that the capital structure results in an optimal ratio of debt
and equity finance.
The capital structure of the Group consists of debt, cash and cash equivalents and equity.
Arrow Global Annual Report and Accounts 2018
Financial statements
126
Notes to the financial statements continued
24. Risks arising from financial instruments continued
Management reviews the capital structure on an ongoing basis. As part of this review, management considers the cost of capital and the risks
associated with each class of capital. The Group’s position as at 31 December 2018 was:
Ordinary share capital and premium
Other reserves excluding opening IFRS 9 and IFRS 15 adjustments
Impact of adopting IFRS 9
Impact of adopting IFRS 15
Total equity and reserves
2018
£000
349,199
(143,343)
(14,000)
(199)
191,657
2017
£000
349,189
(154,041)
–
–
195,148
25. Financial instruments
Fair value estimation
The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price
quotations. For all other financial instruments, the Group determines fair values using other valuation techniques.
For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of
judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.
Valuation models
The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making
the measurements.
Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments.
Level 2: inputs other than quoted market prices within level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices).
This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or
similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or
indirectly observable from market data.
Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on
observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that
are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect
differences between the instruments.
The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid
to transfer the liability in an orderly transaction between market participants at the measurement date.
Valuation techniques include net present value and discounted cash flow models, using prices from observable current market transactions and
dealer quotes for similar instruments and unobservable inputs such as historic performance data and the Proprietary Collections Bureau output.
The portfolio investments’ fair value is calculated using our ERC derived through our own in-house models. Derivative financial instruments are
initially recognised, and subsequently measured, at fair value. The fair values of derivative instruments are calculated using quoted prices. Foreign
currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching
maturities of the contracts. Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the
applicable yield curves derived from quoted interest rates.
Borrowings are initially measured at fair value and are subsequently held at amortised cost.
Financial instruments measured at fair value – fair value hierarchy
The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the
fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position.
Level 2
Liabilities:
Foreign currency contracts
Interest rate swaps
Level 3
Assets:
Portfolio investments
2018
£000
(294)
796
502
2017
£000
2,543
322
2,865
217,974
217,974
30,889
30,889
There have been no transfers in or out of level 2 or level 3.
The fair value of derivative financial instruments has been calculated by discounting expected future cash flows using interest rate yield curves and
forward foreign exchange rates prevailing at 31 December 2018.
Arrow Global Annual Report and Accounts 2018
25. Financial instruments continued
Reconciliation of Level 3 fair values
As at the year brought forward
Reclass due to IFRS 9
Portfolio investments acquired during the year
Fair value gain on portfolio investments at FVTPL
Acquired
Collections in the year
Income from portfolio investments
Foreign exchange gain
127
2018
£000
30,889
76,734
93,836
24,745
8,514
(23,889)
5,070
2,075
217,974
2017
£000
21,315
–
11,058
5,298
–
(8,464)
710
972
30,889
The fair value of portfolio investments recognised as FVTPL has been calculated by using a discounted cash flow model. The three main influencing
factors in calculating this are:
• estimated future cash flows, derived from management forecasts;
• the application of an appropriate exit multiple; and
• discounting using a rate appropriate to the investment and the anticipated rate of return.
Financial instruments not measured at fair value – fair value hierarchy
The following table analyses financial instruments not measured at fair value at the reporting date, by the level in the fair value hierarchy into which
the measurement is categorised. The amounts are based on the values recognised in the statement of financial position. All of the Group’s financial
instruments not measured at fair value fall into hierarchy level 3.
Level 3
Assets
Portfolio investments
Total assets
There have been no transfers in or out of level 3.
2018
£000
2017
£000
869,056
869,056
920,578
920,578
The statement of financial position value of the Group’s portfolio investments not measured at fair value, is derived from discounted cash flows
generated by an 84-month ERC model. The inputs to the ERC model are historical portfolio collection performance data. This ERC model is
updated with the core collections experience to date on a monthly basis.
Estimates of cash flows that determine the EIR are based on the Group’s collection history with respect to portfolios comprising similar attributes
and characteristics such as date of purchase, original credit grantor, type of receivable, customer payment histories, customer location, and the
time since the original charge off.
Following acquisition, the fair value will move directionally in line with carrying amount, but may deviate as market conditions change. For more
information on how the fair value of portfolio investments is calculated, please see page 126.
The Group has an established control framework covering the measurement of portfolio investment values. This includes regular monitoring of
portfolio performance overseen by the portfolio review committee, which considers actual versus forecast results at an individual portfolio level,
re-forecasts cash flows on a semi-annual basis, reviews actual against forecast gross money multiple, approves the latest ERC forecast, assesses
the carrying value of the portfolio assets and reviews revenue recognition.
A reconciliation of the opening to closing balances for the year of the portfolio investments can be seen in note 16.
The Company did not hold any other financial instruments not measured at fair value for which a fair value needs to be calculated (2017: none).
Cash flow hedges
The Group uses foreign currency contracts (‘cash flow hedges’) to hedge foreign currency cash flows that are highly probable to occur within 12
months of the statement of financial position date and interest rate swaps (‘cash flow hedges’) to hedge those interest cash flows that are expected
to occur during the period to November 2020. The effect on the statement of profit or loss and other comprehensive income will also be within
these periods. An amount of £291,000 has been charged to equity for the Group in the period in respect of cash flow hedges (2017: £348,000). All
hedge relationships have been effective in the year and are expected to maintain effectiveness. No charge has been made to the Company’s equity.
The Group has interest rate swaps in place for a notional amount of £453,812,000 (2017: £399,534,000). In 2017 and 2018, these interest rate swaps
covered current borrowings, being the floating rate Euro notes.
Arrow Global Annual Report and Accounts 2018
Financial statements
128
Notes to the financial statements continued
25. Financial instruments continued
Hedge effectiveness is assessed based upon the relative changes in cash flows arising from the specified portion of the Group’s floating rate
borrowings, relative to the change in cash flows of the interest rate swaps (using the hypothetical derivative method). The hedges are deemed to
be highly effective in the current and prior period. In such hedge relationships, the main source of potential hedge ineffectiveness is counterparty
credit risk, of both parties, including the Group. There are no other material sources of hedge ineffectiveness.
Interest rate swaps in place at the statement of financial position date are designated, and are effective under IFRS 9, as cash flow hedges, and their
fair value has been recognised in the hedging reserve. All interest rate swaps are categorised as highly effective, so no charge has been made to the
statement of profit or loss and other comprehensive income in the year (2017: no charge). No re-classifications into or out of the hedging reserve
were made in relation to interest rate swaps.
Interest rate swaps at December
Euro
Weighted
average
interest rate
2018
Maturity
date
(0.13%) Mar 2020
Fair value
2018
£000
(796)
Weighted
average
interest rate
2017
Maturity
date
(0.07%) Mar 2019
Fair value
2017
£000
(322)
The Company did not hold any interest rate swaps at 31 December 2018 (31 December 2017: £nil).
Forward foreign exchange contracts
It is the policy of the Group to enter into forward foreign exchange contracts to cover specific foreign currency payments and receipts and
exposure to currency rate fluctuations.
The total notional amount of outstanding foreign currency contracts that the Group is committed to at 31 December 2018 is £35,300,000 (2017:
£127,800,000). These comprise foreign currency contracts to sell sterling for a total notional of £35,300,000 (2017: £127,800,000). These contracts
have maturity dates to March 2019. These contracts have been designated and are effective as cash flow hedges under IFRS 9 and, accordingly, the
fair value thereof has been deferred in equity and fair value will be recycled to the statement of profit or loss and other comprehensive income in
March 2019. In such hedge relationships, the main source of potential hedge ineffectiveness is counterparty credit risk, of both parties, including
the Group. There are no other material sources of hedge ineffectiveness.
As at 31 December 2018 the aggregate amount of net gain/loss under forward foreign exchange contracts that have been recognised in the
consolidated statement of profit or loss and other comprehensive income relating to the exposure on these anticipated future transactions is
£nil (2017: £nil).
During the year, £1,202,000 (2017: £1,804,000) was recycled from equity to the statement of profit or loss, within finance costs, and other
comprehensive income as a result of maturity of the short dated foreign exchange swaps during the year.
The Company did not hold any foreign exchanges swaps at 31 December 2018 (31 December 2017: £nil).
26. Financial assets and financial liabilities
Financial assets
Portfolio investments
Cash and cash equivalents
Trade and other receivables
Senior secured notes (excluding fees)
Revolving credit facility (excluding fees)
Bank overdrafts (excluding fees)
Other borrowings
Senior secured note interest
Finance lease
Derivative liabilities
Trade and other payables
Current tax liabilities
Arrow Global Annual Report and Accounts 2018
2018
£000
1,087,030
92,001
94,206
1,273,237
2018
£000
935,567
245,587
2,696
11,635
5,542
–
502
197,657
7,915
1,407,101
2017
£000
951,467
35,943
56,885
1,044,295
2017
£000
779,347
155,757
1,332
8,908
6,670
1,816
2,865
98,359
4,528
1,059,582
129
26. Financial assets and financial liabilities continued
Fair values of financial assets and liabilities
The fair value and carrying value of the financial assets and liabilities of the Group are set out below:
Portfolio investments
Cash and cash equivalents
Other receivables
Financial assets
Fair value
2018
£000
1,100,001
92,001
94,206
1,286,208
Book value
2018
£000
1,087,030
92,001
94,206
1,273,237
Fair value
2017
£000
962,820
35,943
56,885
1,055,648
Book value
2017
£000
951,467
35,943
56,885
1,044,295
The carrying value of cash and cash equivalents is deemed to be their fair value, and this would be a level 1 value. Other receivables’ fair value is
deemed to be materially equal to their carrying value due to their short maturity and low credit risk, being a level 3 value.
The fair value of amortised cost portfolio investments has been calculated by observing the compression in market yields over time, and applying
the difference between current average market IRRs for the Group’s most recent vintage, and applying this as a premium or discount to prior
years’ vintages. This approach takes into account changes in market pricing factors over time, while retaining the consideration of the individual
characteristics of each portfolio. As this calculation is based on unobservable inputs, these fair values would be categorised as level 3 values.
Senior secured notes (excluding fees)
Revolving credit facility (excluding fees)
Bank overdrafts (excluding fees)
Other borrowings
Senior secured note interest
Finance lease
Derivative liabilities
Trade and other payables
Current tax liabilities
Financial liabilities
Fair value
2018
£000
859,293
245,587
2,696
11,635
5,542
–
502
197,657
7,915
1,330,827
Book value
2018
£000
935,567
245,587
2,696
11,635
5,542
–
502
197,657
7,915
1,407,101
Fair value
2017
£000
784,166
155,757
1,332
8,908
6,670
1,816
2,865
98,359
4,528
1,064,401
Book value
2017
£000
779,347
155,757
1,332
8,908
6,670
1,816
2,865
98,359
4,528
1,059,582
The carrying value of the bank borrowings is deemed to be a good approximation of their fair value. Bank borrowings can be repaid within six
months if the Group decides not to roll over for further periods up to the contractual repayment date. The impact of discounting is therefore
negligible. These fair values would be categorised as level 3 values.
The fair value of the senior secured notes has been calculated by reference to broker quotes that are based on observable market inputs and
therefore would be included as level 2 in the fair value hierarchy table should the liability have been held at fair value.
Derivative financial instruments are held at fair value, which is equal to the expected future cash flows arising as a result of the derivative transaction.
For other financial assets and liabilities, which are all short-term in nature, the carrying value is a reasonable approximation of fair value.
IFRS 9 transition – classification and measurement
The transition to IFRS 9 resulted in a number of classification changes from previous categories from IAS 39. Under IFRS 9, the Group must, for
each of its financial assets, make a ‘business model’ assessment, which reflects management’s strategy for the asset, whether that is ‘hold to collect’,
‘hold to collect and sell’ or ‘other’. For a business model to be ‘hold to collect’, the strategy must be to hold the asset to collect its contractual cash
flows. A ‘hold to collect and sell’ model’ would be a strategy which contemplates both holding the asset to collect contractual cash flows as well
as regular asset sales. The ‘other’ classification is applied to any other business model. The Group has assess its business model for all its financial
assets, and on the basis that any sales of assets would be infrequent, and for specific reasons such as liquidity or credit risk mitigation, that the
business model for all financial assets is ‘hold to collect’.
The Group must also assess the staging category of each of its financial assets, as described in note 2.1. All of the Group’s portfolio investments are
considered to be POCI, as set out in note 2.1. The Group has applied the low credit risk exemption for cash and cash equivalents, on the basis that
all cash balances are held with investment grade banks, and therefore the credit risk is deemed to be minimal. For trade and other receivables,
the Group has applied the simplified approach, as such receivables are mainly short-term and no ECL has been considered for these assets.
The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for
the Group’s financial assets and financial liabilities as at 1 January 2018.
Arrow Global Annual Report and Accounts 2018
Financial statements
130
Notes to the financial statements continued
26. Financial assets and financial liabilities continued
The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for
the Group’s financial assets and financial liabilities as at 1 January 2018.
Financial assets
Portfolio investments (a)
Portfolio investments (b)
Portfolio investments –
Loan notes (a)
Portfolio investments –
Loan notes (b)
Portfolio investments –
Loan notes (c)
Cash and cash equivalents
Other receivables
Total Financial assets
Financial liabilities
Senior secured notes
(excluding fees)
Revolving credit facility
(excluding fees)
Bank overdrafts (excluding fees)
Other borrowings
Senior secured note interest
Finance lease
Derivative liabilities
Trade and other payables
Current tax liabilities
Total financial liabilities
Original IAS 39 classification
IFRS 9 classification
Loans and receivables
Loans and receivables
Amortised cost
FVTPL (mandatory)
Loans and receivables
Amortised cost
FVTPL
FVTPL (mandatory)
Loans and receivables
Loans and receivables
Loans and receivables
FVTPL (mandatory)
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
FVTPL
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
FVTPL (held–for–trading)
Amortised cost
Amortised cost
Original carrying amount
under IAS 39
£000
New carrying
amount under IFRS 9
£000
843,845
56,924
9,120
30,889
10,689
35,943
56,885
1,044,295
779,347
155,757
1,332
8,908
6,670
1,816
2,865
98,359
4,528
1,059,582
826,936
56,924
9,029
30,889
10,689
35,943
56,885
1,027,295
779,347
155,757
1,332
8,908
6,670
1,816
2,865
98,359
4,528
1,059,582
The only classification change which is deemed material to the Group’s financial statements is the reclassification and remeasurement of the
Group’s portfolio investments. A full review of the Group’s portfolio investments has been performed upon the transition to IFRS 9, and have
concluded that the business model is ‘hold to collect’ for all portfolio investments.
SPPI testing is performed by the Group by assessing the nature of the underlying cash flows in the purchased loan portfolios in which it invests.
The underlying contracts of the loans are examined to make this determination, and if any contractual cash flows arise which are not either interest
or repayments of principal outstanding, this will fail the test. The basis of reclassifications have mainly therefore been as a result of SPPI testing
conclusions, which have included several large portfolios moving to FVTPL as they failed the SPPI test.
The following table reconciles the carrying amounts under IAS 39 to the carrying amounts under IFRS 9 on transition to IFRS 9 on 1 January 2018.
IAS 39 carrying amount as at
1 January 2018
£000
Reclassification
£000
Remeasurement
£000
IFRS 9 carrying amount as at
1 January 2018
£000
Amortised cost financial assets
Purchased loan portfolios:
Opening balance
Remeasurement
Closing balance
Loan notes:
Opening balance
Remeasurement
Closing balance
Cash and cash equivalents
Other Receivables
Total amortised cost
900,769
19,809
35,943
56,885
1,013,406
–
–
–
–
–
(16,909)
(91)
–
–
(17,000)
883,860
19,718
35,943
56,885
996,406
There were no other gains/losses as a result of reclassifications or remeasurements on transition to IFRS 9 for the Group.
Arrow Global Annual Report and Accounts 2018
131
26. Financial assets and financial liabilities continued
The following table summarises the impact of transition to IFRS 9 on the opening balance of the Group’s retained earnings. There is no impact on
other components of equity.
Retained earnings
Closing balance under IAS 39 (31 December 2017)
Recognition of expected credit losses under IFRS 9
Related tax
Opening balance under IFRS 9 (1 January 2018)
Impact of adopting IFRS 9 at 1 January 2018
£000
118,710
(17,000)
3,000
104,710
There was no further transitional impact of IFRS 9 when taking into account provisions for loan commitments and financial guarantee contracts
under IAS 37 – Provisions, Contingent Liabilities and Contingent Assets.
27. Share-based payments – Group and Company
Share incentive plan (SIP)
In 2018 (and previously April 2017, 2016, 2015 and 2014), the Group offered to all UK employees the opportunity to participate in a SIP, where
the Company gives the participating employees one matching share for each partnership share acquired on behalf of the employee using the
participating employees’ gross salaries. The shares vest at the end of three years on a rolling basis as they are purchased, with employees required
to stay in employment for the vesting period to receive the shares.
On 30 December 2014, the Group provided eligible employees with a free share award worth £500, with a grant date price per share of £2.29 as part
of the Arrow Global Group SIP. The free shares vested during the previous year, with restrictions attached to these shares ceasing to have effect
from the vesting date.
Long-term incentive plan (LTIP)
LTIP Awards 2015, 2016, 2017 and 2018
On 27 June 2018, 31 March 2017, 8 April 2016 and 19 May 2016, nil-cost share options were granted to eligible employees based on a maximum of
150% of base salary. Conditional awards were also granted to eligible Dutch employees on 27 June 2018, 31 March 2017 and 19 May 2016. The LTIP
awards vest at the end of three years subject to the achievement of performance conditions. On the same dates, tax-qualifying options were
granted as part of the LTIP awards (‘CSOP options’) to eligible UK employees.
Each CSOP option is subject to the same performance targets as apply to the nil-cost option part of the awards. If a CSOP option is exercised at a
gain, the number of shares that may be delivered under the above associated nil-cost option under the LTIP will be reduced at exercise by the same
value to ensure that the total pre-tax value of the original LTIP award delivered to the participant is not increased by the grant of the CSOP option.
On the 30 June 2015 and 15 June 2015, further awards of nil-cost share options were granted to eligible employees based on maximum of 150% of
base salary. The LTIP awards vest at the end of three years, subject to the achievement of performance conditions. These vested on 15 June 2018
at 100%. CSOP options were granted to eligible UK employees on 15 June 2015.
The 27 June 2018 awards do not include the right to receive a dividend equivalent.
LTIP Awards 2015, 2016, 2017 and 2018 criteria
For each eligible employee, 50% of the LTIP awards are subject to underlying basic EPS growth criteria and vest as follows:
Performance condition
Less than 10% EPS growth per annum
10% EPS growth per annum over the vesting period (‘threshold performance’)
20% EPS growth per annum over the vesting period (‘maximum performance’)
Between 10% and 20% EPS growth per annum over the vesting period
Percentage vesting
0%
25%
100%
Between the threshold performance and
maximum performance on a straight–line basis
Arrow Global Annual Report and Accounts 2018
Financial statements 132
Notes to the financial statements continued
27. Share-based payments – Group and Company continued
For each eligible employee, 25% of the LTIP awards are subject to total shareholder return criteria, being share price growth plus the value of
dividend. The Group is compared against the FTSE 350 Index, with the LTIP awards vesting as follows:
Performance condition
Below median ranking
Median ranking (top 50%) (‘threshold performance’)
Upper quartile ranking (top 25%) (‘maximum performance’)
Between top 50% and top 25% ranking
LTIP Awards 2018 criteria
For each eligible employee, 25% of the LTIP awards are subject to ROE criteria, and vests as follows:
Performance condition
Less than 26% average ROE over the three performance years
26% average ROE growth over the three performance years (‘threshold performance’)
30% average ROE growth over the three performance years (‘maximum performance’)
Between 26% and 30% average ROE growth over the three performance years
LTIP Awards 2015, 2016 and 2017 criteria
For each eligible employee, 25% of the LTIP awards are subject to ROE criteria, and vests as follows:
Performance condition
Less than 20% average ROE over the three performance years
20% average ROE growth over the three performance years (‘threshold performance’)
26% average ROE growth over the three performance years (‘maximum performance’)
Between 20% and 26% average ROE growth over the three performance years
Percentage vesting
0%
25%
100%
Between the threshold performance and
maximum performance on a straight–line basis
Percentage vesting
0%
25%
100%
Between the threshold performance and
maximum performance on a straight–line basis
Percentage vesting
0%
25%
100%
Between the threshold performance and
maximum performance on a straight–line basis
LTIP Awards 2014
On 11 March 2014, nil-cost share options were granted to eligible employees based on a maximum of 150% of base salary. The LTIP awards vest at
the end of three years, subject to the achievement of performance conditions. These vested on 11 March 2017 at a level of 86.04%.
For each eligible employee, 75% of the LTIP awards are subject to underlying basic EPS growth criteria and vest as follows:
Performance condition
Less than 10% EPS growth per annum
10% EPS growth per annum over the vesting period (‘threshold performance’)
20% EPS growth per annum over the vesting period (‘maximum performance’)
Between 10% and 20% EPS growth per annum over the vesting period
Percentage vesting
0%
25%
100%
Between the threshold performance and
maximum performance on a straight–line basis
For each eligible employee, 25% of the LTIP awards are subject to total shareholder return criteria, being share price growth plus the value of
dividend. The Group is compared against the FTSE 350 Index, with the LTIP awards vesting as follows:
Performance condition
Below median ranking
Median ranking (top 50%) (‘threshold performance’)
Upper quartile ranking (top 25%) (‘maximum performance’)
Between top 50% and top 25% ranking
Percentage vesting
0%
25%
100%
Between the threshold performance and
maximum performance on a straight–line basis
Further nil-cost share option LTIP awards were made on 30 May 2014 and 8 December 2014, both of which vested at the same time as the 11 March
2014 LTIP awards and had the same criteria for vesting. A conditional LTIP award was made on 30 May 2014. This award vested during the year with
restrictions attached to these shares ceasing to have effect from vesting date.
Restricted share awards
Restricted share awards were made on 10 May 2018, 31 March 2017, 19 May 2016 and 15 June 2015. These awards vest on 10 May 2020 and 31 March
2019 respectively, subject to continuity of employment with the awards made on and 19 May 2016 and 15 June 2015 vested on 19 May 2018 and
11 May 2017 respectively.
Arrow Global Annual Report and Accounts 2018
133
27. Share-based payments – Group and Company continued
Deferred share bonus plan (DSBP)
Up to 50% of the bonus earned by the executive directors is deferred into shares for up to three years via the DSBP, subject to continued
employment during the vesting period. DSBP awards were made on 31 March 2017, 8 April 2016 and 9 April 2015. See page 70 for details of the
bonus delivered in the form of deferred shares for the financial year 2018. The deferred shared granted on 9 April 2015 vested on 9 April 2018.
Awards granted to Tom Drury on 8 April 2016 and 31 March 2017 vested on 31 December 2018.
Buy-out awards
Buy-out share awards were made on 2 January 2018, in respect to compensation of forfeited awards for Paul Cooper as a result of his resignation
from his former employer. The first award vested on 18 June 2018. These remaining awards vest between 30 April 2019 to 30 April 2021, subject to
continuity of employment.
Grant information
The terms and conditions of the grant are as follows:
Name
Grant date/employees entitled
Equity settled award – SIP
Equity settled award – SIP
Equity settled award – LTIP
Equity settled award – LTIP
Equity settled award – SIP
Equity settled award – LTIP
Equity settled award – LTIP
Equity settled award – restricted
Equity settled award – SIP
Equity settled award – LTIP
Equity settled award – LTIP
Equity settled award – restricted
Equity settled award – SIP
Equity settled award – DSBP
Equity settled award – DSBP
Equity settled award – LTIP
Equity settled award – LTIP
Equity settled award – restricted
Equity settled award – SIP
Equity settled award – DSBP
Equity settled award – LTIP
Equity settled award – restricted
Equity settled award – SIP
Equity settled award – deferred
Equity settled award – buy out
Equity settled award – buy out
Equity settled award – buy out
Equity settled award – buy out
Method of settlement
accounting
Number of
instruments
Vesting
period
Contractual life
of options
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
Equity
81,298
90,252
1,478,751
88,202
16,676
1,483,532
32,739
266,008
55,003
1,563,299
176,053
272,638
73,261
44,183
77,739
1,430,117
74,052
202,312
50,106
65,374
1,814,874
189,702
111,097
70,891
18,089
49,951
70,098
25,491
3 years
3 years
2.3–3 years
2 years
3 years (rolling)
3 years
3 years
2 years
3 years (rolling)
3 years
2.9 years
2 years
3 years (rolling)
3 years
3 years
3 years
3 years
2 years
3 years (rolling)
3 years
3 years
2 years
3 years rolling
3 years
n/a
1 year 4 months
2 years 4 months
3 years 4 months
31 October 2016
30 December 2017
11 March 2017
30 May 2016
30 May 2017
15 June 2018
15 June 2018
1 May 2017
May – June 2018
8 April 2019
8 April 2019
1 May 2018
April 2019
9 April 2018
8 April 2019
31 March 2020
31 March 2020
31 March 2019
May – June 2020
31 March 2020
27 June 2021
10 May 2020
May – June 2021
26 March 2021
18 June 2018
30 April 2019
30 April 2020
30 April 2021
The following table shows the weighted average exercise prices (WAEP) and number of options movements during the year.
Outstanding at the beginning of the year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at 31 December
Exercisable at 31 December
2018
2017
Number of
WAEP
options
£2.90 4,076,095
2,350,193
£2.73
(436,320)
£2.88
(812,896)
£2.59
–
–
5,177,072
£2.88
718,631
£2.53
WAEP
£2.57
£3.48
£3.00
£2.47
£2.46
£2.90
£2.29
Number of
options
4,296,354
1,821,961
(819,078)
(1,090,533)
(132,609)
4,076,095
197,851
Arrow Global Annual Report and Accounts 2018
Financial statements
134
Notes to the financial statements continued
27. Share-based payments – Group and Company continued
The weighted average share price at the date of exercise of share options exercised during the year was £2.54 (2017: £3.44). The share options
outstanding at 31 December 2018 have a weighted average contractual life of 1.3 years (2017: 1.2 years). The weighted average fair value of
options granted during the year was £2.61 (2017: £3.21). The majority of options granted to date are nil-cost options (2017: nil-cost options).
The fair value of equity settled share-based payments has been estimated as at date of grant using the Black-Scholes model. The inputs to the
models used to determine the valuations fell within the following ranges:
Grant date
Expected life of options (years)
Share prices at date of grant
Expected share price volatility (%)
Risk free interest rate (%)
27 June
2018
3
£2.49
38.2%
0.7%
10 May
2018
2
£3.69
n/a
n/a
May
2018
26 March
2018
3
£2.88
n/a
n/a
3
£3.45
n/a
n/a
2 January
2018
4 months –
3 year 4 months
£3.93
n/a
n/a
The total expenses recognised for the year arising from share-based payments are as follows:
Equity settled share-based payment expense spread across vesting period
Total equity settled share-based payment expense recognised in the statement of comprehensive income
2018
£000
3,267
3,267
2017
£000
3,334
3,334
The Company holds the obligation to settle the share options; however, the benefit arises in the subsidiaries in which the employees reside,
with the charge in the statement of profit or loss and other comprehensive income recharged to AGL, CDRL and the Dutch employee
holding company.
Please see the directors remuneration report for further information about directors’ share options.
28. Borrowings and facilities
Senior secured notes (net of transaction fees of £14,769,000, 2017: £15,607,000)
Revolving credit facility (net of transaction fees of £3,466,000, 2017: £2,721,000)
Senior secured notes interest
Bank overdrafts
Finance lease
Non-recourse facility
Total borrowings:
Amount due for settlement within 12 months
Amount due for settlement after 12 months
2018
£000
920,798
242,121
5,542
2,696
–
11,635
1,182,792
2017
£000
763,740
153,036
6,670
1,332
1,816
8,908
935,502
259,045
923,747
165,360
770,142
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.
On 30 March 2017, the Group issued €400 million senior secured floating rate notes due 2025 (the ‘2025 Notes’) at a coupon of EURIBOR +2.875%
per annum with EURIBOR being not less than 0%. Interest is paid quarterly in arrears. The 2025 Notes can be redeemed in full or in part on or after
1 April 2019 at the Group’s option. Prior to 1 April 2019 the Group may redeem, at its option, some or all of the 2025 Notes at a redemption price
equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus an applicable make-whole premium.
The proceeds from the 2025 Notes were used to redeem the existing €335 million 2021 Notes, pay the early redemption and transaction fees
payable in respect of the €335 million 2021 Notes and repay drawings under the revolving credit facility.
The Euro senior notes and Sterling senior notes are secured by substantially all of the assets of the Group.
Arrow Global Annual Report and Accounts 2018
135
28. Borrowings and facilities continued
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. Post year end on 26 February 2019, the revolving credit facility was extended to 2024, with the
margin unchanged.
On 24 February 2017 the commitments under the revolving credit facility were increased from £180 million to £215 million. Upon the redemption
of the €335 million 2021 Notes on 30 March 2017, the maturity of the facility was extended to 31 March 2022.
Finance lease liabilities
Due to the acquisition of Zenith Service S.p.A., in the prior year, the Group’s liabilities included a finance lease in relation to a property which was
payable as follows. The property was sold during 2018 and the finance lease liability extinguished.
Less than one year
Between one and five years
More than five years
Total payable
Future minimum
lease payments
Interest
2018
£000
–
–
–
–
2017
£000
171
685
1,377
2,233
2018
£000
–
–
–
–
Present value of minimum
lease payment
2018
£000
–
–
–
–
2017
£000
114
493
1,209
1,816
2017
£000
57
192
168
417
Reconciliation of movements of liabilities to cash flows arising from financing activities
Balance at 31 December 2017
Changes from financing cash flows
Movements in other banking facilities
Proceeds from senior notes (net of fees)
Redemption of senior notes
Early repayment of bond
Repayment of interest on senior notes
Payment of deferred interest
Bank and other similar fees paid
Total changes from financing cash flows
Changes arising from obtaining or losing control
of subsidiaries or other businesses
Sale of asset
The effect of changes in foreign exchange rates
Changes in fair value
Other changes
Liability-related
Interest expense on senior secured notes
Amortisation of capitalised transaction fees -bond
Interest on senior secured notes
Interest expense and similar charges on bank loans
Amortisation of capitalised transaction fees -revolving
credit facility
Interest and similar charges on bank loans
Bond refinancing costs
Interest rate swap and forward exchange contract hedge
costs
Other interest including interest on finance lease
Capitalised transaction fees
Acquisition of subsidiary, deferred consideration
Total liability-related and other changes
Balance at 31 December 2018
Total
liabilities
relating to
cash flow
from
financing
activity
£000
952,294
91,092
345,847
(203,467)
(13,623)
(36,522)
(257)
(5,326)
177,744
52,209
(1,902)
8,888
–
59,195
35,379
2,078
37,457
5,371
763
6,134
18,658
Interest rate
swap
liabilities and
forward
exchange
contracts
£000
2,280
–
–
–
–
–
–
(846)
(846)
–
–
30
(2,392)
(2,362)
–
–
–
–
–
–
–
Total
£000
954,574
91,092
345,847
(203,467)
(13,623)
(36,522)
(257)
(6,172)
176,898
52,209
(1,902)
8,918
(2,392)
56,833
35,379
2,078
37,457
5,371
763
6,134
18,658
12
1,177
(1,507)
(6,471)
114,655
1,244,693
1,556
–
–
–
1,556
628
1,568
1,177
(1,507)
(6,471)
116,211
1,245,321
Revolving
credit
facility
£000
153,035
Other
borrowings
(a)
£000
28,849
89,040
–
–
–
–
–
–
89,040
–
–
790
–
790
–
–
–
–
763
763
–
–
–
(1,507)
–
46
242,121
2,052
–
–
–
–
(257)
(5,326)
(3,531)
52,209
(1,902)
518
–
50,825
–
–
–
5,371
–
5,371
–
12
1,177
(6,471)
50,914
76,232
Senior
secured
notes
interest
£000
6,670
–
–
–
–
(36,522)
–
–
(36,522)
–
–
15
–
15
35,379
–
35,379
–
–
–
–
–
–
–
–
35,394
5,542
Senior
secured
notes
£000
763,740
–
345,847
(203,467)
(13,623)
–
–
–
128,757
–
–
7,565
–
7,565
–
2,078
2,078
–
–
–
18,658
–
–
–
–
28,301
920,798
Arrow Global Annual Report and Accounts 2018
Financial statements
136
Notes to the financial statements continued
28. Borrowings and facilities continued
a) Other borrowings
Other borrowings
Bank overdrafts
Other liabilities relating to cash flow from financing activity
2018
£000
11,635
2,696
76,232
90,563
2017
£000
10,724
1,332
16,793
28,849
29. Dividend
Dividends paid of £21,158,000 have been included in these financial statements, being the 2017 final dividend of 8.1p per share and the 2018 interim
dividend of 4.0p per share. A final dividend for 2018 has been proposed of 8.7p per share, taking the total declared and proposed dividends for the
year ended 31 December 2018 to 12.7p, being 35% 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 2018 interim dividend was declared at 50% of the 2017 final dividend with the subsequent final dividend being proposed based on the
underlying profit after tax for the year.
The ex-dividend date for the final dividend is 6 June 2019 with a record date of 7 June 2019 and a payment date of 12 July 2019. 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 21 June 2019.
30. Acquisition of subsidiary undertaking
Current year acquisitions
a. Parr Credit s.r.l.
On 1 March 2018, the Group acquired 100% of the share capital of Parr Credit. Parr Credit manages unsecured performing and non-performing
loans and customer relationships for Tier-1 telecommunications, financial institutions and media companies. The acquisition builds on the 2017
acquisition of Zenith and gives the Group Italian primary and special servicing capabilities that support the Group’s growth ambitions. The total
undiscounted consideration for the acquisition is €24,924,000 (£21,917,000) including deferred and contingent consideration.
Contingent consideration is split into three tranches and is based on the three future anniversaries of the transaction. It is included at its fair value,
at the amount contractually agreed. The contingent consideration is based on the business meeting certain income targets each year.
Effect of the acquisition
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below:
Intangible assets
Property, plant and equipment
Investments in associates
Cash and cash equivalents
Trade and other receivables
Current tax receivables
Trade and other payables
Accruals
Provisions
Bank overdraft
Total identifiable net assets
Goodwill on acquisition
Fair values of consideration:
Cash
Deferred consideration
Contingent consideration
Cash reduction at acquisition date:
Cash consideration
Offset by cash and cash equivalents acquired
Arrow Global Annual Report and Accounts 2018
Total
£000
264
84
49
21
3,581
197
(4,387)
(298)
(868)
(5)
(1,362)
22,533
21,171
13,011
4,106
4,054
21,171
13,011
(21)
12,990
137
30. Acquisition of subsidiary undertaking continued
Goodwill of €25,624,000 (£22,533,000) was created as a result of this acquisition. The primary reason for the acquisition was to create scale and
servicing capabilities across multiple asset classes in the Italian market following the purchase of Zenith in 2017.
In the period from acquisition to 31 December 2018, Parr Credit contributed income of £13,900,000 and a loss after tax contribution of £2,100,000
to the consolidated results for the year. If the acquisition had occurred on 1 January 2018, Group total income would have been higher by an
estimated £2,600,000 and profit after tax would have been lower by an estimated £400,000.
b. Europa Investimenti S.p.A (EI)
On 13 September 2018, the Group acquired 100% of the share capital of EI. EI originates and manages Italian distressed debt investments.
The acquisition builds on the 2017 acquisition of Zenith, and subsequent acquisition of Parr Credit in 2018, providing a platform to drive returns
from corporate and SME assets. The total undiscounted consideration for the acquisition is €69,500,000 (£62,092,000) including deferred and
contingent consideration.
Contingent consideration is payable in one tranche. It is included at its fair value, at the maximum amount contractually agreed. The contingent
consideration is based on the business meeting certain cumulative income targets by the end of 2022.
Effect of the acquisition
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below:
Deferred tax asset
Other non-current assets
Portfolio investments
Cash and cash equivalents
Trade and other receivables
Tax receivables
Trade and other payables
Provisions
Tax payable
Total identifiable net assets
Goodwill on acquisition
Fair values of consideration:
Cash
Deferred consideration
Contingent consideration
Cash reduction at acquisition date:
Cash consideration
Offset by cash and cash equivalents acquired
Total
£000
1,066
248
11,853
5,280
2,171
382
(6,191)
(3,636)
(212)
10,961
48,219
59,180
31,716
13,304
14,160
59,180
31,716
(5,280)
26,436
Goodwill of €53,972,000 (£48,219,000) was created as a result of this acquisition. The primary reason for the acquisition was to create scale and
servicing capabilities across multiple asset classes in the Italian market following the purchase of Zenith in 2017 and Parr in 2018.
In the period from acquisition to 31 December 2018, EI contributed income of £13,600,000 and profit after tax contribution of £6,500,000 to the
consolidated results for the year. If the acquisition had occurred on 1 January 2018, Group total income and profit after tax would not have been
materially different at £361,796,000 and £29,969,000 respectively, due to the majority of EI’s 2018 deals closing in the period since acquisition.
c. Norfin Investimentos S.A. (Norfin)
On 21 December 2018, the Group acquired 100% of the share capital of Norfin. Norfin manages real estate investments in Portugal. The acquisition
allows the Group to offer a comprehensive set of servicing solutions to investors in Portugal. The total undiscounted consideration for the
acquisition is €43,100,000 (£38,731,000) including expected contingent consideration.
Contingent consideration is split into two tranches and is based upon the assets under management (AUM) growth and margins achieved in the
business by the end of 2020. If such targets are met, a share of the AUM over the performance threshold will be paid as contingent consideration
in the first half of 2021. There is an upper limit to contingent consideration payable of €33,000,000.
Arrow Global Annual Report and Accounts 2018
Financial statements
138
Notes to the financial statements continued
30. Acquisition of subsidiary undertaking continued
Effect of the acquisition
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below:
Property, plant and equipment
Customer intangible
Fee receivables
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Total identifiable net assets
Goodwill on acquisition
Fair values of consideration:
Cash
Contingent consideration
Cash reduction at acquisition date:
Cash consideration
Offset by cash and cash equivalents acquired
Total
£000
262
2,068
1,209
2,471
1,745
(1,992)
5,763
31,335
37,098
16,445
20,653
37,098
16,445
(2,471)
13,974
An intangible asset of €2,301,000 (£2,068,000) has been recognised at acquisition, being the fair value after appropriate discounting, of expected
cash flows arising from existing customer relationships. Goodwill of €34,644,000 (£31,135,000) was created as a result of this acquisition. The primary
reason for the acquisition was to expand the offering of servicing solutions from the Group to investors in Portugal.
In the period from acquisition to 31 December 2018, Norfin did not contribute any material income or profit after tax to the 2018 Group result.
If the acquisition had occurred on 1 January 2018, Group total income would have been higher by an estimated £5,900,000 and profit after tax
would have been an estimated £500,000 higher.
d. Bergen Capital Management Limited (Bergen)
On 1 July 2018, the Group acquired 100% of the share capital of Bergen. Bergen manages corporate real estate secured loans. The acquisition
provides the Group with additional servicing capabilities in this asset class in the UK. The total undiscounted consideration for the acquisition
is £5,200,000.
Effect of the acquisition
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below:
Property, plant and equipment
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Current tax liability
Total identifiable net assets
Goodwill on acquisition
Fair values at consideration:
Cash
Deferred consideration
Cash reduction at acquisition date:
Cash consideration
Offset by cash and cash equivalents acquired
Total
£000
13
92
34
(83)
(20)
36
5,164
5,200
4,200
1,000
5,200
4,200
(92)
4,108
Goodwill of £5,164,000 was created as a result of this acquisition. The primary reason for the acquisition was to enable the Group to take advantage
of opportunities in the small ticket UK commercial real estate secured loan market.
Arrow Global Annual Report and Accounts 2018
139
30. Acquisition of subsidiary undertaking continued
In the period from acquisition to 31 December 2018, Bergen contributed no material income or profit after tax contribution to the consolidated
results for the year.
Prior year acquisitions
a. Zenith Service S.p.A.
On 28 April 2017, the Group acquired 100% of the ordinary share capital of Zenith Service S.p.A. (‘Zenith’). Zenith has a similar principal activity
to that of the Group and is a leading master servicer in the Italian structured finance market, and provider of various structuring and
securitisation services.
The Group paid cash consideration of €11,327,000 (£9,630,000) together with deferred consideration of €7,551,200 (£6,420,000). Deferred
consideration is payable on the one-year anniversary of the transaction and has been included at its fair value leading to an overall consideration
of €18,588,000 (£15,803,000).
Effect of the acquisition
The acquisition had the following effect on the Group’s assets and liabilities:
Intangible assets
Property, plant and equipment
Deferred tax asset
Cash and cash equivalents
Other receivables
Trade and other payables
Deferred tax liability
Current tax liability
Total identifiable net assets
Minority interest
Goodwill on acquisition
Fair values of consideration:
Cash
Deferred consideration
Cash reduction at acquisition date:
Cash consideration
Offset by cash and cash equivalents acquired
Total
£000
2,517
3,087
965
4,555
3,803
(7,610)
(672)
(727)
5,918
(187)
5,731
10,072
15,803
9,630
6,173
15,803
9,630
(4,555)
5,075
An intangible asset of €2,872,000 (£2,442,000) has been recognised at acquisition, being the fair value after appropriate discounting, of expected
cash flows arising from contractual customer relationships. Goodwill of €11,847,000 (£10,072,000) was created as a result of this acquisition. The
primary reasons for the acquisition were to enter the Italian market via the acquisition of an existing well-established company, and to create scale
and servicing capabilities across multiple asset classes.
Trade and other payables in the acquired entity include a finance lease liability of €2,054,000 (£1,746,000) in relation to a property.
In the period from acquisition to 31 December 2017, Zenith contributed income of £8,681,000 and profit after tax of £1,055,000 to the consolidated
results for the period. If the acquisition had occurred on 1 January 2017, Group total income would have been an estimated £331,942,000 and profit
after tax would have been an estimated £41,498,000.
The minority interest, relating to a non-controlling interest in Zenith’s subsidiary, Structured Finance Management – Italy S.r.l (SFM), was recorded
as the non-controlling party’s proportionate interest in the fair value of the identifiable assets of SFM at the acquisition date.
Arrow Global Annual Report and Accounts 2018
Financial statements
140
Notes to the financial statements continued
30. Acquisition of subsidiary undertaking continued
b. Hefesto
On 31 March 2017, the Group acquired 100% of the ordinary share capital of Hefesto STC. Hefesto is a regulated Portuguese special purpose
vehicle for the securitisation of loans and receivables. Whitestar acts as servicer and administrator of Hefesto. The Group paid cash consideration
of €743,000 (£636,000) which was equal to the fair value of the net assets acquired. The assets and liabilities acquired comprised €1,880,000
(£1,608,000) of cash, €1,181,000 (£1,010,000) of trade and other liabilities and €44,000 (£38,000) of other receivables. These figures are after
fair value adjustments totalling €66,000 (£56,000).
c. Mars Capital
On 30 November 2017, the Group acquired 100% of the ordinary share capital of Mars Capital Finance Limited (“Mars Capital”).
Mars Capital is the leading UK and Irish mortgage servicing business and will strengthen the Group’s asset management capabilities and reinforce
its leading position in the UK, while providing strategic entry into Ireland.
The Group will pay £4,178,000 in cash together with deferred cash consideration of £10,000,000. The deferred consideration is payable on the
four-year anniversary of the transaction. There is an amount of the deferred consideration contingent on the timing of the commencement of a
new servicing contract. The deferred consideration has been included at its fair value, £8,581,000, taking into account management’s best estimate
of the contingent amount payable. This gives an overall consideration of £12,759,000.
Effect of the acquisition
The acquisition had the following effect on the Group’s assets and liabilities:
Intangible assets
Property, plant and equipment
Cash and cash equivalents
Other receivables
Trade and other payables
Deferred tax liability
Current tax liability
Total identifiable assets
Goodwill on acquisition
Fair values of consideration:
Cash
Deferred consideration
Cash reduction at acquisition date:
Cash consideration
Offset by cash and cash equivalents acquired
Total
£000
3,011
162
80
3,214
(3,937)
(462)
(148)
1,920
10,839
12,759
4,178
8,581
12,759
4,178
(80)
4,098
An intangible asset of £2,568,000 has been recognised at acquisition, being the fair value after appropriate discounting, of expected cash flows
arising from contractual customer relationships. Goodwill of £10,839,000 was created as a result of this acquisition. The primary reasons for the
acquisition were to enter the Irish market, which offers significant debt purchasing and servicing potential via the acquisition of an existing
well-established company, whilst enhancing the Group’s asset management capabilities.
In the period from acquisition to 31 December 2017, Mars Capital contributed income of £696,000 and profit after tax of £79,000 to the
consolidated results for the period. If the acquisition had occurred on 1 January 2017, Group total income would have been an estimated
£327,315,000 and profit after tax would have been an estimated £41,915,000.
Measurement period
Whilst the Group believes the acquisition accounting fair value adjustments to be complete, IFRS 3 allows a measurement period of up to one year
after acquisition to reflect any new information obtained about facts and circumstances that were made available to the Group at the acquisition
date. If any additional material changes are required within this measurement period, these will be reflected in the 2019 half year results of the Group.
Arrow Global Annual Report and Accounts 2018
141
31. Commitments
In December 2018, the Group entered into three binding contract to buy portfolio investments for £13,257,000. As payments have not been
made and title has not yet passed, the portfolio investments and associated purchase price liability have not been recognised within the financial
reporting period.
32. Notes to the cash flow statement
Profit before tax
Adjusted for:
Collections in the year
Income from portfolio investments
Share in profit in associate
Fair value gain on portfolios
Net impairment gain
Gain on sale of associate
Depreciation and amortisation
Profit on sale of property
Loss on disposal of intangible assets
Net interest payable
Foreign exchange gains
Equity settled share-based payment expenses
Operating cash flows before movement in working capital
Increase in other receivables
Increase in amounts due from subsidiary undertakings
Increase/(decrease) in trade and other payables
Cash generated by operations
Income taxes and overseas taxation (paid)/received
Net cash flow from operating activities before purchases of portfolio investments
Purchase of portfolio investments
Purchase price adjustment relating to prior year
Net cash (used in)/generated by operating activities
Group
Year ended
31 December
2018
£000
39,991
Group
Year ended
31 December
2017
£000
50,559
Company
Year ended
31 December
2018
£000
154,298
Company
Year ended
31 December
2017
£000
23,944
411,588
(193,932)
–
(24,745)
(50,727)
–
14,235
(731)
508
66,792
(2)
3,267
266,244
(28,132)
–
15,645
253,757
(9,428)
244,329
(263,350)
–
(19,021)
342,210
(179,538)
(1,578)
(5,298)
(63,081)
(14,697)
11,729
–
–
71,660
(611)
3,334
214,689
(13,224)
–
5,915
207,380
(9,598)
197,782
(225,734)
474
(27,478)
–
–
–
–
–
–
–
–
–
–
–
–
154,298
(91)
(130,029)
198
24,376
(720)
23,656
–
–
23,656
–
–
–
–
–
–
–
–
–
–
–
–
23,944
(2)
(5,848)
(14)
18,080
64
18,144
–
–
18,144
33. Events occurring after the reporting period
On 26 February 2019, the revolving credit facility was extended to 2024, with the margin unchanged.
Arrow Global Annual Report and Accounts 2018
Financial statements
142
Additional information (unaudited)
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 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.
Continuing operations
Income
Operating expenses
Collection activity costs
Other operating expenses
Total operating expenses
Operating profit
Finance income
Finance costs
Share of profit in associates
Underlying profit before tax
Taxation charge on underlying activities
Underlying profit after tax before non-controlling interest
Non-controlling interest
Underlying profit after tax
Underlying Basic EPS (£)
Underlying tax rate
Reconciliation of reported to underlying costs
Collection activity costs
Other operating expenses
Finance costs
31 December
2018
£000
31 December
2017
£000
361,796
319,015
(117,961)
(113,296)
(231,257)
130,539
76
(48,210)
–
82,405
(18,297)
64,108
–
64,108
0.37
22.2%
(117,638)
(88,344)
(205,982)
113,033
9
(44,317)
1,578
70,303
(13,697)
56,606
(44)
56,562
0.32
19.5%
Reported
£000
(119,041)
(135,972)
(66,868)
2018
Adjustments
£000
1,080
22,676
18,658
Underlying
£000
(117,961)
(113,296)
(48,210)
Reported
£000
(118,468)
(94,603)
(71,669)
2017
Adjustments
£000
830
6,259
27,352
Underlying
£000
(117,638)
(88,344)
(44,317)
Collection activity cost adjusting items relate to ‘One Arrow’ costs incurred during the current and prior year.
Of the £42,414,000 (2017: £34,441,000) adjusting items total, £18,658,000 (2017: £27,352,000) related to bond refinancing costs, £14,717,000 were
acquisition related costs, and £9,039,000 related to ‘One Arrow’ costs. Bond refinancing costs consisted of a £13,623,000 cost related to the call
premium, along with £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 (2017: £2,444,000) 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 (2017: £4,645,000) 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.
Arrow Global Annual Report and Accounts 2018
‘Adjusted EBITDA’ means profit before interest, tax, depreciation, amortisation, foreign exchange gains or losses and other adjusting items.
The Adjusted EBITDA reconciliations for the year to 31 December are shown below:
143
Reconciliation of net cash flow to adjusted EBITDA
Net cash flow used in operating activities
Purchases of portfolio investments
Purchase price adjustment relating to prior year
Income taxes paid
Working capital adjustments
Amortisation of acquisition and bank facility fee
Proceeds from sale of property
Dividends and interest from associate
Disposal of intangible asset
Acquisition costs
One Arrow costs
Adjusted EBITDA
Reconciliation of core collections to adjusted EBITDA
Income from portfolio investments including fair value and impairment gains
Portfolio amortisation
Core collections (includes proceeds from disposal of portfolio investments)
Other income
Operating expenses
Depreciation and amortisation
Foreign exchange gains
Amortisation of acquisition and bank facility fees
Proceeds from sale of property
Dividends and interest from associate
Disposal of intangible asset
Share-based payments
Acquisition costs
One Arrow costs
Adjusted EBITDA
Reconciliation of operating profit to adjusted EBITDA
Profit for the year
Underlying finance income and costs
Taxation charge on ordinary activities
Share of profit on associate
Gain on sale of associate
Adjusting finance costs
Operating profit
Portfolio amortisation
Depreciation and amortisation
Foreign exchange gains
Profit on sale of property
Amortisation of acquisition and bank facility fees
Proceeds from sale of property
Share-based payments
Disposal of intangible asset
Dividends and interest from associate
Acquisition costs
One Arrow costs
Adjusted EBITDA
31 December
2018
£000
(19,021)
263,350
–
9,428
12,487
273
3,759
–
–
14,717
9,039
294,032
31 December
2017
£000
(27,478)
225,734
(474)
9,598
7,309
273
–
7,233
1,332
2,444
4,645
230,616
269,404
142,184
411,588
91,661
(255,013)
14,235
(2)
273
3,759
–
508
3,267
14,717
9,039
294,032
29,969
48,134
10,022
–
–
18,658
106,783
142,184
14,235
(2)
(731)
273
3,759
3,267
508
–
14,717
9,039
294,032
247,917
94,293
342,210
71,098
(213,071)
11,729
(611)
273
–
7,233
1,332
3,334
2,444
4,645
230,616
39,915
44,308
10,644
(1,578)
(14,697)
27,352
105,944
94,293
11,729
(611)
–
273
–
3,334
1,332
7,233
2,444
4,645
230,616
Arrow Global Annual Report and Accounts 2018
Financial statements
144
Glossary
Glossary
’Adjusted EBITDA ratio’ represents the ratio of Adjusted EBITDA to
core collections. See page 31 for a reconciliation of the movement
in portfolio investments under IFRS reconciled to cash ERC.
‘Adjusting items’ are those items that by virtue of their size, nature or
incidence (i.e. outside the normal operating activities of the Group)
are not considered by the Board to be representative of the ongoing
performance of the Group and are therefore excluded from underlying
profit after tax.
‘APM’ means alternative performance measures.
‘AUM’ means assets under management.
‘Average net assets’ is calculated as the average quarterly net assets
from 2017 to 2018 as shown in the quarterly and half yearly statements.
In comparative periods this was calculated as the average annual
net assets.
‘Cash interest cover’ represents interest on senior secured notes,
utilisation and non-utilisation revolving credit facility fees and bank
interest to Adjusted EBITDA.
‘Cash result’ represents current cash generation on a sustainable basis
and is calculated as Adjusted EBITDA less cash interest, income taxes
and overseas taxation paid, purchase of property, plant and equipment,
purchase of intangible assets and average replacement rate.
‘CGU’ means cash-generating unit.
‘Collection activity costs’ represent the direct costs of collections
related to the Group’s portfolio investments, such as salaries,
commissions paid to third-party outsourced providers, credit
bureau data costs and legal costs associated with collections.
‘Core collections’ or ‘collections’ means cash collections on the Group’s
existing portfolio investments including ordinary course portfolio sales
and put backs. Core collections is a key metric as it represents the
Group’s most significant cash inflow. It is also a key component of
adjusted EBITDA which is used to monitor the Group’s leverage position.
‘Cost income ratio’ see ‘total cost-to-income ratio’.
‘Cost-to-collect ratio’ is collection activity costs over total income.
‘Creditors’ means financial institutions or other initial credit providers to
consumers, certain of which entities choose to sell paying accounts or
non-paying accounts receivables related to debt purchasers (such as
the Group).
‘CSA’ means Credit Services Association.
‘Customers’ means consumers whose unsecured loan obligation is owed
to the Group as a result of a portfolio purchase made by the Group.
‘Defaulted debt’ means a debt where a customer has breached the
repayment terms governing that debt such that it is unlikely to be paid.
Under the Consumer Credit Act 1974 there are specific legal obligations
which require a customer to be sent the relevant statutory default
notice(s) after which the customer’s agreement may ultimately be
terminated. Other types of debts may also be defined as defaulted in
the event that they remain unpaid for a period of 90 days or more, if
there is not an acceptable arrangement in place to bring the account
back up to date, in which case the creditor or lender may reasonably
believe that the relationship has broken down. Under the Data
Protection Act 1990 it is a requirement that any organisation seeking to
register a default with a credit reference agency must also send a notice
of intention to file a default, this notice is very similar in nature to that
required under the Consumer Credit Act both of which give the debtor
28 days to bring the account back up to date before action is taken.
‘Diluted EPS’ means the earnings per share whereby the number of
shares is adjusted for the effects of potential dilutive ordinary shares,
options and LTIPs.
‘DSBP’ means the Arrow Global deferred share bonus plan.
‘EBITDA’ means earnings before interest, taxation, depreciation
and amortisation.
‘EBT’ means employee benefit trust.
‘ECL’ means expected credit losses.
‘EIR’ means effective interest rate (which is based on the loan
portfolio’s gross internal rate of return) calculated using the loan
portfolio purchase price and forecast gross ERC at the date of purchase.
On acquisition, there is a short period that is required to determine the
EIR, due to the complexity of the portfolios acquired.
‘EPS’ means earnings per share.
‘84-month ERC’ and ‘120-month ERC’ (together ‘gross ERC’), mean
the Group’s estimated remaining collections on portfolio investments
over an 84-month or 120-month period, respectively, representing
the expected future core collections on portfolio investments over an
84-month or 120-month period (calculated at the end of each month,
based on the Group’s proprietary ERC forecasting model, as amended
from time to time).
‘ERC roll forward’ relates to additional cash flows from rolling the asset
life on all portfolios to seven years from the date of ERC, including
the impact of any foreign exchange movement and the impact of
reforecast in the period.
‘FCA’ means the Financial Conduct Authority.
‘Free cash flow’ means Adjusted EBITDA after the effect of capital
expenditure and working capital movements.
‘FVTPL’ – Financial instruments designated at fair value with all gains or
losses being recognised in the profit or loss.
‘GFC’ means global financial crisis.
Arrow Global Annual Report and Accounts 2018
145
‘Gross money multiple’ means core collections to date plus the 84-month gross ERC or 120-month gross ERC, as applicable, all divided by the
purchase price for each portfolio, excluding REO purchases and purchase price adjustments relating to asset management fees.
‘IB’ means the Investment Business.
‘IFRS’ means EU adopted international financial reporting standards.
‘Income from AMS’ includes commission income, debt collection, due diligence, real estate management, advisory fees and intra-group income
for these services.
Third party AMS Business income
Intra-group AMS income
AMS Business income
‘IPO’ means initial public offering.
‘Leverage’ is secured net debt over Adjusted EBITDA.
‘Loan to value’ or ‘LTV ratio’ represents the ratio of 84-month ERC to net debt.
‘LTIP’ means the Arrow Global long-term incentive plan.
2018
£000
91,661
40,645
132,306
‘Merger reserve’ represents the reserve generated upon consolidation of the Group following the Group reconstruction as part of the IPO where
Arrow Global became the parent company.
‘NCI’ means non-controlling interest.
‘Net debt’ means the sum of the outstanding principal amount of the senior secured notes, interest thereon, amounts outstanding under the
revolving credit facility and deferred consideration payable in relation to the acquisition of portfolio investments, less cash and cash equivalents.
Net debt is presented because it indicates the level of debt after taking out of the Group’s assets that can be used to pay down outstanding
borrowings, and because it is a component of the maintenance covenants in the revolving credit facility. The breakdown of net debt for the
year ended 31 December 2018 is as follows:
Cash and cash equivalents
Senior secured notes (pre-transaction fees net off)
Revolving credit facility (pre-transaction fees net off)
Secured net debt
Deferred consideration – portfolio investments
Deferred consideration – business acquisitions
Senior secured loan notes interest
Bank overdrafts
Other borrowings
Net debt
‘Net IRR’ means the internal rate of return net of cost to collect.
‘NPL’ means non-performing loan.
‘OCI’ means other comprehensive income.
2018
£000
(92,001)
935,567
245,587
1,089,153
12,031
59,922
5,542
2,696
11,635
1,180,979
2017
£000
(35,943)
779,347
155,757
899,161
15,309
15,200
6,670
1,332
10,724
948,396
‘Off market’ means those loan portfolios that were not acquired through a process involving a competitive bid or an auction like process.
‘Own share reserve’ comprises the cost of the Company’s ordinary shares held by the Group. At 31 December 2018, the Company held
1,030,766 ordinary shares of 1p each, held in an employee benefit trust. This represents 0.6% of the Company share capital at 31 December 2018.
‘Paying account’ means an account that has shown at least one payment over the last three months or at least two payments over the last
six months.
‘Pay-out ratio’ represents the total amount of dividends paid out divided by the underlying profit after tax.
‘POCI’ means purchased or originated credit impaired
‘Portfolio investments’ are on the Group’s statement of financial position and represent all debt portfolios that the Group owns at the relevant point
in time. A portfolio comprises a group of customer accounts purchased in a single transaction.
Arrow Global Annual Report and Accounts 2018
Financial statements
146
Glossary continued
‘PwC’ means PricewaterhouseCoopers.
‘RCF’ means revolving credit facility.
‘Replacement rate’ means the level of purchases needed during
the subsequent year to maintain the current level of ERC.
‘ROE’ means the return on equity as calculated by taking profit
after tax divided by the average equity attributable to shareholders.
Average equity attributable is calculated as the average quarterly equity
from 2017 to 2018 as shown in the quarterly and half yearly statements.
In the comparative period this is calculated as the average annual
equity attributable.
‘Secured loan to value ratio’ represents the drawn revolving credit
facility, senior secured notes and bank overdrafts (all pre-transaction
fees net off), less cash to 84-month ERC.
‘Secured loan to value’ or ‘secured LTV ratio’ represents the ratio of
84-month ERC to secured debt (net debt as defined above excluding
deferred consideration and interest on the senior secured notes and
including the fair value of foreign currency contracts and interest
rate swaps).
‘Secured net debt’ see table in ‘net debt’ definition.
‘SIP’ means the Arrow Global all-employee share incentive plan.
‘SMART’ means aligning the leadership teams across the Group around
our Mission, Vision and Strategy.
‘SME’ means small and medium-sized enterprises.
‘SPPI’ means solely payments of principal and interest.
‘TCF’ means the treating customers fairly FCA initiative.
‘Total cost-to-income ratio’ is total operating expenses over
total income.
‘Translation reserve’ comprises all foreign currency differences arising
from the translation of the financial statements of foreign operations.
‘TSR’ means total shareholder return.
‘Underlying basic EPS’ represents earnings per share based on
underlying profit after tax, excluding any dilution of shares.
‘Underlying profit after tax’ means profit for the period after tax
adjusted for the post-tax effect of certain adjusting items. The Group
presents underlying profit after tax because it excludes the effect of
items (and the related tax on such items) which are not considered
representative of the Group’s ongoing performance, on the Group’s
profit or loss for a period and forms the basis of its dividend policy.
‘Underlying return on equity’ represents the ratio of underlying
profit after tax attributable to equity shareholders, to average
shareholder equity.
Arrow Global Annual Report and Accounts 2018
Shareholder information
Shareholder information
Registered and head office
Belvedere
12 Booth Street
Manchester
M2 4AW
United Kingdom
Company secretary
Stewart Hamilton
Auditor
KPMG LLP
1 St Peter’s Square
Manchester
M2 3AE
Legal advisors
Slaughter and May
One Bunhill Row
London
EC1Y 8YY
Registrar
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Financial calendar for 2019
• Announcement of 2018 full-year results
28 February 2019
• Announcement of the 3 months to 31 March 2019 results
9 May 2019
• Annual general meeting
4 June 2019
• Ex-dividend date for 2018 final dividend
6 June 2019
• Record date for 2018 final dividend
7 June 2019
• Close of dividend reinvestment plan elections
21 June 2019
• Payment date of 2018 final dividend
12 July 2019
• Announcement of 2019 half-yearly results
8 August 2019
• Announcement of the 9 months to 30 September 2019 results
12 November 2019
• Full-year end
31 December 2019
Annual general meeting
The forthcoming annual general meeting of the Company will take
place at The Cavendish Hotel, 81 Jermyn Street, St. James, London,
SW1Y 6JF, on Tuesday, 4 June 2019 at 9.30am. Notice of the annual
general meeting of the Company, which includes the business to be
transacted and resolutions to be considered at the meeting, appear
in the document accompanying this annual report & accounts.
Shareholder information and website
Equiniti Limited is our registrar, and they offer many services to make
managing your shareholding easier and more efficient. You can find
out further information about the Group and view this annual report &
accounts, results, other announcements and presentations, together
with the latest share price information on the Group's website at
www.arrowglobalir.net.
Shareview
If you wish to receive electronic communications and manage your
shareholding online please visit the website of our Registrar, Equiniti
Limited, at www.shareview.co.uk and click to register at the top of
the page.
Customer support centre
You can contact Equiniti’s customer support centre, which is available
to answer any queries you have in relation to your shareholding:
By phone:
UK: 0371 384 2030
From overseas: +44 121 415 7047
Lines are open from 08.30 to 17.30, Monday to Friday, excluding public
holidays in England and Wales.
By post:
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
This report is printed on paper certified in accordance with the FSC®
(Forest Stewardship Council®) and is recyclable and acid-free. Pureprint
Ltd is FSC certified and ISO 14001 certified showing that it is committed
to all round excellence and improving environmental performance is an
important part of this strategy. Pureprint Ltd aims to reduce at source
the effect its operations have on the environment and is committed to
continual improvement, prevention of pollution and compliance with
any legislation or industry standards. Pureprint Ltd is a Carbon/Neutral®
Printing Company
Arrow Global Annual Report and Accounts 2018
Arrow Global Group plc
Belvedere
12 Booth Street
Manchester
M2 4AW
www.arrowglobalir.net
Company No. 08649661
A
r
r
o
w
G
l
o
b
a
l
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
1
8