Annual Report and Accounts 2019
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The Arrow
Advantage
What culture means to me
“It’s about tackling
exciting challenges,
knowing you have
talented and supportive
colleagues with you.”
Louis Merle,
Senior partner manager, UK
“Arrow’s culture is
special. It’s fast-paced
and driven, but because
of its entrepreneurial
spirit, it feels like a family.”
Francesco Ferraiuolo,
WhiteStar Asset Solutions S.r.l head
of finance and Arrow Italy FP&A leader
“Working together in a safe,
supportive environment
where we are allowed to
experiment in the pursuit
of innovation and change.”
Ana Semedo,
Legal manager, Whitestar, Portugal
“Collaborating with colleagues
from across Europe means we
are open to new ways of
doing things and learning
from one another.”
Remco Ooms,
Team lead collections and operational
implementations, Vesting Finance,
Netherlands
“At Arrow, we don’t sit still.
We constantly challenge
ourselves to be better and
more effective. Our customer
is at the centre of everything
we do in order to achieve
results in the right manner.”
Tara Daly,
Team leader primary servicing,
Mars Capital Finance, Ireland
The right
proposition
See p10
The right
strategy
See p16
The right
culture
See p40
Introduction and contents
Arrow is a leading European
investor and asset manager in the
non-performing and non-core
assets sector. We apply smart
thinking and intelligent execution
to unlock the value others
cannot realise.
We are evolving our model by
developing a discretionary
Fund Management business
in order to capitalise on market
opportunities. We are confident
we will succeed because we have
the right proposition, strategy,
model, culture and people.
2019 highlights
The Arrow Advantage
Strategic report
1
2
4 Chair’s statement
6 Group chief executive officer’s
review
10 The right proposition
12 Our business today
14 Market review
16 The right strategy
18 Strategy
20 Key performance indicators
22 The right model
24 Business model
26 Group chief financial officer’s
review
31 Risk management
34 Principal risks and uncertainties
39 Statement of viability
40 The right culture
42 Our stakeholders
49 Environmental, Social and
Governance
52 The right people
Governance
54 Board of directors
56 Executive management team
58 Corporate governance report
70 Audit committee report
76 Risk committee report
78 Nomination committee report
80 Directors’ remuneration report
98 Report of the directors
103 Directors’ responsibilities
statement
Financial statements
104 Independent auditor’s report
112 Consolidated statement
of profit or loss and other
comprehensive income
113 Consolidated and parent company
statement of financial position
114 Consolidated and parent company
statement of changes in equity
115 Consolidated and parent
company statement of cash flows
116 Notes to the financial statements
170 Additional information
(unaudited)
175 Glossary
180 Shareholder information
The right
model
See p22
The right
people
See p52
Financial
highlights
Operational
highlights
Underlying
financial
highlights
2019 highlights
1
Total income
£339.5m -6.2%
(2018: £361.8m)
Profit before tax
£51.3m +28.3%
(2018: £40.0m)
Basic earnings per share (EPS)
20.0p +17.6%
(2018: 17.0p)
Full-year dividend per share
13.1p +3.1%
(2018: 12.7p)
Asset Management and Servicing business
EBITDA margin
23.9% +3.7ppts
(2018: 20.2%)
Leverage
3.4x
(2018: 3.7x)
84-month ERC
£1,817.9m +11.2%
(2018: £1,634.8m)
120-month ERC
£2,035.4m +3.2%
(2018: £1,972.1m)
Funds Under Management (FUM)
€838.0m
(2018: nil)
Core collections
£442.3m +7.5%
(2018: £411.6m)
Free cash flow
£261.4m +13.3%
(2018: £230.7m)
Underlying cost: income ratio
60.9% +3.0ppts
(2018: 63.9%)
Underlying profit before tax
£78.1m -5.2%
(2018: £82.4m)
Underlying return on equity (ROE)
29.5% -5.3ppts
(2018: 34.8%)
Underlying basic earnings per share (EPS)
33.0p -10.8%
(2018: 37.0p)
Important notes:
IFRS, cash metrics and underlying results are important to understand the key drivers of the business. Reconciliations on pages 170 to 173 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 170 to 179.
Arrow Global Annual Report and Accounts 2019
Strategic report 2
The Arrow Advantage
The right model See p22
The right people See p52
The right strategy See p16
Structure: How we are optimally
organised to deliver our strategy
Values: What guides our individual
decision making and behaviour
Clear strategic
priorities are detailed
in our strategy
We’re Brave and Creative
We’re Trusted and Valued
We do the Right Thing
We Succeed Together
STRUCTURE
Investment business
Asset Management and Servicing
Fund Management
STRATEGY
Fund Management and Origination, Commercial and Asset Management, Operations and Asset Servicing, Group Functions
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1. Focus on strong
consistent returns in the
Investment business
2. To grow our specialist
capital light Asset
Management and
Servicing business
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The right culture See p40
Our culture defines Arrow and our
unique points of differentiation
The brands we trade under
Bergen
Arrow Global Annual Report and Accounts 2019
CULTUREVALUES 3
Arrow is a unique business. We have a compelling vision and a purpose that resonates
with all our stakeholders. Our organisational structure will deliver our strategy and
together this will ensure we deliver long-term sustainable growth. We are guided by
our values and culture which provide consistency across the Group and help to make
Arrow a great place to work.
The right strategy See p16
The right proposition See p10
Purpose: What we are doing
for all our stakeholders – it
is our philosophical
heartbeat. Our
stakeholders include:
• Customers
• Shareholders
• Employees
• Clients
• Communities
Building Better
Financial Futures
Vision: An aspirational
description of what we
want to achieve in the
future
The Innovative
and Valued
Partner in Credit
and Asset
Management
STRATEGY
3. To be a leading player
in our chosen markets
4. To transform the customer
journey within our industry
5. To attract and
retain talent
Arrow Global Annual Report and Accounts 2019
VISIONPURPOSEStrategic report 4
Chair’s statement
“We recognise that
to be successful in
the long-term we
need to have the
right approach in
place that ensures
that we continue
to operate
ethically, give
back to local
communities and
help to safeguard
the environment
for future
generations.”
Evolving the strategy to position Arrow as a market
leading integrated alternative asset manager
It is my great pleasure to introduce another set of
annual report and accounts at such a pivotal time in
Arrow’s development. At the Group’s Capital Markets
day in November 2018, management set out our
strategy for the next five years. One of the key targets
was to double revenues from the business’ capital light
Asset Management and Servicing business (AMS).
Developing the Group’s nascent Fund Management
business has formed a vital role in this. Since then,
the Group has delivered this goal much faster than
planned and raised €838.0 million in total capital
commitments, with a target to reach total funds under
management (FUM) of €2.0 billion by the end of 2020.
This demonstrates the attractiveness of the asset class
which the Group specialises in, as well as the strong
track record Arrow has which showcases through-the-
cycle returns that appeal to sophisticated investors.
Arrow’s transition into the alternative asset
management area represents a shift away from its
traditional peer group and into a space where, as a true
market leader, we can provide long-term attractive
and sustainable return opportunities for its diverse
investment client base. Given the commercial and
regulatory pressure forcing the need for a vast array
of assets to move from bank balance sheets and into
the capital markets, I am confident that this move
represents a long-term sustainable growth model that
will prove rewarding for Arrow’s shareholders.
Another year of financial delivery
Delivering the pivot into being a less capital-intensive
business has required an immense amount of focus
within the Group. Despite this, Arrow has achieved
another good year of operational delivery within its core
businesses, with increased cash generation resulting in
finishing the year within the new lower leverage target
range of 3.0x-3.5x. This was achieved whilst maintaining
strong returns on equity during the period.
This year, the Group introduced a new dividend policy,
increasing the threshold pay-out from 25%-35% of
underlying net income to at least 35% of underlying
net income. The Group believes that this better
reflects the enhanced future cash generating ability
of the business as it continues to shift to a more capital
light model. As such, I am pleased to propose that
shareholders receive a full year dividend of 13.1p,
representing a 40.0% pay-out ratio.
Ensuring we have the right corporate culture
Arrow’s management team understands the
importance of how the right corporate culture drives
employee engagement, satisfaction and productivity.
Since joining Arrow our Group chief executive officer,
Lee Rochford, has been focused on aligning the
Group’s culture with our strategy and has been
committed to making Arrow a place where its people
love to work. In 2019, the Group undertook a
comprehensive country-wide programme to identify
the behaviours that are essential for our new
segmental structure to be successful. It’s pleasing
to see that these have been put right at the heart
of everything we do, ensuring that an engaged and
motivated employee base will help to deliver excellent
customer outcomes and financial results – creating
value for shareholders.
Arrow’s Environmental, Social and Governance
(ESG) programme
We recognise that to be successful in the long-term
we need to have the right approach in place that
ensures that we continue to operate ethically, give
back to local communities and help to safeguard the
environment for future generations. In 2019, Arrow
formed a dedicated ESG working group led by our
Group chief operating officer, Dave Sutherland. We are
committed to enhancing our ESG performance and are
developing a structured roadmap defining our key
areas of focus and development. While we already
Arrow Global Annual Report and Accounts 2019
5
“Arrow’s management team
understands the importance of
how the right corporate culture
drives employee engagement,
satisfaction and productivity.”
Jonathan Bloomer
Chairman
report a set of Key ESG factors (see page 50), our
roadmap intends to build on this platform, pinpointing
specific areas of focus to deliver against internal and
external expectations. Arrow’s operations are
intertwined with stakeholders across the financial
services industry. The board is therefore focused on
ensuring best practice across the entire range of the
Group’s activities. At the consumer level, this means
placing strong emphasis on customer treatment and
outcomes. We are committed to working closely with
relevant regulatory bodies, including the FCA, to
ensure that we continue to deliver best practice and
favourable customer outcomes.
Experienced board and management team
The 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
it is exciting to see the pivot to become an integrated
alternative asset manager being executed much faster,
and at much greater scale, than originally planned.
I am also delighted to welcome Matt Hotson, Group
chief financial officer, to the board. Matt has
experience of leading FTSE100 and FTSE250 finance
functions and has already brought an increased focus
on organisation and efficiency to the Group. His track
record of driving value for shareholders at other highly
cash generative companies is particularly apposite in
light of the Group’s shift to a more capital light model.
Lee continues to lead 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
It has been a pivotal year where Arrow took its first
exciting steps to raise significant third-party funds to
invest in its large and attractive market. This clearly
marks an ambition to become an integrated asset
manager, underlined by the target to reach €2.0 billion
of total FUM – a highly ambitious size for a first-time
fund raise. As funds under management continue to
grow in the coming years, and the Group delivers an
increasing proportion of its earnings from recurring
capital light Fund Management and Asset
Management and Servicing fees, this will drive
significant value for shareholders.
Finally, I would like to thank my fellow board members,
Arrow’s senior leadership team and all of the Group’s
employees for the exceptional work they have done in
2019. Raising a first-time fund at such scale, in such a
short time frame, is an impressive feat and one which
marks the start of an exciting transformation for the
Group. A transformation of this scale is designed to
deliver significant benefits in the medium-term, and
I appreciate the patience shown by our shareholders
who share my view of the value accretion potential
that the Group’s pivot to a more capital light model
will bring.
When viewed alongside the current strength of our
balance sheet, the Group’s progress in 2019 leaves
us in a very strong position for 2020 and exciting
prospects beyond that.
Jonathan Bloomer
Chair
12 March 2020
Arrow Global Annual Report and Accounts 2019
Strategic report 6
Group chief executive officer’s review
Delivering on our capital
light strategy
Continuing to deliver against key operating metrics
The business performed well against its key operating
metrics in 2019. Collections and returns in the
Investment business remained strong and investment
volumes were at record levels of £303.7 million.
Revenues and margins in our Asset Management and
Servicing business (AMS) also grew and margins have
already reached our medium-term target of mid-20s
percent. This solid operational performance helped
increase our free cash flow generation by 13.3% to
£261.4 million, continuing to allow us to strike the right
balance between allocating capital to invest for future
growth, paying dividends and deleveraging. We
finished the year within our new lower leverage range
of 3.0x-3.5x net debt to adjusted EBITDA and continue
to target the lower end of this range over time. Profit
before tax increased 28.3% to £51.3 million and it is
proposed that shareholders receive dividend per share
growth of 3.1% to 13.1p – the seventh consecutive year
of progressive dividend delivery.
Executing the strategic pivot to a more capital
light model
It has been a pivotal year for Arrow as we continue
to focus on the business’ shift to a more capital light
alternative asset management model. Our vision is
to be ‘The Innovative and Valued Partner in Credit
and Asset Management’ and to build an alternative
investment business that appeals to investors looking
access high yielding assets. We have a long track record
of investing our own, and our clients’, capital into the
assets we specialise in and have consistently grown the
number of assets we service. The next logical step was
to build a Fund Management business where we could
invest third-party capital at scale, alongside Arrow’s
balance sheet on a discretionary basis into our large
market opportunity. In December, we announced that
we had raised an initial €838.0 million of total Fund
Management capital commitments from a diverse
range of investors, by both geography and investment
style, signalling the first significant step on this journey.
We have been hugely encouraged by the amount
of investor demand we have encountered and are
targeting €2.0 billion of total funds under management
(FUM) by the end of 2020. When viewed in the context
of our five-year targets, the growth of our Fund
Management business reinforces the execution of a
successful capital light strategy. This will see us drive
gross AMS revenues, which include internal AMS
revenues, from the current 36.4% of gross total
revenues to towards 50.0%, as well as sustain gross
AMS EBITDA margins of at least mid-20s percent, in
line with our medium-term targets.
Arrow Global Annual Report and Accounts 2019
7
“It has been a pivotal year for
Arrow as we continue to focus
on the business shift to a more
capital light model and evolution
into a truly integrated asset
management business.”
Lee Rochford
Group chief executive officer
proud that over 70.0% of our deals were off-market
in 2019 – a true testament to our differentiated
business model and quite unique in financial services.
The ‘One Arrow’ investment programme ensured that
we successfully integrated these businesses, instilling
the right culture, oversight, capability and resourcing
at the centre necessary to turn our acquisitions into a
single pan-European business capable of operating
at scale.
Building a differentiated Fund Management business
to capture more value
We are confident that we have a unique and
compelling market offering for our Fund Management
business. Importantly, we do not compete head-on
with the large Global and European debt funds that are
the most prolific purchasers of assets in this space.
Given we originate more niche assets outside of these
investors’ very large target deal size and concentrated
approach, many of these institutions like to co-invest
with us on assets that we originate and are our clients.
Furthermore, few institutional fund investors have our
local presence. The combination of our local,
in-market origination teams and our centralised
structuring and investment team, combined with
regulated, specialist servicing platforms on the
ground, means we can originate smaller deals away
from competitive auctions at higher returns. When
combined with the significant market opportunity
offered by our platform, there is clear demand from
alternative asset investors to commit capital to our
investment strategies.
Restructuring the Group to accommodate the
integrated asset management model
The Group is already well positioned to manage
third-party funds, with many of the required personnel
already in place. As a result, we have performed a
predominantly internal restructuring process to ensure
the Group is positioned to drive the capital light Fund
Management strategy. Zach Lewy, our founder, will run
the Fund Management business as its chief executive
officer, while also remaining chief investment officer
of the Group. Oliver Stratton, our Group chief
commercial officer, will ensure that we deploy the
most effective collections strategies and that our client
relationships are well managed. Dave Sutherland, our
Group chief operating officer will continue to manage
the pan-European operations of the Group. Below the
Group executive committee level, we have developed a
streamlined reporting structure where senior members
of the business with strong industry experience, are
leading their respective origination, underwriting,
analytics and servicing teams on a country basis. This
has been implemented alongside the development of a
robust Group-wide governance structure that ensures
close alignment between Arrow and the Fund
Management business.
A business model built to take advantage of the
significant market opportunity
We have been extremely successful in putting in place
the building blocks for our Fund Management vision.
In recent years, we have positioned ourselves to
capture the massive market opportunity we have by
building two interdependent business lines – IB and
AMS. They serve our wide client franchise and provide
each other with off-market deals. We have carefully
created this platform by acquiring twelve servicing
businesses that enable us to target, and invest in,
high margin niches in attractive markets. It is a highly
efficient platform that gives us relevance, pricing
power and off-market deal flow and I am particularly
Arrow Global Annual Report and Accounts 2019
Strategic report 8
Group chief executive officer’s review continued
The impact of rapidly building a Fund Management
business and pivoting towards a more capital
light model
I’m extremely proud of the transformation the
business has undergone in 2019, the long-term value
creation a more capital light model will bring is
significant. Executing this pivot has not just involved
raising a fund but building of an entirely new business
line, at the same time as reconfiguring the rest of the
business to support it. As we are still a relatively small
business, we have had to prioritise building the Fund
Management business over other activities that
might have been more accretive to earnings in the
short-term, sacrificing that short-term performance
for the larger long-term prize. The demand placed on
the wider Arrow team in order to achieve this in such
a short time has demanded an enormous amount of
dedication over and above their day-to-day roles.
For this extra effort, I extend my sincere thanks to
everyone at Arrow who has been involved.
Focus on risk management
We have built a robust business that has a strong
counter-cyclical element to it and that can generate
returns despite weaker economic environments.
Execution is key and we are aware of the importance
of delivering against our targets and building a Fund
Management business that supports capital light
revenue growth and deleveraging over the long-term.
Regulation is clearly something we focus on and we
look to maintain strong relationships with all the
regulatory authorities in our countries of operation.
While changes in regulation cannot be predicted with
certainty, we have been careful to move into markets
that we consider have more mature regulatory
frameworks. We are also experts in managing our
business to ensure the right customer outcomes and
to deliver our goal of building better financial futures
for all our stakeholders.
No impact from Coronavirus to date but active
ongoing monitoring of the situation
We are closely monitoring the developing Coronavirus
situation and it is currently too soon to say what
impact this will have on the global economy and how
long it may last. Our immediate focus is on the health
and welfare of our colleagues, as well as ensuring
continuity of service for our customers and clients.
We have fully instituted our response plans and, at
this stage, there has been no detrimental impact on
our business. This includes Italy where, in February,
collections were running ahead of target. Prudent
management of our resources remains a priority and
we are taking a cautious view of capital deployment
and risk-adjusted pricing in the short term. With over
70% of our deals transacted off-market, we are in a
good position to carefully evaluate the risks of any
portfolio we underwrite and have flexibility around the
timing of investments. Prior experience of operating
during a downturn means we expect any impact on
cashflows that we do see to be largely timing related
rather than due to any ultimate loss. The benefit of
having materially reduced our individual transaction
sizes in recent years is that we are not over-exposed
to any specific portfolio under-performing.
No material impact from Brexit
We continue to monitor the ongoing Brexit situation
closely for any impact it may have on the Group’s
operations. As the majority of our revenues are in Euros
and not Sterling, we remain relatively well insulated
from any sudden foreign exchange impact related to
the UK’s departure from the European Union.
A message for the entire Arrow team
Businesses are only as good as their employees and
I believe we have built a great team at Arrow. The
external recognition we have received this year is
testament to this. Our Portuguese servicing business,
Whitestar, won ‘Best Asset Management Service
Provider Portugal 2019’, as well as the ‘Top Employer
Portugal 2020’ certification by the Top Employers
Institute. Moreover, the Group was shortlisted for
three awards at the 2019 Credit Strategy awards.
A personal highlight for me has also been travelling
round the business as part of our ‘SMART story’
roadshow, celebrating the successes of local teams
and outlining the exciting journey the Group is
embarking on as it transforms into an alternative
asset manager.
Outlook
Arrow remains well positioned to react robustly to
the fast-moving macro-economic environment in
2020. Our prudence in refinancing the balance sheet
in recent years means we have long liabilities with no
debt maturing before 2024. When combined with
nearly €1 billion of freshly raised capital committed to
our Fund Management business and ready to deploy,
we remain optimistic for the business’ prospects.
We continue to target €2.0 billion of total FUM and
welcome the significant operational and funding
flexibility this provides moving forward. The market
we operate in is large and becoming increasingly
more active as European financial institutions are
encouraged to deleverage and transfer assets off their
balance sheets and into the capital markets. Our
strong origination operation allows us to target the
most attractive niches within this asset flow and that
continues to translate into the strong returns that are
attractive to both us and our fund investors. When I
look further ahead over the next three years, I remain
confident in our ability to continue to grow our FUM,
deploy these funds at attractive IRRs and charge
predictable Fund Management and AMS fees for our
services. Successfully executing this will mean that the
Group’s transition to a more capital light business
model will continue to accelerate, supporting the key
elements of our five-year targets – to double AMS
revenues, reduce leverage, increase cost efficiencies
and grow returns to shareholders.
Lee Rochford
Group chief executive officer
12 March 2020
Arrow Global Annual Report and Accounts 2019
9
Creating a culture steering committee
Having the right culture in place is essential for long-term
sustainable growth. Our Culture Steering Group was
established as the central focus for all cultural activity,
ensuring a positive correlation between our aspirational
culture and strategy as well as an alignment of all systems
and institutional practices.
Arrow Global Annual Report and Accounts 2019
Strategic report 10
The right proposition
The Arrow Advantage allows the Group to combine its strong
investment expertise with its pan-European servicing platforms,
unlocking value for a wide range of investors and enabling us to
deliver better financial futures for all our stakeholders.
Delivering the Arrow Advantage
for clients
“We aim to offer the best possible
service for our clients, fulfilling
their requirements by valuing and
purchasing portfolios they need to
divest and servicing their assets.”
Richard Roberts,
Head of origination and corporate
development
Delivering the Arrow Advantage
for shareholders
“We create value for our
shareholders by investing our
capital at attractive returns and
generating capital light revenue
from the servicing of third-party
assets and from Fund
Management fee income.”
Duncan Browne,
Head of investor relations
Arrow Global Annual Report and Accounts 2019
11
Arrow’s proposition is orientated around our DNA as a long-term
investor in the non-performing loan and non-core asset sector.
Arrow’s stakeholders benefit from our fifteen-year track record
of investing our own capital across over 600 deals, with the ability
to service both our own, and third-party assets, as well as the ability
to increasingly deploy capital at attractive returns for sophisticated
investors via our growing Fund Management business.
Arrow’s local presence and expertise allows us to be a specialist in
identifying attractive, granular assets in high-returns niches in our
chosen geographies.
12
Our business today
We are specialists in unlocking value
from high-return niches
Arrow specialises in targeting high yielding and granular assets that are
often smaller in size and therefore below the target volume thresholds
of the largest credit funds investing in the sector.
• Arrow targets three core asset classes, comprising
unsecured and secured non-performing, and
performing portfolio investments
• Typical portfolio investments are granular,
containing hundreds or thousands of loans,
providing diversification within and across
portfolio investments
• Portfolio investments typically require a significant
amount of operational management expertise to
efficiently convert from distressed state into
beneficial cash-flowing assets
• Arrow’s target assets can trade at high-teen gross
returns – this can significantly increase when
purchasing in a dislocated market
Arrow has increasingly co-invested with third-party capital to capture the full scale of market opportunity
Fund Management will enable Arrow to capture more of the market opportunity
350
280
210
140
70
0
304
Arrow portfolio investment
volume (£m)
Net IRRs (%)
Cost of debt (%)
223
224
263
Improved
spread
176
138
2014
2015
2016
2017
2018
2019
Creating broad value for our stakeholders
Customers
Our goal is to deliver better
financial futures for our customers
by enabling them to service their
debt in a more affordable way
and to rebuild their credit score.
Excellent customer outcomes
are a core focus for the Group
and contribute to how our staff
get rewarded.
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 and in return
we offer challenging and rewarding
job opportunities and career paths
alongside attractive remuneration.
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 , as well as a range of
debt charities and advisory firms,
including StepChange, Payplan
and Christians Against Poverty.
Shareholders
By operating with integrity
and striving to deliver against
our plans and strategy, we aim
to build long-term value for
our investors.
Clients
We exist to help our clients create
value. We enable our bank clients
to transfer assets from their
balance sheets into the capital
markets – encouraging a stronger
financial system – and assist our
institutional clients with valuing
and servicing the assets that they
own, creating value for both us
and them.
Arrow Global Annual Report and Accounts 2019
13
The Arrow DNA
Arrow has a track record of over 600 deals,
generating attractive returns. Our deep
local market connections provide prime
access to off-market opportunities.
Specialist debt investor
Arrow’s investment strategy is highly
differentiated from the typical large
credit fund. Arrow’s local operating
platforms and operational expertise
allow us to focus on smaller, high-
return niches. This has resulted in
the majority of Arrow’s deals being
executed outside of competitive
auctions in off-market bilateral trades
– in 2019, over 70% of Arrow’s
investments were transacted
off-market. Arrow also has a track
record of co-investing with
investment clients to diversify risk.
Investment
business
Fund
Management
Developing the
discretionary Fund
Management business
With our strong track record of
successfully investing our capital into
assets and servicing assets on behalf
of clients, developing a discretionary
Fund Management business was the
logical next step. Investor demand
for the exposure that Arrow can
provide to our specialist, high-return
asset class is strong from a wide
range of alternative investors. Arrow
has already raised €838.0 million of
total capital commitments, with a
target to achieve €2.0 billion of total
FUM by the end of 2020.
Asset Management
and Servicing
Rapidly growing
capital light income
Arrow services a large amount of
assets for both its own investment
business and for its clients. Arrow’s
co-investment strategy with its
investment clients means it
increasingly services entire portfolios
where it has only a small balance sheet
equity exposure, earning servicing
fees from other capital providers,
which drives capital light revenues.
In 2019, gross AMS revenue formed
36.4% of gross total Group revenue.
Read more about our specialist platform on p15
Arrow Global Annual Report and Accounts 2019
Strategic report 14
Market review
Arrow connects the large yield-seeking
alternative investment sector to its
enormous market of high return assets
Increasing regulatory and accounting pressure on EU banks is forcing
the transfer of assets from bank balance sheets into capital markets. The
subsequent future secondary trades and the formation of new stock
through the regular credit cycles, means that Arrow has an enormous
pipeline of investment opportunities to selectively choose from.
€5 trillion+
Size of private markets
Arrow’s Fund Management
business connects yield-
seeking alternative investors
to Arrow’s enormous and
high-return market
€1.5 trillion+
Total size of Arrow’s Market
Arrow’s current
€56 billion1
market share
Primary market
NPL and non-core
assets on bank
balance sheets
Growing secondary
market due to the
long-term nature of
these assets
1. Gross Book Value of total assets currently on Arrow’s platform, including third-party assets.
Arrow Global Annual Report and Accounts 2019
15
Euros of European NPLs in chosen markets1 (€bn)
Completed deals by country since 20141 (€bn)
€bn
250
200
150
100
50
0
Italy
UK
Netherlands
Portugal
Ireland
Arrow’s chosen geographies
€bn
250
200
150
100
50
0
Italy
UK
Netherlands
Portugal
Ireland
Arrow’s chosen geographies
1. Sources: Deloitte deleveraging Europe 2019 report and European Banking Authority risk dashboard.
European banks remain
under growing pressure
Strong franchise – bank clients
rely on Arrow’s services
• Transformational restructuring of banks’
balance sheets
• Strong regulatory tailwinds expected to
drive an acceleration of asset sales in the
coming years
• New requirements for minimum levels
of impairment recognition
Our market provides a growing
pipeline of opportunities
Highly active primary market:
• Over €1.5 trillion total European NPL and
non-core credit market, with structural
inefficiencies not present in more mature
markets such as the US
• Arrow’s target geographies provide circa
€1 trillion addressable market of both
primary and secondary sales – with the
Arrow Platform ideally positioned to
underwrite and service a wide range of
asset classes
• Strong growth in new lending across
Europe (mainly for mortgages and
consumer credit) providing future
NPL flow
Growing secondary market:
• Over €800 billion of portfolio sales
acquired by global debt funds and
European debt funds over the last six years
• Many debt funds will soon reach end of
life, however NPL portfolios typically
continue to collect far beyond many of
these funds’ distribution periods
• Arrow is well positioned to invest in this
wave of secondary deal flow
• Arrow is a reliable purchaser of assets that
can be relied on to transact in good faith
• Arrow has strong customer culture,
governance and oversight, which means,
banks can have confidence that their
customers will be treated fairly
• Arrow has established relationships with a
wide range of clients meaning a high
proportion of purchases can be off-market
Longer term outlook
EU banking market is large and fragmented
• EU banks significantly more capital-intensive
than US counterparts
• Lack of consolidation in the EU market
• Heavy reliance on local and co-operative
banks – typically overly reliant on
interest margin
Transformational restructuring of bank
balance sheets
• New requirements on minimum levels
of impairment recognition
• Recent NPL backstop creates forced
write-offs for the first time
• EU banks need to sell assets to comply
with regulation, which should drive an
expected acceleration of asset sales in
the coming years
• €1.5 trillion assets need to leave European
banks to meet capital ratios, cost-income
ratios and returns on capital
• ECB’s ‘Asset Quality Review’ encourages
NPL sales even for strong banks given
provisioning requirements and rating
agency impact
When sold, European assets have to stay in
regulated servicers
• Many assets are well-suited to local
servicing platforms such as Arrow’s –
enables attractive returns from assets sold
by banks and via secondary sales
• Arrow has the market positioning and
operational capability to invest in these
niche assets
• Regulated servicers have a structural
advantage to be able to participate in the
full asset life
We are specialists in unlocking value from
high-return niches
Arrow specialises in targeting high yielding
and granular assets that are often smaller in
size and therefore below the target volume
thresholds of the largest credit funds
investing in the sector
• Arrow targets three core asset classes,
comprising unsecured and secured
non-performing, and performing
portfolio investments
• Typical portfolio investments are granular,
containing hundreds or thousands of
loans, providing diversification within
and across portfolio investments
• Portfolio investments typically require
a significant amount of operational
management expertise to efficiently
convert from distressed state into
beneficial cash-flowing assets
• Arrow’s target assets can trade at mid-teens
net IRRs – this can significantly increase
when purchasing in a dislocated market
Arrow Global Annual Report and Accounts 2019
Strategic report 16
The right strategy
The Arrow Advantage plays a key role in allowing
us to implement the right strategy to drive sustainable
shareholder value.
Delivering the Arrow Advantage for customers
and employees
“Our goal is to transform the customer journey
within our industry, using leading data and
analytics to ensure excellent customer outcomes.
To be best in class, we need the best people
working for us. We look to attract talent with
exciting career prospects and retain valued
employees by providing a competitive package
of pay and benefits.”
Lesley Peel,
Head of talent
Delivering the Arrow Advantage
for shareholders
“We leverage our experience and
expertise to generate strong
returns in our Investment business
and to grow capital light revenues
by growing our Fund Management
and Asset Management and
Servicing businesses.”
Phil Shepherd,
Group treasurer
Arrow Global Annual Report and Accounts 2019
17
Arrow aims to be a leader in all of our chosen markets and to leverage
our pan-European footprint to originate attractive assets and drive
strong returns in our Investment business. The Group is also
focused on increasing our capital light revenues by growing Asset
Management and Servicing revenues. Growing FUM within our
Fund Management business will grow management fee income
and increase the volume of assets the Group services, both driving
capital light revenues.
By striving to transform the customer journey within our industry,
we ensure we have the right customer focus to drive positive
outcomes for all of our stakeholders. When combined with our
focus on attracting and retaining the best talent, Arrow’s strategy
is optimally positioned to deliver value.
Arrow Global Annual Report and Accounts 2019
18
Strategy
The Arrow engine
for growth
We believe we have the right strategy in place to
drive growth and create value for our shareholders.
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Strategic priorities
Focus on strong
consistent returns
in the investment
business
To grow our specialist
capital light Asset
Management and
Servicing business
To be a leading player
in our chosen markets
o
T
r
u
r i n o
To be a leading p l a y e
chosen markets
To transform the
customer journey
within our industry
To attract and
retain talent
Arrow Global Annual Report and Accounts 2019
concentration risk
our cost of capital
AMS business
Our approach
• Target high-return niches
Progress in 2019
Key priorities in 2020
• Maintained strong underwriting
• Continue to invest prudently
• Leverage expertise in granular asset classes
performance of 104%
alongside the Fund
• Use local knowledge and experience of our local
• Generated Net IRRs of 17.0%, significantly
• Drive collections performance
in-country teams to drive performance
• Maintain underwriting discipline
above our cost of debt of 3.7%
• Focus on generating mid-teens
• Created a diverse investment vintage by
returns across a diversified
• Maintain diversity by geography and asset class
geography and asset class
vintage
• Invest in a large number of smaller deals to mitigate
• £303.7 million invested at an average deal
• Stay alert for signs of
• Invest in assets that provide returns significantly above
size of £3.9 million
deterioration in the economies
of any of our countries
• To increase capital light servicing revenues in our
• Gross revenues in our AMS business
increased by 5.9% to £140.1 million
• To drive increased volumes from the capital provided by
• Announced our inaugural Fund launch
our Fund Management business through our servicing
with €838.0 million of capital
platforms, driving servicing revenues
commitments
• To increase FUM in our Fund Management business,
• Invested in our servicing platforms to
increasing recurring revenue from management fees
maximise performance and efficiency
by end 2020
• To manage the Fund Management business prudently
over the long-term, resulting in performance fees
• Ensure our servicing platforms provide value for us and
our clients
• We have carefully identified the markets we want to
• Purchased £303.7 million of portfolios
• Continue to drive
• Continue to grow AMS
revenues supported by
contracts from discretionary
Fund Management business
• Targeting €2.0 billion in
total capital commitments
• Maintain focus on offering
our clients excellent service
and solutions
operational excellence
throughout the Group
• Maintain strong
relationships with
regulatory bodies
operate in; those with strong NPL volumes, high returns
at attractive returns
characteristics and established regulatory environments
• Invested in an efficiency programme
• We have focused on identifying and acquiring the best
to streamline our businesses and
businesses with the best management teams in our
improve margins
chosen markets
• Our Portuguese servicing business,
• This has allowed us to increasingly diversify our earnings
Whitestar, won Best Asset Management
by both geography and asset class
• We are regulated in all of our jurisdictions and actively
Service Provider Portugal 2019 at the
International Investor Magazine awards
participate in industry bodies that help lead change in
• Continued the integration of newer
legislation and best practice
businesses into our pan-European
• Our strong reputation and relationships make us a
platform
favoured buyer of portfolios, enabling us to engage in a
greater number of off-market transactions
• Enable customers to build better financial futures by
• Shortlisted for three categories in the
helping them to rehabilitate their credit scores and gain
Credit Strategy ‘Collections and
• Continue to focus on
excellent customer
access to future credit
Customer Service’ awards 2019, including
outcomes
• We use industry-leading data and analytics to better
‘Best Customer Service Provider’, ‘Debt
• Increase customers’ digital
understand our customers’ financial situations and tailor
Purchaser of the Year’, and ‘Excellence in
interaction with us
our interactions with them on an individual basis
Training Award’
• Maintain staff incentives
• We work with debt charities and other organisations
• Maintained our strong relationship with
based on positive customer
that provide free impartial services to ensure that
Citizens Advice in the UK
outcomes
customers get the best possible advice
• Worked closely with and funded
StepChange, Payplan and Christians
Against Poverty on consumer debt issues
• Customer engagement via digital routes
continued to increase
• We understand that to be the best in one’s industry it
• Continued to promote our Group values
• Continue to cultivate a culture
is vital to attract the best talent
and purpose programme with Group-
• We aim to attract talent with experience from other
wide management roadshows
leading financial and technology companies and
• Strengthened leadership structures
throughout the Group through key hires
across all countries and at Group
• 80 winners of the employee recognition
• Reward highflyers in order
scheme for displaying the Group’s values
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
orientated around our Group
values that rewards positive
customer outcomes and
promotes an enjoyable
working atmosphere
to maintain high retention
rates of talented employees
• Attract new talent through
offering unique working
opportunities combined with
attractive compensation and
benefits packages
Strategic priorities
Our approach
Progress in 2019
Key priorities in 2020
19
Focus on strong
consistent returns
in the investment
business
To grow our specialist
capital light Asset
Management and
Servicing business
To be a leading player
in our chosen markets
To transform the
customer journey
within our industry
To attract and
retain talent
• Target high-return niches
• Leverage expertise in granular asset classes
• Use local knowledge and experience of our local
in-country teams to drive performance
• Maintain underwriting discipline
• Maintain diversity by geography and asset class
• Invest in a large number of smaller deals to mitigate
concentration risk
• Invest in assets that provide returns significantly above
our cost of capital
• To increase capital light servicing revenues in our
AMS business
• To drive increased volumes from the capital provided by
our Fund Management business through our servicing
platforms, driving servicing revenues
• To increase FUM in our Fund Management business,
increasing recurring revenue from management fees
• To manage the Fund Management business prudently
over the long-term, resulting in performance fees
• Ensure our servicing platforms provide value for us and
our clients
• Maintained strong underwriting
• Continue to invest prudently
performance of 104%
• Generated Net IRRs of 17.0%, significantly
above our cost of debt of 3.7%
• Created a diverse investment vintage by
geography and asset class
alongside the Fund
• Drive collections performance
• Focus on generating mid-teens
returns across a diversified
vintage
• £303.7 million invested at an average deal
• Stay alert for signs of
size of £3.9 million
deterioration in the economies
of any of our countries
• Gross revenues in our AMS business
increased by 5.9% to £140.1 million
• Announced our inaugural Fund launch
with €838.0 million of capital
commitments
• Invested in our servicing platforms to
maximise performance and efficiency
• Continue to grow AMS
revenues supported by
contracts from discretionary
Fund Management business
• Targeting €2.0 billion in
total capital commitments
by end 2020
• Maintain focus on offering
our clients excellent service
and solutions
• We have carefully identified the markets we want to
• Purchased £303.7 million of portfolios
• Continue to drive
operate in; those with strong NPL volumes, high returns
characteristics and established regulatory environments
• 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
• 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
at attractive returns
• Invested in an efficiency programme
to streamline our businesses and
improve margins
• Our Portuguese servicing business,
Whitestar, won Best Asset Management
Service Provider Portugal 2019 at the
International Investor Magazine awards
• Continued the integration of newer
businesses into our pan-European
platform
• Enable customers to build better financial futures by
• Shortlisted for three categories in the
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 understand that to be the best in one’s industry it
is vital to attract the best talent
• We aim to attract talent with experience from other
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
Credit Strategy ‘Collections and
Customer Service’ awards 2019, including
‘Best Customer Service Provider’, ‘Debt
Purchaser of the Year’, and ‘Excellence in
Training Award’
• 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
• Customer engagement via digital routes
continued to increase
• Continued to promote our Group values
and purpose programme with Group-
wide management roadshows
• Strengthened leadership structures
throughout the Group through key hires
across all countries and at Group
• 80 winners of the employee recognition
scheme for displaying the Group’s values
operational excellence
throughout the Group
• Maintain strong
relationships with
regulatory bodies
• Continue to focus on
excellent 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 highflyers 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 2019
Strategic report
20
Key performance indicators
Measuring our performance
Our KPIs are linked to our long-term strategic goals
and allow investors to track our performance.
Underlying ROE
29.5%
(2018: 34.8%)
AMS EBITDA margin
23.9%
(2018: 20.2%)
Gross AMS revenue share
36.4%
(2018: 32.9%)
34.8%
32.9%
29.5%
target
mid.
20s%
23.9%
target
mid.
20s%
20.2%
target
50%
36.4%
32.9%
2017
2018
2019
2018
2019
2018
Total gross revenue
2019
Gross AMS revenue
Description
• Arrow aims to achieve an underlying ROE
in the mid-20s per cent through the cycle
• Arrow has a five-year target from FY 2018
to increase AMS margins from a level of
high-teens per cent to mid-20s per cent
• Arrow also has a five-year target from
FY 2018 to double the AMS business’ share
of the Group’s total gross income to
around 50.0%
• Arrow sees significant potential for margin
enhancement as we continue to grow our
AMS and Fund Management businesses
• The Group’s Fund Management is high
margin and will contribute to margin
expansion in the business as it grows
and matures
• The Group has continued to increase the
AMS business’ share of total income in the
year to 36.4%
• The growth of the Fund Management
business is expected to accelerate
this trend
Link to strategy
• Arrow’s ability to source high return assets
through its unique origination pipeline
translates into strong earnings generation
• The capital light revenue from the AMS
business and Fund Management business
are also highly accretive to ROE and
should benefit this metric over time
• All three of Arrow’s business lines have
strong counter-cyclical attributes which
provides the confidence to give through-
the-cycle guidance
Arrow Global Annual Report and Accounts 2019
21
Free cash flow generation1
£261.4m
(2018: £230.7m)
Leverage ratio
3.4x
(2018: 3.7x)
Dividend paid
13.1p 40% pay-out ratio
(2018: 12.7p, 35% pay-out ratio)
3.9x
3.7x
3.4x
target
3.5x
3.0x
12.7p
13.1p
target
35%
11.3p
£261.4m
£230.7m
£173.0m
2017
2018
2019
2017
2018
2019
2017
2018
2019
• Arrow has a leverage target of 3.0x-3.5x
Secured net debt to Adjusted EBITDA
• Arrow has a policy of paying out at least
35.0% of our underlying profit after tax
as a dividend
• The Group targets the generation of
free cash flow prior to investing in
new portfolios
1. Targeting £750.0m million of total FCF generation
between 2019-2021.
• Leverage forms a key part of the Group’s
view of capital allocation
• As the Group executes its pivot towards a
more capital light business model, this will
naturally lead to the Group moving towards
the bottom end of the guided range
• Should the economic cycle turn and result
in a greater number of higher yielding
portfolio purchase options, the Group may
take a different view on its leverage level
• Arrow recently took the decision to review
its dividend policy increasing it to at least
35% of net underlying income. This is
closely related to our expectation that the
capital light AMS and Fund Management
businesses will be the fastest growing parts
of the Group over the long-term. As these
businesses are both highly cash
generative, the Group envisages a clear
path to paying a larger dividend in the
future once leverage targets have
been met
• Arrow aims to generate cash from the
assets it purchases
• Generating high levels of free cash flow
is key for the strategic and operational
performance of the business
• High levels of free cash flow provides
the Group with optionality around
capital allocation
• The Group has a prudent approach to
capital allocation. Depending on cyclical
conditions, the Group has a number of
options to deploy its free cashflow,
including: portfolio acquisitions,
dividends, paying down debt and share
buy backs
Arrow Global Annual Report and Accounts 2019
Strategic report 22
The right model
Arrow’s model has three unique business
lines which are highly synergistic.
23
Arrow’s local presence and expertise allows us to be a specialist in
identifying attractive, granular assets in high returns niches within
our chosen markets. Arrow’s origination and underwriting expertise
allows the Investment business to identify and value attractive assets
and for our Fund Management business to invest in them. Our
servicing business provides us with the capability to manage these
assets efficiently, generating capital light revenue for us and our
third-party clients. As many of the assets on our servicing platforms
are owned by institutional funds with a propensity to sell the asset
over time, Arrow and its Fund Management business are often the
preferred buyer, gaining exposure to an asset where the quality is
already well known.
Our Fund Management business provides a wide range of alternative
investors access to our proven track record, helping to drive capital
light Asset Management and Servicing revenue. This provides a highly
synergistic model where the three business lines feed each other with
new opportunities.
Delivering the Arrow Advantage
for customers and clients
“The Arrow model has enabled us to build a Fund
Management business that can purchase assets
that exist in our large primary market, as well as the
assets already on the platform, driving higher quality
capital light fee income and servicing revenue.
The development of the Fund Management
business also makes the model less reliant on
current sources of funding.”
Dan Perry,
Director of investments, analytics and performance
Delivering the Arrow Advantage
for our Fund Management investors
“Arrow’s model provides a full suite of solutions for
clients who wish to sell their assets or extract more
value from them via our sophisticated servicing
techniques combined with local expertise. The
development of the Fund Management business
provides us with even more capability to assist
clients with their balance sheets.”
Richard Husk,
Head of investment
Arrow Global Annual Report and Accounts 2019
24
Business model
Our pan-European platform allows
us to generate value for investors
and stakeholders
Unique positioning
High-return niches
Arrow performed over 70.0% of
its business off-market outside of
competitive auctions in 2019. This
is because the business targets
smaller transactions in more
sophisticated granular assets
classes where our local
knowledge gives us an edge.
Targeted geographies
Arrow has carefully selected
geographies which we believe
offer the most attractive
opportunities. This is based on
a number of factors, including
the volume and type of asset
classes, as well as confidence
in the robustness of the local
regulatory framework.
Regulatory parity
We are careful to ensure that
our servicing platforms have
regulatory conduct parity with
banks and our wider client base.
This ensures that we are able to
transact with them seamlessly
and guarantee that their
customers receive excellent
service and treatment.
The Arrow platform provides full coverage of targeted European credit asset niches
UK
Portugal
Italy
Netherlands
Ireland
1
Niches by
asset class
Consumer
SME
Mortgage
Real Estate
Master servicing/
Securitisation/
Credit bureau
Fund
Management
1. Strategic partner.
Arrow Global Annual Report and Accounts 2019
25
Expert platform
Harnessing the platform’s synergies provides
attractive investment opportunities and capital
light income.
Generating strong
returns
• Arrow’s Investment
business generates strong
returns by investing capital
at significantly higher
returns than its cost
of capital
• In 2019, Arrow achieved
a blended Net IRR of
17.0% while cost of debt
is only 3.7%
Fund
Management
Asset
Management
and Servicing
Recurring revenue
• Arrow’s Fund Management
Business generates recurring
revenues through charging
management fees
• Arrow’s offer is highly attractive,
providing investors with exposure
to a high yielding asset class
Investment
business
Capital light revenue
• Arrow services assets on behalf
of its clients
• Servicing fees are recurring
and capital light, making this
business highly accretive to ROE
Synergy
• Our AMS business services our own balance sheet investments as well as third-party client assets
• Third-party AMS assets provide a plentiful source of future investments for our Investment
business and Fund Management business
• Our fifteen-year investment track record has enabled us to build a Fund Management business
and our Investment business that will make all future investments through the Fund
Arrow Global Annual Report and Accounts 2019
Strategic report 26
Group chief financial officer’s review
“Another excellent cash
collection performance
has driven strong cash
generation and further
deleveraging.”
Matt Hotson
Group chief financial officer
Total income
£339.5
-6.2%
(2018: £361.8m )
Basic EPS
20.0p
+17.6%
(2018: 17.0p)
Profit before tax
£51.3m
+28.3%
(2018: £40.0m)
Full-year dividend
per share
13.1p
+3.1%
(2018: 12.7p)
2019 was a pivotal year for Arrow
I joined Arrow in the second half of 2019, and I am
excited to be part of the business at such an interesting
time as it transitions towards an increasingly capital
light model. It was a key year for the Group, as we
exerted significant time and resource into executing
this pivot, culminating in a successful initial fund raise
of third-party capital at notable scale.
objective will create significant shareholder value.
Our strong investment track record appeals to
investors seeking attractive yield and in December
2019, we announced a successful inaugural fund raise
of €838.0 million of total capital commitments, with
a target to manage €2.0 billion of funds under
management (FUM) by the end of 2020.
Strong cash generation
One of the key performance metrics for the business
is free cash flow generation. Arrow has an excellent
track record of generating high levels of free cash flow
and 2019 saw this increase by 13.3% to a record
£261.4 million (2018: £230.7 million). This was driven
by a 7.5% increase in core cash collections to
£442.3 million (2018: £411.6 million) from the
Investment business and a 2.9% increase in capital
light third-party servicing revenues from the Asset
Management and Servicing business to £94.4 million
(2018: £91.7 million). The increase resulted in a 12.2%
improvement in adjusted EBITDA to £330.0 million
(2018: £294.0 million). The reconciliation for the year
of profit after tax to the cash result, including a
reconciliation to adjusted EBITDA, is provided on
page 173. Adjusted EBITDA is a key indicator for the
business’s cash flow and allows the Group to monitor
the operating performance, cash flow generation
and leverage of the Group.
Overview
On a statutory basis, profit before tax increased by
28.3% to £51.3 million (2018: £40.0 million), principally
driven by the considerably lower level of refinancing
charges. There were a number of adjusting items in
relation to the launch of Arrow’s Fund Management
business and strategic simplification programmes
throughout the year. It is not anticipated that any
significant adjusting items will be incurred in 2020 in
relation to these activities. Underlying profit before
tax reduced 5.2% to £78.1 million (2018: £82.4 million),
primarily driven by lower impairment gains.
As we highlighted at the Interim and Q3 results, we
are executing our strategic shift much faster, and at
much greater scale, than initially guided at our Capital
Markets Day in November 2018, where we set out the
Group’s five-year strategy. This accelerated speed of
execution has meant that we have delayed or
cancelled smaller scale strategies in both the
Investment business and Asset Management and
Servicing business (AMS), which would have yielded
greater near-term EPS growth. Instead, we sacrificed
these more immediate earnings streams to focus our
time and resource on raising discretionary funds at
scale at the Group level to accelerate towards our goal
to become a fully integrated asset management
business. We believe that rapid delivery against this
Arrow Global Annual Report and Accounts 2019
Investment case
Arrow’s strong market
positioning, balance sheet
and access to multiple
sources of capital means
it can take advantage of
opportunities to achieve
strong, sustainable returns
while also generating
recurring, capital light
revenue streams.
“The launch of
Arrow’s Fund
Management
Business will
continue to fuel
the growth we
have seen in our
AMS Business,
providing scalable
opportunities to
grow capital light
AMS revenues
by offering AMS
services to
the Fund.”
Investment business
Record investment volumes at consistent returns
Throughout 2019, the pricing environment and
quantum of opportunities within our markets
remained attractive, resulting in higher purchase
volumes than previously guided.
In 2019, Arrow committed to investing a record
£303.7 million in new portfolios, with £62.9 million of
this payment deferred to 2020 (2018: £263.4 million
purchased, with £12.0 million deferred). This meant
we were able to prudently manage annual leverage in
2019, while also ensuring a robust flow of Investment
business revenue into 2020, despite likely reduced
balance sheet investment volumes due to the
co-invest structure with the Fund Management
business. This should help to support earnings while
the business transitions to a more capital light model.
Despite these record volumes, our returns remained
stable at a 17.0% Net IRR and the average deal size
onto our own balance sheet reduced by 41.8% to
£3.9 million (2018: £6.7 million), further reducing our
future concentration risk. The size of our portfolio
investment, combined with the co-investment we
receive from institutional fund clients, allowed us to
continue to grow the funds under management on
our servicing platform. This provides both increased
Asset Management and Servicing revenues and future
purchase opportunities for Arrow’s Investment
business and Fund Management business as the
co-investment owners of those portfolios look to sell
into the secondary market. Arrow is extremely well
positioned to purchase these portfolios in bilateral
trades at attractive returns given our experience of
servicing them. The Group continues to take a prudent
approach to its underwriting, targeting Net IRRs in
the mid-teens.
27
2
Increasin
of earnin
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uality
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1
S o p histic ate d
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in a gro w th
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R
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Resilient balance sheet
4
Core cash collections – record performance with
a changing shape expected over time
Core cash collections from our purchased
portfolio asset base increased to £442.3 million
(2018: £411.6 million), reflecting continued strong
operational performance. Core cash collections
continue to cumulatively outperform our
underwriting expectations. As at 31 December 2019,
we have cumulatively collected 104% of our initial
underwriting expectation on all portfolios, consistent
with the position as at 31 December 2018 reflecting
our continued underwriting discipline. The Group
continues to purchase an increasing proportion of
secured assets, including real estate assets – as
highlighted by the move at the 2019 Interim results
to independently disclose real estate assets on our
balance sheet given their growing materiality. Cash
collections from unsecured assets – Arrow’s original
asset class – tend to be recognised on a more
consistent basis quarter to quarter. Increasing cash
collections from secured assets – where cash
collections are more frequently realised at one
point in time, rather than collected gradually over
time – will result in greater quarterly variability of cash
collections. The advantage of the secured collections
profile is that the payback on these assets is generally
faster than unsecured, but the timing can move
between quarters. We therefore continue to
encourage the market not to look at the Group’s
collections profile on a quarterly basis when
performance is better reflected on an annualised basis.
Arrow Global Annual Report and Accounts 2019
Strategic report
28
Group chief financial officer’s review continued
The Fund Management business will accelerate the
growth and achievement of targets
The launch of Arrow’s Fund Management business will
continue to fuel the growth we have seen in our AMS
business, providing scalable opportunities to grow
capital light AMS revenues by offering AMS services to
the Fund. Revenue from Fund Management activities
will be incorporated in the AMS segment until it
becomes large enough to be a separately reported
segment. During 2020, the Group plans to present
a Fund Management seminar to assist the market in
modelling the impact of the Fund Management
business on Arrow’s performance in the coming years.
The financial benefits of raising this Fund are
numerous, including:
• The accelerated achievement of five-year targets
• New capital light earnings streams from market
standard management fees and performance fees
payable to Arrow as manager of the Fund, resulting
in further improvements in the quantum and quality
of earnings in the medium-term
• A reduction in leverage due to lower absolute levels
of Arrow balance sheet investment compared to
recent periods as a result of the co-invest structure
with the Fund
• Increased future flexibility around Arrow’s capital
structure
• A scalable opportunity to grow capital light AMS
activities by offering AMS services to the Fund
• Continued attractive returns on capital from Arrow’s
co-investment alongside the Fund in portfolios
“The launch of our
Fund Management
business is
transformational
for the Group as
we continue to
transition towards
a more capital light
integrated asset
management
model.”
Income – lower levels of revaluations
While core cash collections in the Investment
business increased by 7.5%, Investment business
income decreased by 9.1% to £244.8 million
(2018: £269.4 million). This was principally driven
by a significant reduction in upwards revaluations
of portfolios held on the balance sheet, along with
increased amortisation as cash from secured and
real estate assets was realised at a faster rate.
Revaluations in 2018 had seen a positive impact
from specific litigation work that was undertaken
on the back book to drive cash collections from
unpaying accounts. Lower levels of revaluations led
to a 75.0% reduction in non-cash impairment gains
to £12.7 million (2018: £50.7 million).
Arrow’s Fund further evolves the purchase
model and accounting
Arrow’s new Fund is targeting FUM of €2.0 billion by
the end of 2020. This includes a 24.9% commitment
from Arrow and will form the majority of Arrow’s future
ordinary course of investment volume.
Moving forward, Arrow will continue to originate and
underwrite assets before offering them to the Fund.
If the Fund decides to invest in the asset then Arrow
will co-invest capital up to 24.9% of the transaction.
This means the Group will likely invest its own balance
sheet at a reduced rate in 2020 and onwards compared
to recent years, depending on total Fund investment.
Over time, this structure also means that an increasing
proportion of our assets will be accounted for under
fair value, rather than at amortised cost, simplifying
our accounting.
Asset Management and Servicing business
Revenue and margins continue to improve
The Group’s capital light AMS income has grown
significantly in recent years and gross revenues
increased by 5.9% to £140.1 million (2018: £132.3 million),
constituting 36.4% of total Group revenue. Margins also
improved by 3.7ppts. to 23.9%, in line with our 2023
target to grow EBITDA margins in the AMS business to
the mid-twenties percent. Third-party fees (excluding
internal fees for servicing the Investment business)
increased 2.9% to £94.4 million (2018: £91.7 million).
Our execution of the pivot to becoming more capital
light by building a Fund Management business faster,
and at greater scale, than originally planned had an
impact on AMS revenue in 2019. Under the original
strategy, smaller and faster to execute fund raises were
envisaged at the local level in our Norfin and Sagitta
businesses in Portugal and Italy, which would have
driven AMS fees. More capital intensive strategies had
also been assumed in the business plans relating to a
number of the servicing businesses that also would
have driven nearer term EPS accretion (but also
leverage). While this has created a short-term headwind
to AMS revenues, the opportunities and benefits that a
scaled pan-European Fund Management business
offers significantly outweigh this.
Arrow Global Annual Report and Accounts 2019
Underlying ROE
29.5%
-5.3ppts
(2018: 34.8%)
Statutory ROE
17.9%
-1.6ppts
(2018: 16.3%)
29
Costs
Focus on efficiency
The collection activity cost ratio improved by 4.1 ppts.
to 24.8% (2018: 28.9%) as the Group continued to
extract efficiencies within our servicing businesses
and reduced the number of lower margin servicing
contracts ahead of the expected volume relating to
the Fund Management business.
Finance costs and Tax
Net interest charges of £54.5 million were lower by
18.4% than 2018 as no bond refinancing costs were
incurred during 2019. Underlying net interest charges
of £54.5 million were up 13.2% on 2018 as a function of
the unwind of the discount rate on deferred
consideration, higher facility balances in the period and
the impact of the adoption of IFRS 16 lease accounting.
Group overheads reduced from £136.0 million to
£123.9 million. This reduction was primarily driven by
the release of provisions held against the payment
of deferred consideration against recent business
acquisitions. This collectively totalled £21.1 million
and the release is primarily driven by the accelerated
strategic shift towards a capital light business
comprising a larger Group level Fund Management
offering. Under the previous strategy, management
teams were incentivised on projects that no longer
form part of the current strategy and their
remuneration has been realigned to the Group’s Fund
Management strategy. Cash overheads remained
broadly flat at £97.2 million (2018: £95.0 million).
Total adjusting items related to costs came in at
£26.8 million, £3.8 million higher than guided. The cost
of implementing the efficiency programme announced
at the Interim results – representing an investment of
£20.0 million to extract £20.0 million of run rate costs
– was £15.2 million. Benefits for the programme have
been reforecast at around £17.0 million, representing
better returns on the investment than originally
planned. The changes are due principally to higher
than anticipated new business volumes in the UK.
The UK business is already running at the improved
efficiency levels we are targeting. Start-up costs
relating to the launch of our Fund Management
business were £10.1m as the size and scale of the
launch of the business exceeded expectations. The
remaining £1.5 million relates to the costs associated
with the acquisition of Drydens.
All further spend on efficiency savings will be absorbed
within business as usual cost, with no further adjusting
items relating to this anticipated in 2020.
The tax charge of £14.0 million represents an effective
tax rate of 27.3% (2018: 25.1%) on profit before tax.
The effective tax rate on underlying profit is 23.2%
(2018: 22.2%) and has increased as we continue to
generate a greater amount of the Group’s profit from
non-UK jurisdictions, which have outperformed our
business plan, but which have tax rates in excess of
the UK.
Robust balance sheet
Leverage continues to reduce
The Group continues to have significant liquidity
headroom, with headroom as at 31 December 2019
of £153.0 million and no debt facilities maturing until
2024. This means that the Group’s weighted average
duration of its borrowing facilities is 4.8 years – longer
than its weighted average asset life – representing a
strong position for a financial services business.
On 30 April 2019, the Group further strengthened
and diversified its funding structure by completing a
securitisation of loan portfolios with a £100.0 million
revolving commitment through an asset backed
security funding structure at LIBOR + 3.1% per annum.
Following this, Arrow’s weighted average cost of debt
has reduced to 3.7% (2018: 3.9%).
The Group’s secured net debt position at the period
end was £1,134.2 million (2018: £1,089.2 million) with
the increase mainly relating to further portfolio
purchases in the year. Leverage reduced to 3.4x
(2018: 3.7x) as a result of the continued strong cash
generation from the Investment and AMS businesses.
We continue to target the lower end of the 3.0x-3.5x
leverage range in the medium-term.
As part of the insourcing of litigation operations on
8 April 2019, the Group acquired Drydens Limited,
a provider of legal services, broadening Arrow’s UK
range of servicing capabilities and skills across
consumer and commercial litigation, probate and
insolvency. The goodwill on acquisition of Drydens
Limited amounted to £14.5 million.
Arrow Global Annual Report and Accounts 2019
Strategic report 30
Group chief financial officer’s review continued
The launch of our Fund Management business is
transformational for the Group as we continue to
transition towards a more capital light integrated asset
management model. While profitability was impacted
by the speed of the pivot towards this model, and the
time and resource that absorbed during the year, it
leaves us in a very strong position moving forward.
Increased cash generation will continue to enable us
to deleverage, while access to such a large pool of
third-party capital reduces our dependence on the
bond market. While initial start-up costs mean the
business will not contribute materially to the Group’s
profit in 2020, it will begin to do so from 2021 onwards.
We will update the market on the economics of the
business and its accelerated impact on Arrow’s
five-year targets later in 2020.
Matt Hotson
Group chief financial officer
12 March 2020
Underlying basic EPS
33.0p
-10.8%
(2018: 37.0p)
Free cash flow
£261.4m
+13.3%
(2018: £230.7m)
Strong returns for shareholders
Statutory return on equity (ROE) was 17.9% (2018: 16.3%)
and was impacted by the adjusting items in the period.
Underlying ROE, one of the key performance metrics
for the Group is 29.5% (2018: 34.8%) and continues to be
well in excess of our mid-20s percent through-the-cycle
target. Basic EPS is £0.20p (2018: £0.17p) with the
increase largely relating to the lower levels of adjusting
items incurred during the year.
Underlying basic EPS reduced by 10.8% to £0.33p
(2018: £0.37p), impacted by the shift in operational
focus referred to above, as well as higher finance costs,
a higher tax rate and a one-off non-controlling
interest charge.
The Group’s dividend policy is to deliver a pay-out
ratio of at least 35.0% of underlying profit after tax,
reflecting our confidence that the shift towards a
capital light business model will increase the scope to
return capital to shareholders in the future. The Group
proposes to pay an 8.7p final dividend, increasing the
total declared and proposed dividends for the year to
13.1p (2018: 12.7p), representing an increase of 3.1%
on 2018.
Summary and outlook
The Group has continued to deliver against its
priorities in 2019 in what was a pivotal year for the
Group’s business model. Key operating metrics across
the Group performed well and we achieved record free
cashflow generation and record investment volumes
while also maintaining returns at a consistently
attractive level.
In the wider market, the geographic and asset class
diversification of the Group means that we continue
to find attractive investment opportunities exhibiting
returns significantly in excess of our cost of capital.
We remain vigilant for early signs of economic distress,
particularly regarding COVID-19 and Brexit. However,
economic dislocation potentially presents higher
return purchasing opportunities and our back
book has historically remained robust during
distressed scenarios.
Arrow Global Annual Report and Accounts 2019
Risk management
31
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
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u
C o
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t
I n
T r
External Stakeholders
Market Initiatives
Trade Bodies
Environmental
Governance
Social
I
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v
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a
P
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a
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F
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A w a
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Risk Committees
Policy Framework
Governance
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Risk Culture
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A ssess m e nt
Risk
T o p E nterprise Risks
A n alysis & M o nitorin g
R C S A
Information
Security
GDPR
Data Privacy
Cyber Risk
Arrow Global Annual Report and Accounts 2019
Strategic report
32
Risk management continued
“People and
infrastructure
commitments are
in place to support
key risk processes,
creating greater
consistency across
the Group in
support of the
One Arrow model.”
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 ten
Group-wide risk appetite statements covering each of
our three headline risk categories: strategic, financial
and operational. Focus on strategic risk also
encompasses significant external factors, allowing
senior management to address risks and opportunities
that are emerging or longer-term such as the macro
and political factors that impact the countries in which
we operate. Whilst Brexit has been a significant topic
during 2019, a broader view is taken using external
macroeconomic inputs and regular horizon scanning
by the Group’s risk and compliance teams.
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. The board risk committee sets the tone
for our approach, tracking progress and challenging
management to ensure that the Group is improving
and embedding risk management processes to
effectively identify, measure and manage risk. Country
risk committees are run independently by each
country risk leader, with the director of Group risk and
compliance 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, having successfully
embedded the asset and liability committee (ALCO) in
2019 to promote robust and efficient oversight and
control across the balance sheet, funding and income
in line with our risk appetite. A model risk committee
has also been established which will provide more
consistent oversight of the Group’s key models.
Our three lines of defence
Delivering on our commitments 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 are in place to support these processes,
creating consistency across the Group. Our risk
culture, which is aligned to Arrow’s values, is a
commercial differentiator and a fundamental driver
of our success.
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. Notably, it
provides transparency and allows for actions across all
three lines of defence to be managed to completion
via a single data source with oversight through the risk
committee structure.
Three lines of defence
A three lines of defence model allows us to
operationalise our approach, driving clear
accountability into the first line. Senior leaders retain
approved person status where applicable. This enables
a formalised approach to responsibility and ensures
embedded behaviours support the long-term
sustainability of the business through increased
accountability which is exercised within a framework
of high governance standards.
The Group risk team and specialist teams maintain
an overarching responsibility across key areas of
the framework:
• Enterprise and Operational Risk
• Portfolio Risk
• Country Risk and Regulatory Compliance
• Environmental, Social and Governance (ESG)
• Cyber Risk, Information Security and Data Privacy
First line business owners – Ownership and Accountability
• Day-to-day ownership and management of risks
• Adhere to risk framework and processes
• Responsible for control environment
Second line Risk and Compliance – Oversight and Challenge
• Business partner and regulatory interface
• Develop and maintain risk framework
• Provide oversight, monitoring and assurance
Third line Internal Audit – Independent Assurance
• Independent
• Review and challenge of first and second line
Arrow Global Annual Report and Accounts 2019
“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.”
33
The third line internal audit activity is delivered by
the Group head of internal audit with support from
country audit teams and Deloitte LLP. Reporting to the
board audit committee, the role also ensures a clear
distinction between responsibilities in the second and
third lines, as well as being an attendee at Group
executive risk committee and the board risk committee.
Key considerations in 2019
Launch of the Fund Management business
Risk and Compliance teams were fully involved
throughout the process of launching the Fund in
line with the Group’s stated ambition to realise
opportunities to deploy third-party capital. Critical
success factors included a board approved investment
risk appetite and reporting process, ensuring
regulatory compliance matters were addressed with
internal and external experts working in tandem,
updating of the existing policy suite to support the
new organisational operating model, and ensuring
governance and delegated authorities were re-
structured to meet the new requirements. In addition,
direct consideration was given to ensuring that the
established Group-wide culture and values were
extended to the Fund Management activities and
where the risk committee can lead and support via
consistent governance and risk management
standards and practice. Embedding, updating and
refining these operational protocols with appropriate
second line oversight will remain in focus in 2020.
Brexit
Throughout the year, management have continued
to monitor the risks and opportunities presented by
Brexit with a range of actions prepared depending
on the final outcome. This has been overseen by the
director of Group risk and compliance, and subject
matter experts from both within the UK business,
Group functions and European colleagues as well as
external advisors. Our focus, inevitably, is on our
people, financial impacts and business processes, and
we shall continue to monitor broader developments
throughout 2020. Financial mitigation exists in the
form of long-term funding and our balance sheet
strength – both reducing exposure to any potential
market risk in relation to funding. Geographic, regulatory
and currency diversification, along with a strong
balance sheet position, continue to leave the business
well placed to negotiate a range of Brexit outcomes.
Arrow is well positioned post-Brexit given the
operating licenses held by each of our businesses and
strong ongoing relationships built across individual
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.
Regulatory Scrutiny
With diversification comes a greater spread of
regulatory relationships. We are fully focused on our
regulatory conduct responsibilities across all platforms.
This includes the FCA in the UK, the Dutch Authority for
Financial Markets, Banka D’ Italia, Central Bank of Ireland
and the Portuguese Securities Market Commission.
The director of group risk and compliance, reporting
to Group chief legal and risk officer, 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 customer treatment, as well as
broader regulatory compliance, by blending our
detailed country expertise with Group-wide standards.
This is supported by the operational teams who use data
from internal sources, as well as customer feedback
surveys to facilitate customer experience forums which
places the customer journey and customer outcomes at
the heart of how we operate. 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.
In addition to existing practices within the UK business,
the Senior Manager and Certification Regime was
formally deployed and provided key inputs to updated
target operating models and governance structures.
This will continue to be monitored during 2020.
Following the launch of the Fund Management
business, the Group is now engaged with a broader set
of regulators to provide additional oversight of the
expanded activities. We remain in frequent dialogue
with our regulators and trade bodies across our
markets and have no regulatory fines to report.
Information Security and Operational Resilience
A fundamental area of operational risk management
and operational resilience is our approach to
information security. Data is key to our value
proposition and is therefore safeguarded for
everyone’s benefit including our colleagues,
customers and 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, and we respond
to this by investing in our people, processes and
technology to protect our colleagues, customers and
clients. This strengthens 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 and building
our resilience.
Although cyber risk forms a critical component of
our operational resilience and scenario testing, we
acknowledge that it is not the only business disruptor
that could have significant impact on how Arrow
operates. We are building our business operating
model capabilities encompassing our culture,
behaviours, processes and systems to allow our
business to deliver the Group strategy in the face
of disruption – regardless of source. This will enable
Arrow to anticipate, protect and plan for operational
recovery at all times.
Arrow Global Annual Report and Accounts 2019
Strategic report 34
Principal risks and uncertainties
Principal risks
Principal risks are identified through the risk framework and tracked
via our risk committees. The following table identifies key thematic
risks and mitigants, alongside an indicative risk rating based on risk
framework data, management oversight and areas of business activity.
Key risk
Strategic Risk
Key mitigating actions
Year on year movement
A. Macro and Political
Geographic and asset class diversification,
Stable
in-country expertise
B. Target Operating Model
Updated organisational design, re-alignment
Decreasing
of senior roles and responsibilities,
modernised Governance
Financial Risk
C. Liquidity/Funding
Strong governance (ALCO), Fund
Decreasing
Management business reduces bond market
reliance
D. Risk/Return Assumptions
Strong governance and second line
oversight, underwriting track record
Stable
Operational Risk
E. Regulatory Scrutiny
Policy, processes and training, local expertise,
Stable
stakeholder engagement
F. Operational Resilience
Testing, business continuity and disaster
Stable
recovery plans, information security
standards
G. Fund Management Execution
Organisational design, infrastructure, change
New
management, process improvement,
governance
H. Scalability
Targeted investment in people, processes
Increasing
and systems to support strategy
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 25 to the financial statements.
Arrow Global Annual Report and Accounts 2019
35
Link to strategic priority
Focus on strong consistent returns
in the Investment business
To be a leading player in our
chosen markets
To attract and retain
talent
To grow our specialist capital
light Asset Management and
Servicing business
To transform the customer
journey within our industry
Read more on our strategic
priorities on pages 18-19
Key risk
Strategic Risk
Description
Mitigating actions
A. Macro and Political
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.
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, ensuring
that procedural and strategic mitigants are
in place.
B. Target Operating Model
The need to ensure enterprise-wide
alignment of the updated model, including
Fund Management capabilities, to prevent
gaps 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, all
of which inform the necessary business
structures and operating model. The next
step in Arrow’s corporate evolution is the
addition of Fund Management operations
as a core part of an enhanced offering to
deliver the strategic vision.
Arrow’s geographic and asset class
diversification allows the Group to respond
to market opportunities arising from
possible disruption, including market
downturn scenarios driven by
macroeconomic factors. This is informed
by in-country expertise across investments,
operational execution and regulatory
compliance, ensuring that both the
opportunity pipeline and horizon scanning
inform decision-making Group-wide.
A Brexit Working Group made up of
cross-functional senior management have
continued to monitor Brexit-related risks in
2019, notably in case of a ‘No Deal’ Brexit
scenario, ensuring that procedural mitigants
in relation to people and data were
addressed in addition to strategic planning.
Whilst this risk is in part decreased, the
Group will continue to monitor the
transitional period alongside macro and
political trends in the EU and globally,
informed by external macroeconomic data
sources and statutory and regulatory
horizon scanning. This is overseen by the
executive and board risk committees.
The strategic plan has been supported by
an organisation-wide review of the target
operating model, the outputs of which are
now being embedded through a series of
initiatives including:
i. updated organisational design of
three distinct but interdependent
business lines, supported by
Central Functions;
ii. re-alignment of senior leadership
team roles and responsibilities and
incentives; and
iii. launch of a modernised Governance
structure with clear linkages
between localised and Group-wide
policies, committees and delegated
authorities.
This remains underpinned by a common
set of values and a Group-wide Culture
statement which informs our performance
management process.
Arrow Global Annual Report and Accounts 2019
Strategic report
36
Principal risks and uncertainties continued
Link to strategic priority
Focus on strong consistent returns
in the investment business
To be a leading player in our
chosen markets
To attract and retain
talent
To grow our specialist capital
light Asset Management and
Servicing business
To transform the customer
journey within our industry
Read more on our strategic
priorities on pages 18-19
Key risk
Financial Risk
C. Liquidity/Funding Risk
The risk that the Group is unable to meet
its obligations as they fall due.
Description
Mitigating actions
The Group is highly cash generative and
has a strong focus on collections. Funding
and liquidity risks are managed by the
central treasury team, and the Group
seeks to maintain minimum levels of
liquidity headroom, leverage of between
3.0–3.5 times, diverse funding sources
and a balanced maturity profile of its
debt facilities.
Strong governance and alignment with
risk appetite is managed via the ALCO
committee, with regular reporting of the
key metrics.
Through the regular budgeting and
forecasting processes, the Group continues
to assess the required level of liquid
resources, funding plans and risk appetite.
At the year end, the liquidity headroom was
£153 million, leverage was 3.4 times and,
except for the amortisation of the asset
backed securitisation, the Group has no
contractual debt maturities until 2024.
Going forward, the Group has increased
flexibility regarding investment levels, as it
is able to increase investments through
third-party funds it manages. This enables
the Group to curtail investment volumes
funded by the Group and conserve liquid
resources, without impacting the franchise
of the businesses. Overall, the Group is
well positioned given the term profile of
its liabilities.
A revised governance and delegated
authority matrix has been specifically
designed to balance effective business
decision-making and appropriate oversight
in line with stated risk appetite. The updated
governance model applies equally to the
new Fund Management operations with
specific details defined for the Fund
Manager such as risk appetite and KRIs.
The addition of a second line chaired model
governance committee, a sub-committee of
the Group executive risk committee, will
add a further layer of robust challenge to 1st
line activity, taking a balanced, risk-based
approach to the Group’s suite of models.
Increasingly, scenario analysis is used to
further validate key assumptions for new
portfolio acquisitions.
D. Risk/Return Assumptions
The risk of returns adverse to forecast due
to inadequate portfolio purchase analysis
and consequent mispricing, or inadequate
assessment of cost to collect and/or
subsequent portfolio performance
impacting estimated remaining collections.
Successful investments are the culmination
of a series of activities spanning first and
second line teams. Group risk provide a risk
appetite framework, oversight of due
diligence and challenge to models and
assumptions to help accurately price new
investment opportunities. Newly proposed
investments are subject to second line
oversight by Group risk, executive review
through an investment committee process
in accordance with agreed mandate levels
prior to purchase. Similarly, an enhanced
governance process has been deployed to
further support the ongoing agreement and
monitoring of servicing propositions.
Arrow Global Annual Report and Accounts 2019
37
Description
Mitigating actions
Key risk
Operational Risk
E. Regulatory Scrutiny
Risk of non-compliance with regulatory
obligations, increased regulatory scrutiny
and inappropriate conduct and customer
treatment.
We operate in increasingly highly regulated
environments in both the UK and across our
European locations, this having extended
as a result of the launch of the Fund
Management business. 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.
F. Operational Resilience
Risk that the business is unable to withstand
significant business disruption that could
pose a threat to customer outcomes,
corporate reputation and/or financial
performance.
The Group relies on core systems and
processes 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.
Regulatory conduct and Treating Customers
Fairly (TCF) are at the heart of our business
and Arrow has clearly defined, documented
and communicated policies and procedures
in place to guide colleagues on the required
standards for customer outcomes.
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.
Horizon scanning and industry body
presence helps to influence best practice
across the sector and ensures our internal
practices and training are updated
accordingly. We maintain increasingly
proactive relationships with our key
regulators in all locations.
To further benefit from the increasing
breadth and depth of expertise, the Group
has developed pan-European Customer
Experience Forums to allow for the
exchange of best practice and are informed
by customers.
Operational resilience and business
continuity will be increasingly tested
commensurate with the external and
internal threats which exist, and the Group
has recognised the importance of this
through investment in associated
programmes throughout 2019 and beyond.
Our core systems and processes 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 deploying a One Arrow IT
infrastructure, which will enable us to be
more efficient, drive process automation
and manage data more effectively and
securely. This is governed at a Group level,
with aligned strategies for IT, digital,
security and data.
Arrow Global Annual Report and Accounts 2019
Strategic report
38
Principal risks and uncertainties continued
Link to strategic priority
Focus on strong consistent returns
in the Investment Business
To be a leading player in our
chosen markets
To attract and retain
talent
To grow our specialist capital
light Asset Management and
Servicing business
To transform the customer
journey within our industry
Read more on our strategic
priorities on pages 18-19
Description
Mitigating actions
Key risk
Operational Risk continued
G. Fund Management Execution
Risk that poorly executed or misaligned
operations processes result in reputational
risk, financial loss and/or poor customer
outcomes.
With the additional clarity of Arrow’s
evolved business line structure, comes
the need to carefully design and execute
on more efficient and cost-effective
operational processes in all areas of the
business. Whilst we 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, the increasing
maturity of the business drives greater
foresight and proactive management of
process changes through initiatives such
as LEAN and governance provided by both
strategic change board and our risk and
compliance committees.
H. Scalability
Risk that the Group is unable to respond
appropriately and efficiently to scaled
opportunities as a result of the increased
market opportunity arising from the Fund
Management business .
The opportunity to grow volumes in line
with the updated funding model presents
a risk that the necessary people, processes
and systems may not be available to
maximise potential demand which in turn
could lead to strategic, financial or
operational risks that detract from the
long-term success of the company.
Arrow Global Annual Report and Accounts 2019
In support of the Fund Management launch,
Arrow focused significant senior
management time on areas of organisational
design, infrastructure, change management,
process improvement and governance –
including the roles, responsibilities and
membership at executive committee level.
Furthermore, objectives, incentives and
governance routines have been aligned to
ensure appropriate levels of oversight –
from strategy and budget setting through
to operational and financial performance –
with delegated authorities in place to
promote efficient and effective day-to-day
operations. This includes the important
relationships now established with
third-parties who we have engaged to
support specific parts of the Fund
Operations process and oversight, with
aligned reporting back to our existing
business line and central function
management teams.
The Group is focused on developing process
and system capability to absorb new
opportunities through deeper, broader and
more consistent methodologies, including
standardisation of data processing activities.
Operational resilience is an enabler for
scalability, alongside a strong risk-aware
culture. This enables the Group to expand
whilst deploying resource and infrastructure
improvements to front line services to
maximise commercial opportunities that
align with customer, regulator and client
expectations, whilst delivering on our
financial commitments.
There are increasing opportunities for
professional development across the
Group, alongside the growth of our talent
pool, in the context of a values-led,
professional culture.
39
Statement of viability
Provision 31 of the UK Corporate Governance code requires the
board to make an assessment of the prospects of the Group over a
period it has determined and why it considers that to be appropriate
and explain how it has assessed the prospects of the company, taking
account of the Group’s current position and principal risks.
The board have considered the Group’s viability in detail over a
three-year period to December 2022, taking account of the current
position of the Group and the Group’s principal risks as detailed in the
strategic report on pages 34 to 38.
The board has 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:
The Group has prepared a five-year forecast predicated on a detailed
year one budget which has been approved by the board and
extrapolated 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. The board has therefore
concluded that the viability assessment should cover a period of
three years.
The Group is highly cash generative, receiving consistent flows
of cash in the form of collections from its customers. The Group
recently launched its Fund Management business. This provided an
acceleration towards the Group’s capital light strategy and plans to
de-lever over the short to medium-term. Furthermore, the Group
has a long track record of generating predictable cash flows over
many years via its interconnected Investment business and Asset
Management and Servicing businesses. The Group has prudently
managed the balance sheet with leverage at 3.4x and, aside from the
amortisation under the asset backed security facility, the Group has
no contractual debt maturities until 2024. The board has 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 of the Group’s revolving credit facility
is to maintain a leverage ratio below 4.4x, calculated as secured net
debt divided by the 12-month rolling adjusted EBITDA. The covenant
reduces to 4.3x from 1 January 2021 and 4.2x from 1 January 2022.
The board 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 are happy that the projections show
covenant compliance. Furthermore, based on the three- year
forecast and funding plan, the Group will continue to comply across
the assessment period.
In addition, the Group now has significant balance sheet flexibility
with the launch of the third-party Fund Management business. The
Group is now able to invest third-party managed funds with greater
flexibility around whether to do so from its own balance sheet and
therefore, the franchise is less reliant on either the external debt
markets or its own balance sheet. This enables the Group to
reduce portfolio purchases without impacting the underlying
business franchises.
Several stress tests have been performed against the forecast. The
tests selected consider the principal risks faced by the Group. The
most material risk for the Group in relation to its liquidity headroom
and leverage covenant, are reductions in expected cash collection
levels. The group has utilised its IFRS9 severe downside scenario,
which it considers severe but plausible, as the basis for its stress
testing. Using this scenario, collections performance deteriorates
from the base case ERC, resulting in lower cash generation. The
Group leverage ratio remains below the minimum covenant level
with significant liquidity headroom. The board also reviewed a
reverse stress test scenario that outlined a more severe reduction
in the collection profiles which was designed to cause a covenant
breach. Several management actions were identified that the Group
could deploy to avoid a covenant breach and to maintain sufficient
levels of liquidity in the event of this scenario being realised.
As a result of the analysis performed on the forecast future position
of the Group, the board has 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.
Approval of strategic report
The strategic report for the year ended 31 December 2019 has been
approved by the board and was signed on it’s behalf by:
Lee Rochford
Group chief executive officer
12 March 2020
Arrow Global Annual Report and Accounts 2019
Strategic report 40
The right culture
To make Arrow an even better place to work for our people and to help
to maximise our long-term potential, we have defined an aspirational
culture that underpins everything we do. This culture shapes Arrow and
is one of our unique points of differentiation.
Our aspirational culture statement
“Arrow is an ambitious company. Our determination
to succeed is matched by our drive to do things the
right way – ensuring we create a sustainable
business that builds better financial futures for
our stakeholders.
We are entrepreneurial, fast-paced and decisive.
Proud of our family values, we cherish working
together in a safe, supportive community. We trust
our people to make the right decisions – and we
back them all the way. We’re also brave enough to
acknowledge mistakes – and to learn from them.
We celebrate success and reward those who take
personal accountability to help us achieve
exceptional long-term results.
We’re open and eager to embrace new ways of
working. Ours is a diverse community, enriched by
our local identities, working collaboratively to build
a powerful, unified and dynamic organisation.”
This collective identity is One Arrow.
41
We understand that culture and strategy are mutually
dependent and are both essential components of
One Arrow. In 2019, the business identified the
behaviours that we believe are essential for our new
segmental structure to be successful, and we captured
these in our new aspirational culture statement. The
process by which we came to define our culture
reflected the best of One Arrow as an inclusive,
decisive and collaborative business.
Importantly, our new aspirational culture statement
is the lens through which we will evaluate our own
behaviours and decision making, and also our ways
of working, processes and procedures. As well as being
a powerful unifying force, our aspirational culture
statement will, over time, see incompatible and
isolated practices removed from our business in favour
of better, more consistent ways of working. Whilst the
Culture Steering Group is the ultimate custodian, we
expect every employee to embrace our culture and its
key attributes.
Delivering the Arrow Advantage
for people
“We are open and eager to
embrace new ways of working.
We embrace diversity of
thinking and are open to new
ideas on building a better,
more successful business.”
Brigite Fernandes,
Compliance analyst, Whitestar, Portugal
Delivering on our commitments
“Delivering on our commitments
is the basis of trust and in our new
segmental structure with three
interdependent businesses,
personal accountability is essential.”
Sanjot Gill,
Group head of analytics, UK
Arrow Global Annual Report and Accounts 2019
42
Our stakeholders
Responding to our stakeholders’ needs
Our key stakeholders are those who impact our strategy materially or are impacted by it directly. As a responsible
business building long-term shareholder value, we listen to our stakeholders regularly to help guide our strategy,
and ensure we continue to deliver relevant services that meet the needs of our clients, investors and customers.
Customers
Employees
Communities
Regulators and
industry
Shareholders
Clients and
Fund Investors
Why we engage
Key areas of interest
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.
• Affordable repayment plans which repay 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
• Trusted and responsible servicing panel and
credit manager
• Clear and transparent communications
• Professional development and career
development
• Recognition and fair reward
• Diversity and inclusion
• Transparent and timely communications
• Clarity on Vision, Purpose, Values and Culture
• Responsible and fair treatment of customers
• Safe and productive working environment
• Affordable repayment plans
• Employment
• Financial literacy programme via Junior
Achievement Europe
• Wider community support programmes i.e.
charity fundraising, volunteering
• Compliance with EU and national regulations
• Control and supervision
• Affordable repayment plans
• Treating vulnerable customers fairly
• Taxation
It is important to attract, retain and
engage people who have the skills, values
and expertise to implement our strategy,
and ensure our clients and customers are
serviced to the best of our ability.
Engaged employees will make us more
successful, more sustainable and act as
business ambassadors.
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.
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 understandable information to
enable both public investors and Fund
limited partners to fully understand our
business, so they may make an informed
and educated investment decision.
• Strategy and performance
• Risk management and corporate governance
• Outlook
• Executive remuneration
• Dividend policy
• Access to senior management
• Site visits
A deep understanding of our clients and
the challenges they are facing is
essential if we are to build sustainable
partnerships. We use this understanding
to inform our decisions, refine our
solutions and differentiate ourselves
from our competitors.
• Our capability and the solutions we can provide
• How we treat our customers
• Our understanding of the industry and the
challenges the businesses within it are facing
• Ability to demonstrate that our values are
aligned with those of our clients
• Investment in digital and new technologies
Arrow Global Annual Report and Accounts 2019
43
How we engage with
our stakeholders
Customers
Our aim is to establish sustainable relationships with
our customers through understanding their needs and
delivering appropriate solutions tailored to their
individual circumstances. This is a constantly evolving
process, and one which secures better financial futures
for our customers.
Better Customer Outcomes
Arrow operates a hybrid business model with an
in-house collections operation complemented by a
panel of Arrow ‘Approved Partners’. This model allows
Arrow to utilise the skills of market-leading specialist
partners to provide a service, which supplements our
internal capability. Understanding our customers’
needs is vital for our operations. 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 in which we
operate, 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.
Customer Voice
The introduction of the Customer Satisfaction Surveys
(CSAT) across the Group in 2019 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.
This service is currently being reviewed to make it
easier for the customer to provide feedback and to
provide further insight. These improvements will be
made in H1 2020.
The Customer Journey
A project was held in the UK in Q2 2019 called Rapid
Scans. The intention was to gain insight from a
customer’s perspective, to understand the processes,
strengths and weaknesses, providing us with areas
where we could improve the whole customer
experience and how we engage both in traditional
and digital ways. As an example, all customer
communications have been thoroughly reviewed
and amended to ensure they are easier to read, with
concise and clearer calls to action; importantly, these
improvements are applicable across all channels,
including letters, text messages and online portals.
Arrow Global Annual Report and Accounts 2019
Strategic report 44
Our stakeholders continued
Customer Forums
With the UK customer experience forum firmly in place,
the decision was made to roll this out across the Group.
The first Group-wide customer experience forum was
hosted in Dublin in August 2019 and similarly to the UK
forum, this committee drives the delivery of customer
outcomes throughout the organisation – not just in
front-line areas. The committee is led by senior leaders
within the Group, who can drive changes to ensure
customers are treated fairly and responsibly, all
strategies and processes are working correctly, that we
are generating the right customer outcomes and that
we are sharing all best practices throughout the Group.
The second customer forum was held in Lisbon in
December 2019.
The UK customer forum continues to evolve and has
successfully driven improvements around
implementation, strategies and customer touchpoints.
Alongside the customer dashboard, key KPIs are
measured, including customer satisfaction and
complaint volumes. This also continues to provide
key customer insight across UK business areas.
Employees
We have worked hard to maximise the value of our
existing people development programmes, whilst
challenging ourselves to innovate and embrace new
ways of working.
Cultural alignment
The launch of our new aspirational culture statement
at our Senior Leadership Conference and all-employee
roadshow was pivotal to this new way of thinking, as
was the creation of the culture steering group (CSG)
that will act as the central forum for ensuring our
culture provides a clear, supportive and productive
environment for all our employees.
In particular, we have identified six cultural attributes
and will introduce performance indicators in 2020 to
help determine whether we are on the right track.
Recognising that more diverse businesses are more
successful, as well as an appreciation that it’s the right
thing to do, we also have worked hard to embed a
diversity agenda across the Group, with Matt Hotson,
Group chief financial officer, acting as our diversity and
inclusion sponsor.
Strategic and leadership alignment
We continued the roll-out of our senior leadership
development programme DIPS (Define, Insight,
Practice, Sustain) that commenced in March 2018.
To date, eighty of our most senior leaders have been
through this programme, helping to align our senior
leaders and their teams around our business strategy
and preferred ways of working. Furthermore, we have
taken the key leadership concepts from this into our
wider management programmes to create a common
language and alignment across the leadership pipeline.
Shanna Wallace,
winner of Arrow’s
inaugural
Group-wide
Employee of
the Year award.
Recognised in
Porto by Lee
Rochford and
Maria Luís
Albuquerque for
helping vulnerable
customers.
Arrow Global Annual Report and Accounts 2019
45
Management Development
Our leaders play a critically important role in inspiring
our teams, and 2019 saw Arrow continue its various
management development programmes across the
geographies to build capability and confidence.
In the Netherlands, we launched a new programme
focusing on personal leadership insights, the ability to
lead through complex change and our Lean efficiency
programme that seeks to eliminate unnecessary waste
and drive simplification and efficiencies – all of which
are underpinned by our aspirational culture. This will
be rolled out across the Group in 2020. In the UK,
we continue to utilise the UK Government’s
apprenticeship levy to develop and accredit our
first-line managers, as well as to support their
professional development across our talent pipeline,
from recruiting apprentices in IT and Finance with a
view to developing the next generation of talent,
through to a senior leader undertaking an MSc.
Consistent with other areas of the business, we will
use technology – in the form of a new Learning
Management System across the Group – to deliver
faster, smarter and more bespoke learning
applications. Technology is also helping to connect
our employees on a single communications platform
via Workplace (by Facebook), for the very first
time, helping to drive collaboration and new ways
of working. This empowerment is being further
enhanced via Peakon, an online engagement and
measurement tool that will help line managers make
better-informed, data-driven decisions when it comes
to acting on the voice of our employees and enable
our leaders to drive engagement in their own teams.
As we move into 2020, our focus will be to ensure our
people have the skills, cultural mindset and Group
support to successfully embed our new segmental
structure and realise our commercial ambitions.
Competitive Total Reward
Arrow delivers a reward and recognition structure that
provides competitive remuneration which is fairly
derived and incentivises high performance, with a suite
of benefits that support our employees’ short, medium
and long-term personal goals and circumstances.
We deliver these items through:
• Competitive base salaries that are reviewed and
appropriately adjusted on an annual basis
• Bonus schemes that focus on both ‘what’ is
delivered and ‘how’ it is delivered in equal measure
• Long-term incentives to drive long-term engagement
and retention of our most talented people
• Competitive benefits that provide employees the
opportunity to select benefits that support their
short, medium and long-term personal goals
and circumstances
• 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 (ERS) where all
employees can nominate and are eligible to win. In
2019, we celebrated the winners’ achievements with
a gala dinner at Old Trafford, home to Manchester
United Football Club, and most recently, in January
2020, over 80 winners were celebrated in Porto.
Arrow is committed to building a diverse and inclusive
workforce, and the treatment of reward and
recognition is central to this commitment. Our
entrepreneurial drive is complemented by a deep
commitment to rewarding work done in the right way,
the Arrow way.
Arrow Global Annual Report and Accounts 2019
952
ERS nominations
80
ERS winners
60
Values Champions
Strategic report 46
Our stakeholders continued
249
volunteers
3,194
students helped
Communities
Supporting our communities
Our Purpose is to Build Better Financial Futures, and
it’s what we do for all our stakeholders including the
communities where we operate.
2019 was an important year, as we expanded our
partnership with Junior Achievement Europe (JAE),
Europe’s largest non-profit provider of educational
programmes for financial literacy and entrepreneurial
skills for young people.
In 2019, we worked with JAE across six countries to
deliver a number of innovative educational
programmes, the core activities of which were
anchored under the ‘Learn to Earn’ or ‘Economics for
Success’ initiative. This programme, delivered in either
classroom-based sessions or larger workshops, aims
to inspire students and provides information on career
options to help them make informed choices and
prepare them for destinations and life beyond
education. Students engage in a range of hands-on
activities, including role-play interviews and a board
game, to help them understand how education is key
to their future success. With the help of our
employees, students explored themes including career
choices, personal skills, job interviews and financial
planning and budgeting.
Across the Group, we directly helped 3,194 students,
with 249 employees volunteering their time and
commitment. This is a significant achievement for the
business, and we would like to thank all our volunteers
for their commitment to our Purpose.
In 2020, with the support of the board, we will continue
to work alongside JAE and will see the programmes
fully rolled out across the entire organisation, including
our Dutch operations. We hope to expand our activities
to reach more than 3,500 students and involve
300 volunteers.
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.
Collectively across the Group, we have a wide range
of activities to support our local communities. Some
recent examples include: our Italian business, Zenith
S.p.A, running the Pittarosso Pink Parade, a marathon
in support of breast cancer; our Vesting Finance
business in the Netherlands collecting clothes and toys
for Kwintes, an organisation supporting people with
mental health issues, and our Portuguese business that
provided goods for Casa da Criança, an institution for
vulnerable children.
In Portugal, we also sponsor the Terry Fox Run, a
marathon in support of cancer research. In the UK,
across both Manchester and Glasgow our CSS (Charity,
Social and Sports) teams run regular fundraising for
good causes including Macmillan, The Christie
Hospital, Food Banks and Children in Need.
We also support colleagues’ contributions to the
community by matching funds raised by them for their
chosen charities, and we encourage our employees to
volunteer and assist local community organisations,
both in and out of Company time.
“Teaching young people how to
manage money effectively will help
them make sound financial decisions
in the future. Thanks to Arrow’s
financial support and volunteers’
commitment, more than 3,000
students across Europe had access
to financial literacy programmes and
developed the skills and competences
they will need growing up.”
Salvatore Nigro
Chief executive officer of JA Europe
Regulators and Industry
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.
In 2019, we held a number of important industry
positions, including board membership of the Credit
Services Association (CSA). During the year, Arrow has
actively contributed to varying initiatives across the
collections and debt advice sectors. Through our
involvement with the Federation of European National
Collection Associations (FENCA), we have finalised a
Code of Conduct for the EU General Data Protection
Regulation (GDPR) which is currently undergoing
approval within the European Data Protection Board.
Arrow Global Annual Report and Accounts 2019
“We value the
support of our
shareholders and
want to ensure
that we always
make it possible
to have an honest
and open dialogue
with them about
the direction the
business is going
and where they
think we can
improve.”
Also, through FENCA, we have been supporting the
Non-Performing Loan Directive to ensure appropriate
regulation of debt buyers and debt collections
agencies across the EU, with authorisation and
notification by competent authorities in each member
state. This is to ensure a consistent approach to
customer treatment.
We held a board position, then the role of Ambassador,
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 held the 2019 presidency of the prestigious
International Collectors Group (ICG), organising the
annual ICG conference in Portugal.
We have continued to actively engage with numerous
trade bodies during 2019 and have a constructive and
open relationship with the FCA and other European
regulators, focusing in particular on conduct and
vulnerable customer issues, where we remain fully
committed to raising standards and promoting fairer
practices in the collection of debt.
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.
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 where we fully support StepChange, Payplan and
Christians Against Poverty by way of FairShare
contributions.
Additionally, in Ireland, we maintain a proactive
relationship with the Irish Mortgage Holders
Organisation, a registered charity and the main
customer advocate in Ireland. We also encourage
customers in difficulties to approach Money Advice
and Budgeting Service, a non-profit organisation
which belongs to the State and provides a free and
confidential service for people having problems with
money management and debt.
47
Shareholders and investors
We take a highly structured and proactive approach
to liaising with our shareholders and analysts. Arrow
has a dedicated investor relations department which
is fully available to analysts and investors daily, should
they have queries or require a meeting. We report
our financial results publicly at every quarter and
consistently hold public calls and presentations to
allow analysts and investors the opportunity to engage
directly with management regarding the financial
statements and any news flow they consider material.
We also look to hold frequent Capital Markets Days
where all investors and analysts are welcome to attend.
These days are more operationally orientated than
the management presentations given for results
announcements. They also offer analysts and investors
an excellent opportunity to meet and engage with
members of the wider management team that liaise
with the market less frequently. This will often involve
divisional management teams presenting directly to
analysts and investors on areas of the business specific
to their roles and focus.
Outside of set-piece market announcements, we
endeavour to hold a number of non-deal roadshows
every year in order to provide our shareholders and
investors with the opportunity to spend time with
management on a one-to-one basis. Aware that we
have a diverse range of investors spanning multiple
geographies, we aim to conduct these roadshows
across the countries where our investors are based.
We also use this to provide new potential shareholders
with an opportunity to meet the management
team, which often forms an important part of their
due-diligence process.
As well as liaising with the portfolio managers, we
believe it is also important that investors’ corporate
governance teams are aligned with the Company
strategy and policies. We therefore ensure that we
engage proactively with investors’ corporate
governance departments, offering both regular
meetings and the chance to comment on any
suggested changes to Company policies.
Arrow Global Annual Report and Accounts 2019
Strategic report 48
Our stakeholders continued
Clients
Our clients are the lifeblood of our business and we
depend upon them to be able to deliver the sustainable
growth we forecast. We work hard to build strong
relationships with our clients by taking the time to
understand their businesses and by providing them
with unique industry insights. We also learn from these
relationships, and use their insights to inform our
decisions and to help us to develop innovative
solutions which address the challenges they’re facing.
This can, and does, lead to further investment in
technology, and this year alone we have invested
significantly in our core collections system and digital
customer portal for the benefit of our clients.
Our clients expect us to demonstrate that our values
are aligned, and in doing so we build their trust. This
trust is essential if they are to allow us to represent
their brand. It gives them confidence that we will treat
their customers in a way that they and the regulators
would expect.
We evidence this fair treatment of customers by
providing regular call quality scoring reports and
customer journey reviews. We actively encourage this
oversight, as we are very proud of the standards we
set and believe it to be another differentiator for us
in the market.
We consider our clients to be invaluable partners and
strive to ensure they view Arrow in exactly the same
way. We hope that these partnerships will form the
foundation of our success for years to come.
Section 172 Statement
Section 172 of the Companies Act 2006 requires a
director of a company to act in the way he or she
considers, in good faith, would most likely promote
the success of the Company for the benefit of its
members as a whole. In doing this, section 172
requires a director to have regard, amongst other
matters, to the:
•
likely consequences of any decisions in the
long-term;
interests of the Company’s employees;
•
• need to foster the Company’s business relationships
with suppliers, customers and others;
impact of the Company’s operations on the
community and environment;
•
• desirability of the Company maintaining a reputation
for high standards of business conduct; and
• need to act fairly as between members of the
Company.
The directors of Arrow Global Group plc are fully
aware of their responsibilities to promote the success
of the Company in accordance with section 172. In
discharging its duties, the board has considered the
factors above as well as any other factors which they
considered relevant to the decision being made.
Arrow Global Annual Report and Accounts 2019
The board’s aim is to make sure that its decisions are
consistent, by considering the Group’s strategic
priorities and having a governance framework in
place for key decision-making that takes into account
relevant stakeholders. Further details on how the
Arrow board operates and the way in which it reaches
decisions, including the matters discussed and
debated during the year can be found in the Corporate
Governance Report on pages 58 to 59.
Arrow’s success depends on our ability to engage
effectively with our stakeholders and this is consistent
with the ethos of section 172. As a responsible business,
we continually engage with our stakeholders to define
and refine our strategy and to ensure that we deliver
relevant services that meet the needs of our clients,
our customers and our wider stakeholders. Although
the majority of the business engagement is carried out
by Arrow’s commercial and functional business teams,
the board has regular and direct engagement with
employees and investors.
On pages 42 to 48 we report on how Arrow responds
to its stakeholders’ needs. In particular, we explain why
we engage, the key areas of interest and the way in
which we have had regard during the year to the need
to foster the Group’s business relationship with
customers, suppliers and other stakeholders.
49
Environmental, Social
and Governance report
“Arrow is fully
committed
to meeting our
stakeholders’
expectations on
Environmental,
Social and
Governance
issues.”
Jonathan Bloomer
Chairman
Arrow’s Environmental, Social and Governance (ESG)
Programme
Arrow is committed to being a responsible business
that actively engages with our stakeholders on related
ESG issues. Arrow offers high-quality services to our
customers, treats our employees and business parties
with respect, upholds our legal obligations to human
rights, serves the communities we operate in and is
committed to improving our impact on the
environment. As a responsible business, we take our
responsibilities and duties under the UK Corporate
Governance Code seriously. It is at the heart of our
business philosophy and is embedded within the culture
and conduct of our business. We are increasingly aligning
our activity with the recommendations of the Task Force
on Climate-related Financial Disclosures (TCFD)
addressing the following four areas:
Governance
We believe that by integrating ESG considerations into
our investment and asset management practices,
Arrow can enhance business performance, contribute
to a more sustainable society and support the diverse
communities within which we operate and thereby
continue delivering our purpose of building better
financial futures for all of our stakeholders. This includes
having clearly documented ESG considerations in both
our risk appetite and investment decision making
processes and recognising ESG challenges and
opportunities within our governance forums.
Strategy
We recognise that ESG issues are interconnected
across the business, contributing to how we develop
and implement our strategy, informing how decisions
are taken based on relevant performance information,
and how we approach risk management.
Our commitment to improve and measure our ESG
performance is demonstrated by the formal launch,
in 2019, of the Arrow ESG programme, an initiative
sponsored by Arrow’s Chairman, Jonathan Bloomer,
and led by the Group chief operating officer, Dave
Sutherland. Deloitte LLP were engaged to advise and
assist the Group in developing this programme which
includes an ESG working group, supported by formal
terms of reference. Chaired by the enterprise and
operational risk director, the working group has
representatives from each function of our business,
allowing us to address ESG principles with a One Arrow
mindset and adopt practices in a proportionate
manner,in response to external inputs including the
United Nations Principles for Responsible Investment
(UNPRI), Sustainable Accounting Standards Board
(SASB) and TCFD.
Risk Management
To support the ESG working group a comprehensive
and robust framework to identify and manage ESG
issues will be deployed using our existing risk
management framework. To successfully manage
risks and opportunities, we must continue to raise
awareness and react in a robust and coordinated
manner. This will be supported through externally
facilitated training sessions to educate and inform
senior management across the organisation on ESG
factors, and on the importance of responsible
investing and sustainable business practices in
enhancing investment performance and contributing
to a more sustainable economy. Combining these
actions with established risk management practices,
governance and financial reporting disciplines will set
the tone for our cultural adoption of ESG.
Metrics and targets
Looking to the future, we recognise that Arrow is on
a journey. As our ESG programme evolves and
environmental, social and governance factors become
a fundamental part of our strategy we recognise that
stakeholders need clear, relevant and consistent
information. In the table overleaf we set out a number
of Arrow’s ESG focus areas in 2019. We shall continue
to focus on enhancing disclosure, transparency
and engagement, particularly on climate change
and sustainability.
Dave Sutherland
Group chief
operating officer
“As we continue developing our ESG
journey, we have further invested in our
approach with the use of industry
benchmarking and through the creation of
an ESG working group, of which I am proud
to be the executive committee sponsor.”
Arrow Global Annual Report and Accounts 2019
Strategic report 50
ESG dashboard
Key ESG factors
As part of our ESG journey, we are developing
a structured roadmap, defining key areas for focus
and mechanisms to enable us to monitor progress.
Factor / requirement
Issue
Relevant information
Focus areas
Environmental – being aware of our impact on the natural environment
and our efforts to improve it
Environmental matters
• Climate change
Social – understanding and responding to the needs of our stakeholders
Customers
• Responsible financial services
Employees
• Diversity, Inclusion and Engagement
• Well-being
Communities
• Helping local communities
Human rights
• Modern slavery
Suppliers
• Supply chain management
• Wider stakeholder engagement, page 67
• Oversight and policy setting via the Group chief operating officer function to
Governance – being a responsible business and investor
Cybersecurity and data
protection
• Privacy and security
Anti-bribery and
corruption issues
• Transparency
Professional Integrity
• Culture, conduct and compliance
• Regulatory and industry engagement, page 42
• Internal expertise and third-party advisors; bespoke regulatory relationships
Responsible investment
• Business conduct
Our Business model can be found on pages 12 to 13.
Arrow Global Annual Report and Accounts 2019
• Environmental policy and carbon reporting, pages
• Improving the measurement of our environmental footprint. Identifying
and responding to emerging environmental considerations.
100 to 101
• GhG emissions, page 100
• Customer Satisfaction Surveys (CSAT), page 43
• Best practice sharing, acting on customer feedback, improved operational
KPIs and management oversight.
• Strategy, objectives and measures overseen by the culture steering group
– embedded into our operating rhythm and values. Metrics include turnover,
employee engagement scores and gender balance and pay.
• Customer forums, page 44
• Vulnerable customers, page 47
• Employee engagement, page 44
• Reward and recognition, page 45
• Fairness and inclusivity, page 45
• Diversity, page 44
• Employee consultation, page 100
• Building financial literacy, page 46
• Supporting debt charities, page 47
• Helping our local communities, page 46
• Developing our network of Corporate Social Responsibility champions,
ongoing financial support for debt charities, extensive internal
communication to publicise colleague opportunities to participate in
community volunteering.
• Supporting human rights, page 47
• Annual update of Modern Slavery statement actions, senior leadership
• Modern slavery statement: www.arrowglobal.net
training and awareness targets.
• Data privacy and GDPR, page 46
• Bribery Act compliance, page 66
• Whistleblowing, page 100
• Regulatory risk, page 77
• Taxation, page 131
• Due diligence, pages 65, 68
• Risk appetite, pages 32 to 33
• Investment in expertise, systems and management reporting on data
breaches – including any customer or personally identifiable data incidents
in line with our GDPR compliant Information Security policies.
• Group-wide training and awareness; board risk committee reporting
manage consistency.
and oversight.
in each jurisdiction.
• Embedding updated governance processes, risk management oversight,
KRI’s reported at risk committee.
51
Non-Financial Information Statement
Below you can find information relating to non-financial matters in our Strategic
Report, in accordance with sections 414CA and 414CB of the Companies Act 2006.
Information on our principal risks and uncertainties can be found on pages 34 to 38,
information on our non-financial measures can be found in the table below and a
description of our business model can be found on page 12. References to our
policies, due diligence processes and information on how we are performing on
various measures in these areas are contained throughout the Strategic Report.
For more information on our approach
to ESG visit: www.arrowglobal.net
Relevant information
Focus areas
• Environmental policy and carbon reporting, pages
• Improving the measurement of our environmental footprint. Identifying
100 to 101
• GhG emissions, page 100
and responding to emerging environmental considerations.
• Customer Satisfaction Surveys (CSAT), page 43
• Customer forums, page 44
• Vulnerable customers, page 47
• Employee engagement, page 44
• Reward and recognition, page 45
• Fairness and inclusivity, page 45
• Diversity, page 44
• Employee consultation, page 100
• Building financial literacy, page 46
• Supporting debt charities, page 47
• Helping our local communities, page 46
• Best practice sharing, acting on customer feedback, improved operational
KPIs and management oversight.
• Strategy, objectives and measures overseen by the culture steering group
– embedded into our operating rhythm and values. Metrics include turnover,
employee engagement scores and gender balance and pay.
• Developing our network of Corporate Social Responsibility champions,
ongoing financial support for debt charities, extensive internal
communication to publicise colleague opportunities to participate in
community volunteering.
• Supporting human rights, page 47
• Modern slavery statement: www.arrowglobal.net
• Annual update of Modern Slavery statement actions, senior leadership
training and awareness targets.
Suppliers
• Supply chain management
• Wider stakeholder engagement, page 67
• Oversight and policy setting via the Group chief operating officer function to
manage consistency.
• Data privacy and GDPR, page 46
• Investment in expertise, systems and management reporting on data
• Bribery Act compliance, page 66
• Whistleblowing, page 100
• Regulatory and industry engagement, page 42
• Regulatory risk, page 77
• Taxation, page 131
breaches – including any customer or personally identifiable data incidents
in line with our GDPR compliant Information Security policies.
• Group-wide training and awareness; board risk committee reporting
and oversight.
• Internal expertise and third-party advisors; bespoke regulatory relationships
in each jurisdiction.
• Due diligence, pages 65, 68
• Risk appetite, pages 32 to 33
• Embedding updated governance processes, risk management oversight,
KRI’s reported at risk committee.
Arrow Global Annual Report and Accounts 2019
Environmental – being aware of our impact on the natural environment
Factor / requirement
Issue
and our efforts to improve it
Environmental matters
• Climate change
Social – understanding and responding to the needs of our stakeholders
Customers
• Responsible financial services
Employees
• Diversity, Inclusion and Engagement
• Well-being
Communities
• Helping local communities
Human rights
• Modern slavery
Governance – being a responsible business and investor
Cybersecurity and data
• Privacy and security
protection
Anti-bribery and
corruption issues
• Transparency
Professional Integrity
• Culture, conduct and compliance
Responsible investment
• Business conduct
Strategic report
52
The right people
We work hard to understand how we can work together
to make Arrow a better place to work; one where each
individual can express themselves freely and maximise
their own potential.
We empower our people
to drive change from the
ground up.
53
In March 2019, we conducted a Group-wide engagement
pulse. Over 75.0% of our employees made time to give
us their feedback, and the results showed that the
actions we have taken have started to have a positive
impact. Our engagement scores increased significantly,
the engagement index was up across the six categories
surveyed, with the highest rated categories being
Work/Life Balance, Performance Management and
Collaboration. This improvement shows that with
focused planning and a conscientious and disciplined
delivery, we can collectively make Arrow a great place
to work. This progress was recognised in January, when
our Whitestar business was awarded as a Top Employer
in Portugal. We have worked hard to give all of our
employees a meaningful voice, keep them well-informed
of our strategic initiatives and the reasons behind them
and promoting the importance and benefits of diversity
and inclusion. We have made sure our compelling Vision,
Purpose and newly defined aspirational culture
statement are clear in order to help guide our people’s
decisions. Moreover, regular engagement forums keep
this topic at the centre of discussions and ensure that
our employees’ ideas are acted upon in order to improve
our workplace.
Delivering the Arrow Advantage
for people
“I was lucky enough to be invited
to participate in the Leadership
Development programme in
Vesting Finance, and I’m excited
by the learning opportunities on
offer and how this will help my
future career.”
Gijs Smallenburg,
Transformation manager, Vesting Finance,
Netherlands
Accessible leadership is key to our
continued success
“I feel well connected to the
business. In November, we had
the strategy roadshow in Milan,
and it was helpful to hear about
our future plans and new
segmental structure.”
Alessandra Tubi,
Senior transaction lawyer, Arrow Italia
Arrow Global Annual Report and Accounts 2019
54
1
Board of directors
2
3
4
1. Jonathan Bloomer MBE
Non-executive chair
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.
2. Lee Rochford
Group chief executive officer
Appointment
3 January 2017
Committee membership
Disclosure (chair)
Skills and experience
Prior to joining Arrow, Lee was chief
financial officer at Virgin Money
between 2013 and 2015, seeing the
Group through its successful IPO
and subsequent Stock Exchange
listing. Before 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.
3. Matt Hotson
Group chief financial officer
Appointment
8 October 2019
Committee membership
Disclosure
Skills and experience
Matt is a highly experienced
finance professional, having
worked for more than twenty-five
years at leading FTSE 100
companies. His experience spans
core finance, strategy, investor
relations and business leadership.
In 2019, he joined Arrow from
RSA Insurance Group plc, where
he was chief financial officer, UK
and International. Prior to this,
Matt was at Cable and Wireless
Worldwide plc, following fourteen
years at Legal & General Group
plc where he held a variety of
senior finance and business
roles. Matt holds Masters
degrees in Natural Sciences
from Cambridge University and
Neuropharmacology at the
Open University, and is currently
studying for a PhD in Digital
Economics at Exeter University.
External appointments
None.
4. Lan Tu
Non-executive director
Appointment
9 March 2015
Committee membership
Remuneration (chair), Audit,
Nomination and Risk
Skills and experience
Lan is currently chief executive
officer of Virgin Money Unit Trust
Managers, a joint venture
between Virgin Money and
Standard Life Aberdeen, having
joined Standard Life Aberdeen as
chief strategy officer in April 2016.
Before this, she spent over ten
years at American Express in a
variety of senior leadership roles.
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 twelve
years at McKinsey & Company,
working primarily in the financial
services sector.
External appointments
Lan is chief executive officer
of Virgin Money Unit Trust
Managers Limited and
non-executive director
of Kings College London.
Board gender diversity
Board tenure
Board balance
Male - 4 (67%)
Female - 2 (33%)
0-3 years - 1 (17%)
3-5 years - 4 (67%)
5-7 years - 1 (17%)
Non-executive
director - 3 (50%)
Chair - 1 (17%)
Executive
director - 2 (33%)
Arrow Global Annual Report and Accounts 2019
5
6
7
55
6. Andrew Fisher
Non-executive director
Appointment
9 December 2016 (Andrew Fisher
became senior independent
director on 28 May 2019)
Committee membership
Audit (chair), Risk (interim chair),
Remuneration, Nomination and
Disclosure
Skills and experience
Andrew, a chartered accountant,
was the finance director of
Provident Financial plc until he
stepped down in December
2018. He has spent over twenty
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.
7. Stewart Hamilton
Company secretary, Group
chief legal and risk officer
Appointment
24 September 2013
Committee membership
Disclosure
Skills and experience
Stewart has over seventeen
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
Stewart is a director of the
Credit Services Association.
5. Maria Luís Albuquerque
Non-executive director
Appointment
7 March 2016
Committee membership
Audit, Nomination and Risk
Additional board role
Board representative for
workforce engagement.
Skills and experience
Maria Luís was Portuguese
minister of state and finance from
2013 to 2015, and deputy minister
for treasury from 2011 to 2013. She
has 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 rail
infrastructure company. She is
an economist who lectured in
Universidade Lusíada of Lisbon
from 1991 to 2006.
External appointments
Member of the European
commission high-level forum on
capital markets union. Chairs the
sub-group focusing on the area
of “Investment choice and
accessibility to capital markets
services to promote greater
retail investors’ participation”.
A member of the advisory
board for INDEG-ISCTE
executive education.
Areas of experience
Strategy
Asset Management
People
Transformation (M&A, Business Turnaround)
Marketing
Debt Markets
Investor Relations
Management Consultancy
Finance
Government/Regulatory
Technology
Financial Services
Non-executive director
Executive directors
0.0
1.0
2.0
3.0
Number of board members with relevant experience
Arrow Global Annual Report and Accounts 2019
Governance 56
1
Executive management team
2
3
4
2. Matt Hotson
Group chief financial officer
Skills and experience
Matt is a highly experienced
finance professional, having
worked for more than
twenty-five years at leading
FTSE100 companies. His
experience spans core finance,
strategy, investor relations and
business leadership. In 2019,
he joined Arrow from RSA
Insurance Group plc, where he
was chief financial officer, UK
and International. Prior to this,
Matt was at Cable and Wireless
Worldwide plc, following
fourteen years at Legal & General
Group plc where he held a variety
of senior finance and business
roles. Matt holds Masters
degrees in Natural Sciences
from Cambridge University and
Neuropharmacology at the
Open University, and is currently
studying for a PhD in Digital
Economics at Exeter University.
1. Lee Rochford
Group chief executive officer
Skills and experience
Prior to joining Arrow, Lee was
chief financial officer at Virgin
Money between 2013 and 2015,
seeing the Group through its
successful IPO and subsequent
Stock Exchange listing. Before
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.
3. Zachary Lewy
Founder and Group chief
investment officer
Skills and experience
Zachary Lewy is the Founder
and Group chief investment
officer of Arrow. Zachary was
the chief executive officer of the
business from its inception until
2011, when his focus changed to
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 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. Clare Dyer
Group chief people officer
Skills and experience
Clare is a highly experienced
strategic and performance-
focused HR director, with a
proven track record within the
digital technology and media
sectors. With more than twenty
years’ experience, her expertise
includes building agile, simple
organisations that deliver
purpose and meaning alongside
profit and growth. Before joining
Arrow in December 2019, Clare
was the HR strategy and
transformation director at BT,
leading a number of enterprise-
wide programmes to transform
the organisation’s operating
model. Prior to BT, Clare was the
chief people officer at KCOM.
Clare is an accredited executive
coach with the International
Coaching Federation, and is
currently studying for a Post
Graduate Certification in
Coaching and Mentoring.
Executive management team gender diversity
Executive management team tenure
Male – 6 (75%)
Female – 2 (25%)
0-3 years – 5 (62%)
3-6 years – 1 (13%)
6+ years – 2 (25%)
Arrow Global Annual Report and Accounts 2019
5
6
7
57
5. Dave Sutherland
Group chief operating officer
Skills and experience
Dave has over twenty years of
experience operating at board
level as chief operating officer
and managing director. Dave
joined Arrow from a fast-growth
SME financial services business,
where he was managing director.
Before this, he was
the chief operating officer at
TD Wealth International. Dave’s
experience includes banking
and financial services, retail,
operations, technology and
process transformation. He was
previously chief operating officer
for Santander Cards UK, chief
operating officer and
transformation director of
GE Money UK 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.
6. Stewart Hamilton
Company secretary, Group
chief legal and risk officer
Skills and experience
Stewart has over seventeen
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. Oliver Stratton
Group chief commercial officer
Skills and experience
Oliver has over seventeen years
experience in financial services.
He joined Arrow in 2013 and has
held various operational and
commercial leadership roles,
including UK chief operating
officer and UK country manager,
before becoming Group chief
commercial officer in 2019. Prior
to Arrow, Oliver spent over ten
years as an investment banker
with Deutsche Bank and a
corporate lawyer with Allen &
Overy LLP in London, specialising
in UK corporate finance and
equity capital markets.
Oliver is a qualified solicitor,
holds an LLB (Hons) from the
University of Sheffield and the
ICAEW’s Corporate Finance
Qualification, and is a member
of the Chartered Institute of
Securities and Investment.
Katie Hutchinson
Chief of staff
Role
Katie provides support and advice to the Group chief executive
officer on strategic priorities and oversight of key cross-functional
strategic projects.
Skills and experience
Katie has eight years experience of working in Financial Services.
Her background is predominantly Finance where she has spent
thirteen years working across a breadth of areas ranging from
external audit to commercial finance. Prior to joining Arrow in
September 2018, she worked for online retailer and financial
services provider Shop Direct, and trained with KPMG.
Katie is a Chartered Accountant and a member of the ICAEW.
She also holds a BSc (Hons) in Internal Management and Modern
Languages (French) from the University of Bath.
Arrow Global Annual Report and Accounts 2019
Governance 58
Corporate governance report
“At Arrow, we recognise
the importance of effective
corporate governance in
supporting the long-term
success and sustainability
of our business. It is critical
to delivering our strategy,
retaining our license to operate
and in creating long-term value
for our shareholders and our
stakeholders generally.”
Jonathan Bloomer
Chair
Corporate governance report
Chair’s governance report
On behalf of the board, I am pleased to present the
Group’s governance report for the year ended
31 December 2019.
The last two years have witnessed wide-ranging
changes for UK corporate governance. The Companies
(Miscellaneous Reporting) Regulations 2018 and the
2018 UK Corporate Governance Code, both of which
became effective for companies in 2019, put the
relationships between companies, shareholders and
stakeholders at the heart of long-term sustainable
growth in the UK economy. The purpose of companies
and their place in society is being redefined with a
clear mandate for boards to demonstrate greater
transparency about how their companies conduct
their business, interact with stakeholders and take
their views into consideration when formulating and
executing their strategy.
At Arrow, we recognise the importance of effective
corporate governance in supporting the long-term
success and sustainability of our business. It is critical
to delivering our strategy, retaining our license to
operate and in creating long-term value for our
shareholders and our stakeholders generally. Strong
and effective corporate governance is at the heart of
Arrow’s business, it is embedded in our purpose, our
values, our vision and above all, our culture. This
commitment is further underpinned by the recent
establishment of an Environmental, Social and
Governance (ESG) working group, which I am the
board sponsor for, and which is supported by formal
terms of reference. More information on Arrow’s ESG
working group can be found on pages 50 to 51.
Statement of Compliance
This corporate governance report, together with the
reports of the audit committee, risk committee,
nomination committee and directors’ remuneration
report, explains how the main principles of the
2018 UK Corporate Governance Code (the Code),
which applies to accounting periods beginning on or
after 1 January 2019, have been applied by the Group in
2019. The Code is available on the Financial Reporting
Council’s website at www.frc.org.uk.
Since 2018, the Group has reviewed its governance
initiatives and programmes and has been working
towards compliance with the Code. During 2019,
Group internal audit undertook a formal review of the
Group’s compliance with the relevant provisions of
the Code. This review concluded that the Company
has complied in full with the provisions of the Code
with one exception. The Code states that there ‘should
be a means for the workforce to raise concerns in
confidence and – if they wish – anonymously.’
Although the Company’s existing Whistleblowing
Policy afforded an individual reporter confidentiality,
it did not provide a mechanism for a concern to be
raised directly and anonymously. Corrective action
has been taken by management and a new externally
supported Whistleblowing Reporting line has been
implemented across the Group in accordance with
the Code, with roll-out across the Group scheduled
for 2020. Furthermore, Maria Luís Albuquerque, an
independent non-executive director and member of
the audit, nomination and risk committees, has been
appointed as the board’s whistleblowing champion,
which the board considered aligned with Maria Luís’s
role as employee champion.
Arrow Global Annual Report and Accounts 2019
59
Stakeholder engagement and the board’s duty
The board recognises the importance of our wider stakeholders
in delivering our strategy and achieving sustainability within our
business. We are always conscious of our responsibilities and duties
to these stakeholders under section 172 of the Companies Act 2006.
We have detailed our stakeholders, how Arrow engages with them
and their importance to our business in the strategic report on pages
42 to 48. In the strategic report we include a statement, describing
how the board has had regard to, and incorporated, the views of
stakeholder groups into its decision-making during the year.
Following the 2019 annual general meeting, I joined the Chair of
the remuneration committee, Lan Tu, in engaging with a number
of institutional investors who had voted against the director’s
remuneration report to better understand their views and voting
decisions. This dialogue demonstrated that the majority of our
shareholders are very supportive of our approach to executive
remuneration. Nevertheless, the board has carefully considered the
feedback from this engagement, and we have sought to address a
number of our investor’s views in this year’s directors’ remuneration
report, further details of which can be viewed on pages 80 to 97.
Workforce engagement
The board recognises that the Company’s success depends on a fully
engaged workforce and culture. In 2019, the board considered the
provisions of the 2018 Code, and in particular, reviewed the three
FRC recommended methods of workforce engagement. Following a
detailed review of the board’s existing mechanisms for engagement,
it was felt that the appointment of a designated non-executive
director for workforce engagement would build on the existing
range of engagement activities that were already in place. In view
of her experience of leading large teams and representing people’s
views in public-facing roles, such as being a member of the
Portuguese parliament, Maria Luís Albuquerque, an independent
non-executive director, was seen as the right director for this role.
Maria Luís has already participated in a number of employee events
and a busy programme of employee visits, forums, keynote events
and online discussions are scheduled for 2020. More detail on Maria
Luís engagement activities can be found on page 69.
Culture
As chair, promoting a culture of openness and debate in the
boardroom is one of my key responsibilities, and as a board we play
an important leadership role in promoting the desired culture
throughout the organisation and in ensuring that we establish good
governance to underpin a healthy culture. Our corporate culture
defines who we are, what we stand for and how we do business.
Maintaining the right culture across the organisation continues to
be a priority for the board. This commitment is underlined by the
establishment of a culture steering group which is led by our Group
chief executive officer, Lee Rochford. Further detail on Arrow’s
culture journey can be viewed on pages 41.
Board changes, succession planning and diversity
There were a number of changes made to the composition of the
board during the year. In March 2019, we announced that after six
years on the board, Iain Cornish would step down as a non-executive
director with effect from 30 April 2019. The search for a replacement
for Iain is ongoing, and we hope to be in a position to update
shareholders on the appointment of a new non-executive director
in due course.
In August 2019 Paul Cooper stepped down as Group chief financial
officer and was succeeded by Matt Hotson, who joined the board
on 8 October 2019. Matt is a highly experienced finance professional
having worked for more than 25 years in leading FTSE100
organisations. His extensive experience spans finance, investor
relations and business leadership.
On behalf of my colleagues, I would like to thank Iain and Paul
for their contributions and to welcome Matt in his new role at Arrow.
Biographical details of all of our directors, and of our executive
management team, are set out on pages 54 to 57.
Succession planning and the development of our talent pipeline
continues to be an area of focus for the board and the nomination
committee to ensure we maintain an appropriate combination of
skills, experience and knowledge to deliver our strategy and to
ensure that plans are in place for an orderly succession to the
board and senior management positions.
Our diversity and inclusion agenda, which is underpinned by our
Diversity and Inclusion Policy, continues to progress. An inclusive
and diverse culture across the business improves effectiveness,
encourages constructive debate and supports good decision
making. In 2019, management defined new gender diversity targets
for 2023 for the senior leadership team, with 50.0% female
representation being the aspirational goal and 40.0% the minimum
threshold. These targets have been reviewed and are supported by
the nomination committee. The board currently has two female
non-executive directors, Lan Tu and Maria Luís Albuquerque, who
together represent 33.0% (2018: 29.0%) female board membership,
which aligns with the recommended target by the Hampton-
Alexander Review for FTSE 350-listed companies. The executive
committee has two female members, Clare Dyer (Group chief people
officer) and Katie Hutchinson (chief of staff), representing 25.0%
(2018: 29.0%) of the committee’s membership.
You can read more on how we strive towards our diversity and
inclusion objectives, and on our approach to talent management
and succession planning in our nomination committee report on
pages 78 to 79.
Board effectiveness review
The board carries out an annual evaluation of its effectiveness.
Having undertaken an external evaluation in 2018, an internal
evaluation was completed in 2019. The results of this review are set
out on page 62.
Conclusion
We are committed to doing the right thing in line with our purpose,
our culture, our values and our vision. We will continue to strengthen
our governance processes over the coming year to ensure that we
are aligned with best practice and the 2018 Code. The corporate
governance report which follows details the Group’s governance
framework under the 2018 Code, the UK Listing Rules and the
Disclosure Guidance and Transparency Rules. I hope that you will find
the report informative and engaging.
Jonathan Bloomer
Non-executive chair
12 March 2020
Arrow Global Annual Report and Accounts 2019
Governance 60
Corporate governance report continued
How we are governed
The Board
The board is collectively responsible for the long-term success of the Group. With due regard to the views of
shareholders and other stakeholders, it provides leadership and direction, including establishing the Group’s
culture, purpose, values and ethics, setting strategy and overseeing its implementation, ensuring only acceptable
risks are taken and being responsible for corporate governance and the overall financial performance of the Group.
The board’s responsibilities include:
• approval of the Group’s strategic aims and objectives;
• approval of the annual operating and capital
expenditure budgets;
• reviewing and monitoring business performance;
• ensuring the Group maintains a sound system of
• ensuring adequate succession planning for the
board and senior management;
• approval of the dividend policy;
• ensuring a satisfactory dialogue with shareholders
based on the mutual understanding of objectives;
internal control and risk management;
• ensuring appropriate oversight of portfolio
• reviewing the Group’s overall corporate governance
arrangements;
investments and disposals; and
• approval of external reporting.
Board composition and roles
Chair
Responsible for the leadership and
management of the board. In
doing so, the chair is responsible
for promoting high ethical
standards, ensuring the effective
contribution of all directors and,
with support from the company
secretary, Group chief legal and
risk officer, best practice in
corporate governance.
The positions of the chair and
Group chief executive officer are
held by separate individuals.
Group chief executive officer
Responsible for the executive
leadership and day-to-day
management of the Group, to
ensure delivery of the strategy
agreed by the board.
Group chief financial officer
Responsible for providing strategic
financial leadership of the Group
and day-to-day management of
the Group’s finance function.
Independent non-executive
directors
Responsible for contributing sound
judgement and objectivity to the
board’s deliberations and overall
decision-making process,
providing constructive challenge,
and monitoring the executive
director’s delivery of the strategy
within the board’s risk and
governance structure.
Non-executive directors are
appointed for periods of three
years, subject to annual re-election
by shareholders at the Company’s
annual general meeting. Terms in
excess of six years are subject to a
more rigorous review. The
non-executive directors meet
periodically without the executive
directors present.
Senior independent director
Acts as a sounding board for the
chair and serves as a trusted
intermediary for the other
directors, as well as shareholders
as required.
Group executive directors
Responsible for executive
leadership and day-to day
management of relevant
business units in support of the
Group chief executive officer and
delivery of the strategy agreed
by the board.
Company secretary
Adviser to the chair and the board
on matters of corporate
governance, induction, training
and efficient management of the
board and committee meetings.
Responsible for ensuring the
effectiveness of Arrow’s
governance framework.
Read more about our committees:
Audit
committee
See page 70
Nomination
committee
See page 78
Risk
committee
See page 76
Remuneration
committee
See page 80
Arrow Global Annual Report and Accounts 2019
61
Your board in 2019
How the Board spent its time (%)
18
20
15
12
10
25
Board activity
During the year, the board considered a comprehensive and
structured programme of matters covering operational and
financial performance reporting, strategic reviews and updates,
and a number of governance reports and matters seeking
board approval.
In addition, the board and board committees undertook a
programme of deep dives into specific operations and topics.
These discussions included:
Strategy
Governance and risk
Operational
People
Financial
New business/Products
New business/Products
• Launch of NPL Fund and Fund Management business
Strategy
• Acquisition of Drydens Limited
• Oversight of a Group-wide cost efficiency programme
• Monitoring operational performance against
2019 strategic goals
Governance and risk framework
• Overview of Group compliance with new UK Corporate
Governance Code
• Review and approval of committee terms of reference and matters
reserved for the board
• Review of the implementation of the Senior Managers and
Certification Regime
• Reviewing and approving the 2018 statement of compliance with
the Modern Slavery Act
• Approval of notice for the 2018 annual report and associated
documentation
Operational
• Implementation of a Group change programme
• Country deep dives
• Consideration of the Group customer agenda.
People
• Review of the Group’s approach to diversity and inclusion.
• Talent and leadership reviews
• Review of the Company’s culture and creation
of a Group culture statement
• Review of the Group’s approach to engaging with the workforce
Financial
• Approval of 2019 budget and consideration of 2020 budget
• Approval of the 2018 full year dividend and
2019 Interim dividend.
• Establishment of an asset-backed security facility
Attendance by board members and board and committee meetings is detailed below:
Director
Jonathan Bloomer
Lee Rochford
Iain Cornish
Lan Tu
Maria Luís Albuquerque
Andrew Fisher
Paul Cooper
Matt Hotson
Board
Audit
Risk
Nomination
Eligible
to attend
10
10
4
10
10
10
7
2
Attended
10
10
4
10
10
10
7
2
Eligible
to attend
N/A
N/A
1
4
4
4
N/A
N/A
Attended
41
41
1
4
4
4
31
11
Eligible
to attend
N/A
N/A
2
5
5
5
N/A
N/A
Attended
51
51
2
5
5
5
31
21
Eligible
to attend
5
N/A
1
5
0
5
N/A
N/A
Attended
5
31
1
5
51
5
N/A
11
Remuneration
Eligible
to attend
3
N/A
1
3
3
3
N/A
N/A
Attended
3
21
1
3
3
3
11
N/A
1. Attended by invitation of the committee chair.
Arrow Global Annual Report and Accounts 2019
Governance
62
Corporate governance report continued
Board evaluation 2019
Review of the effectiveness of the board and its committees
The board recognises the importance and benefits that continually monitoring its performance can bring to the
board’s overall effectiveness. The performance and effectiveness of the board and its committees is formally
reviewed on an annual basis. The Corporate Governance Code provides that FTSE 350 companies undertake an
externally facilitated board review at least once every three years. In 2018, the evaluation of the board’s
effectiveness was facilitated by an external provider and the output of this process was distilled into a number
of actions, all of which were addressed in 2019.
The 2019 board and committee effectiveness review were facilitated internally by way of a questionnaire.
The process that was followed for this review and the actions flowing from it, are set out below.
Process
Outcomes
Action plan
Stage 1
Each director and the
company secretary
completed a detailed online
questionnaire prepared by
the Group secretariat
function. The questionnaire
covered a number of key
themes, including: strategy,
stakeholder engagement,
risk, board behaviours,
culture, talent and
succession.
Stage 2
Group secretariat collated
and analysed the responses
and a report was prepared
and shared with the chair.
Stage 3
The results were presented
and discussed with board
members in November 2019.
An action plan, detailing
focus areas, was discussed
and agreed.
The evaluation highlighted that the board
works well together as a cohesive and
dynamic team. There is a constructive
relationship between the executive and
non-executive directors, with appropriate
levels of challenge and support in evidence
when issues are debated in the boardroom.
Board members acknowledged that as the
Group continues to grow and diversify,
particularly following the creation of the
Group’s Fund Management business, that
the composition of the board may need to
increase to ensure sufficient diversity of
thinking and expertise.
The outcome of the board evaluation on
strategic formulation and the translation
of this into action was positive, it being
acknowledged that a significant level of
focus was placed on the launch of the
Fund Management business in 2019.
When discussing the findings of the review,
the board considered its performance
generally and was particularly pleased with
the work undertaken throughout the year
on the development of the Group’s culture
statement, together with the increased levels
of engagement with the wider workforce.
The board concluded that the board and its
committees continued to discharge their
duties and responsibilities effectively.
The board identified a number of
opportunities to improve the way it
operates, some of which are detailed in the
action plan for 2020.
1. Continuing the review and
enhancement of board papers
and presentations to enable
effective and high-quality
debate, input and challenge
at board meetings.
Responsibility: Chair and
Group chief legal and risk
officer and company secretary
2. Regular reviews of the
composition of the board,
particularly following the
development of the
Company’s Fund Management
business, to ensure sufficient
diversity of thinking and
expertise on the board
following the expansion
of the Group.
Responsibility: Chair
and Group chief legal and risk
officer and company secretary
3. Incorporating a programme
of deep dive reviews into the
board and committee work
programme to ensure the
board is focused on issues
that are material to the Group.
Responsibility: Chair and
Group chief legal and risk
officer and company secretary
Chair’s performance
The Senior independent director, Andrew Fisher, led a meeting of the non-executive directors (without the chair
being present) to appraise the chair’s performance. Andrew then discussed the feedback and any areas of
development with the chair.
Arrow Global Annual Report and Accounts 2019
63
Board contributions 2019
Directors delivering Arrow’s success
Individual director contributions throughout the year are set out below. The chair held performance meetings with each director to discuss
their individual contribution and performance over the year and their training and development needs. Following these meetings, the chair,
on behalf of the board, has confirmed that 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 2020 annual general meeting in relation to the election and re-election of the directors.
Jonathan Bloomer MBE
Non-executive chair
Jonathan has led the board through a period of significant
diversification, structural realignment and the launch of a Fund
Management business. As chair of the nomination committee,
Jonathan has overseen the development of the Group’s aspirational
culture statement and the review of the Group’s diversity and inclusion
policy, resulting in an increased target of 40% female representation
within the senior leadership team by 2023. He also led a rigorous
search and selection process leading to the appointment of Matt
Hotson. Jonathan is the board’s sponsor and oversees the Group’s
broad spectrum of Environment, Social and Governance initiatives.
Andrew Fisher
Non-executive director
Andrew’s wealth of financial experience and strength of challenge
continues to be invaluable to the board. During the year, Andrew
was appointed as senior independent director, in which he acts as
a sounding board for the chair and the other directors. Andrew also
took on the role of interim chair of the risk committee in April 2019
following the departure of Iain Cornish and has led the committee
in overseeing the embedding of new risk management systems
across the Group that will provide a consistent approach to risk and
control self-assessments and incident management , furthering the
development of our risk culture across all three lines of defence.
In his role as Chair of the audit committee, Andrew has led the
committee through the review of the accounting for the acquisition
of Drydens Limited, 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.
Lan Tu
Non-executive director
Lan led the remuneration committee throughout 2019 and was
actively involved in the investor engagement programme following
the 2019 annual general meeting. In conjunction with senior
management, Lan has overseen the development of a programme to
incentivise, motivate, reward and retain key talent within the Group.
Lan also played a key role in setting the remuneration for the new
Group chief financial officer, Matt Hotson, and in overseeing the exit
arrangements in relation to his predecessor, Paul Cooper. She has
also overseen the new compensation arrangements in respect of the
Fund Management business and has led the committee through its
review of the wider workforce pay arrangements.
Maria Luís Albuquerque
Non-executive director
Following her appointment as the board’s employee engagement
champion in 2019, Maria Luís has been active in ensuring that
employees across the Group feel engaged with the Company and
that their views are being listened to and understood by the board.
This has included visiting the majority of the Group’s businesses and
leading engagement sessions with the board, as well as attending
roadshows with the executive management team to discuss the
aspirational culture of the Group. Maria Luís also represented the
board at the Annual Gala Dinner in Porto, recognising winners of
the Employee Recognition Scheme throughout 2019. These
contributions underpin the board’s people agenda in fostering an
environment of continuous employee engagement and supports
the Group’s initiatives to ensure that the best talent is attracted
and retained.
Lee Rochford
Group chief executive officer
Lee has led the Group through a significant year of change in terms
of the reorganisation of the business structure and the launch of the
new Fund Management business, including the successful first fund
raising. As well as driving the strategic decision agenda, Lee has
developed and implemented the Group’s new aspirational culture
statement throughout the business. This puts culture at the heart
of the Group’s strategy, and focuses on delivering positive customer
outcomes, and creating an entrepreneurial environment where
talented employees can thrive. Lee has also supported the Group’s
new chief financial officer, chief commercial officer and chief people
officer in their integration into the organisation and the executive
management team.
Matt Hotson
Group chief financial officer
Matt joined the business in July 2019 as Group chief financial officer.
Since joining, Matt has driven the Group’s cost efficiency programme
and supported the Group chief executive officer in the development
of the new Fund Management business. Matt initiated, and is now
leading, a Group-wide finance and reporting transformation
programme that will provide greater levels of insight, increased
control and reduced reporting timelines through increased
efficiency. This will support the delivery of the Group’s strategy by
strengthening the control environment and by producing higher
quality information and analytics thereby enabling a better
understanding of the commercial drivers of the business and
enhanced strategic decision-making.
Arrow Global Annual Report and Accounts 2019
Governance 64
Corporate governance report continued
The board – Leadership
Board meetings
The board discharges its responsibilities through an annual
programme of board and committee meetings which are held at
various operational sites of the Company. In 2019, the board held
10 scheduled meetings and visited the Company’s offices in London,
Milan, Lisbon, Glasgow and Amersfoort. Ad hoc conference calls and
meetings were also convened to deal with specific matters which
required attention between scheduled meetings.
During the year, the non-executive directors, including the chair,
met periodically without management 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 page 54. The board is satisfied that each
non-executive director is able to dedicate the necessary amount
of time to the Company’s affairs.
Disclosure committee
The disclosure committee is made up of the Group chief executive
officer, the Group chief financial officer, the senior independent
director and the company secretary. The committee is chaired by
the Group chief executive officer, however the senior independent
director typically chairs committee meetings that consider the
disclosure of the Company’s financial results. 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
assist the Company and the Group in ensuring timely and accurate
disclosure of all information where disclosure is required to meet
legal and regulatory obligations.
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.arrowglobal.net).
Directors independence and conflicts
All of our non-executive directors are considered to be independent
against the criteria in the Code and free from any business interest
which could materially interfere with the exercise of their judgement.
In accordance with the Companies Act 2006, the Company’s Articles
of Association and Company policy, directors are required to report
actual or potential conflicts of interest to the board for consideration
and, if appropriate, authorisation. If such conflicts exist, directors
recuse themselves from consideration of the relevant subject matter.
The Group maintains a schedule of authorised conflicts of interest.
See also related party transactions note 22.
Directors’ induction
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. On completion of the induction programme, all new
directors should have sufficient knowledge and understanding of the
business to effectively contribute to strategic discussions and the
oversight of the Group.
Matt Hotson undertook a thorough induction process leading up to
his appointment to the board on 8 October 2019. The process included:
• a detailed handover from Paul Cooper (the outgoing Group chief
financial officer);
• one-to-one meetings with the members of the executive
committee to discuss the Group’s business, strategy and operations;
• site visits were undertaken;
• meetings with the Group’s key external advisors, including its
external auditors, KPMG, and brokers, J.P. Morgan and Numis; and
• meetings were held with various senior managers across the
Group and Matt spent a significant amount of time with the Group
finance function and local finance leaders.
Continued professional development undertaken during the year
Ongoing training is provided for all directors, as necessary. This
includes formal and informal briefings, meetings with management
and visits to the Group’s operations.
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
Arrow Global Annual Report and Accounts 2019
65
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.
would threaten its business model, future performance, solvency
or liquidity. These are documented on pages 31 to 38 of the
strategic report, with an explanation of how these are being
managed or mitigated.
Board diversity
Arrow recognises the benefits of diversity and inclusion in all its
forms, at board level and throughout the Group.
As at 31 December 2019, 33.0% of the board were women, which
aligns with the recommended target by the Hampton-Alexander
Review for FTSE 350-listed companies and comprised directors with a
wide range of backgrounds and experience. The Group supports the
recommendations of the Hampton-Alexander and Parker Reviews in
relation to gender and ethnic diversity and is continuing to develop
the skills, experience and knowledge of a diverse pipeline. Our
nomination committee is committed to promoting a diverse blend of
skills, backgrounds and perspectives on the board as well as ensuring
that the best candidate for each position is appointed. Further details
on the Committee’s activities in this regard ,including the new
gender diversity targets for the senior leadership team, are set out in
the nomination committee report on pages 78 to 79.
Site visits
While the major part of the board’s work is conducted around the
boardroom table, directors recognise the importance and benefits
to be gained by visiting the Group’s operations. During 2019, the
board visits included the Group’s operations in Milan, Glasgow,
Lisbon and Amersfoot. Each visit comprised a site tour, an employee
engagement session, a presentation by local senior leaders followed
by a board dinner.
Accountability
Adequacy of risk management and internal control systems
The board has overall responsibility for monitoring risk management
and internal controls, and for reviewing their effectiveness and delegates
certain responsibilities to the audit and risk committees. The Code
requires that the board should, 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 Group’s 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 the in-house internal audit function, and support provided by
Deloitte LLP in specialist areas. During the year, the board, supported
by the risk committee, carried out a robust assessment of the
principal and emerging risks facing the Group, including those that
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 £20.0 million in investment value are
escalated to the board for approval. The processes and controls
are documented in a governance and delegated authority manual.
• A strong risk and compliance framework supported by the
enterprise wide risk management framework, risk committees and
maintenance of the Group, country and departmental risk registers.
• Regular monitoring of portfolio performance, overseen by the
portfolio review committees. This considers actual versus forecast
results, focuses on significant individual portfolio variances,
forecasts cash flows on a six-monthly basis, signs off the latest ERC
forecast, assesses the carrying value of the portfolio assets and
reviews revenue 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 its
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 and received a report
on the same from the head of internal audit. The assessment for 2019
involved oversight of the respective risk management and internal
control systems from across the Group, including the Group’s
operating subsidiaries in the UK, Portugal, Italy, the Benelux
countries and Ireland. There were no material failings or weaknesses
identified following the committee’s review. Based on the audit
committee’s recommendation, the Board concluded that, overall,
the Group’s risk management and internal control systems were
adequately effective.
The board is satisfied that the Group’s risk management framework
provides assurance and evidence that the Group’s principal and
emerging risks are understood and are being appropriately
managed, whilst acknowledging that with continued growth in
existing geographic territories and the creation of the new Fund
Management business, together with exposure to increasing levels
of client expectation and regulatory scrutiny, the expected standards
of risk management continue to increase.
Arrow Global Annual Report and Accounts 2019
Governance 66
Corporate governance report continued
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 and the level of non-audit
fees and audit-related assurance services provided by the external
auditor for the year can be seen in the audit committee report
on page 70.
Internal audit function
The audit committee was responsible for monitoring and reviewing
the effectiveness of internal audit activities in 2019. Further detail on
the internal audit function and its activities can be found in the audit
committee report on pages 72 to 75.
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 reviewed approximately 275 portfolios in 2019,
with approximately 75 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
£10.0 million and any transaction over £20.0 million. Based upon
recent performance, the board will be asked to consider circa four to
five transactions per annum. In 2019, the board approved, amongst
others, the acquisition of Drydens Limited.
Bribery Act compliance
The Group has anti-bribery and corruption policies and standards
available to all its employees. There is a summary of the policy
complying with the provisions of the UK Bribery Act available on the
Company’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. Regular training on the policy and the principles outlined
therein is provided to all staff.
Remuneration
In line with the Code and the 2013 Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008,
details on remuneration including the annual report on
remuneration to be approved at the 2020 annual general meeting,
can be seen on pages 83 to 84.
Relations with shareholders
Management, together with members of the board, engaged with
investors throughout the year in a number of ways as part of a
comprehensive investor engagement programme. Key activity in the
year included:
• results and marketing roadshows in the UK and internationally
to meet current and prospective shareholders;
• an ongoing programme of one-to-one and Group investor and
analyst meetings hosted by management and the head of investor
relations;
• management and the head of investor relations attending industry
conferences and presenting to investor audiences; and
• annual dinner hosted by the chair, with members of the executive
management team in attendance, for the Group’s major
shareholders.
The views of these investors are communicated to the board by the
chair and executive directors on a regular basis. Copies of analysts’
and brokers’ briefings, together with reports on institutional
feedback on the Group and its performance, are circulated to the
board. The chair is also 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.
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 102 for information on the 2020
annual general meeting. The notice of meeting and annual report will
be sent out at least 20 working days before the meeting. The chairs
of the audit, risk, remuneration and nomination committees attend
and are available to answer questions.
This report was approved by the board and signed on its behalf by:
The Group considers itself to have adequate procedures within
the meaning of the MOJ Guidance. The Group chief legal and risk
officer has primary and day-to-day responsibility for implementing
this policy.
Stewart Hamilton
Company secretary
12 March 2020
Arrow Global Annual Report and Accounts 2019
67
Wider stakeholder
engagement statement
How the board discharges its duties
under Section 172
The directors are fully aware of their responsibilities to
promote the success of the Company in accordance
with section 172 of the Companies Act 2006.
Arrow’s license to operate relies, to a large extent, on
how the business is perceived by its stakeholders, and
specifically its customers, its clients, its employees, the
communities in which it operates, its regulators and the
wider industry, and its shareholders. The board manages
and maintains this license to operate by understanding
and responding to its stakeholders’ needs. Regular
engagement with stakeholders enables the board to
define and refine the Group’s strategy and ensure that
the Group delivers relevant services that meet the needs
of its clients, its customers and its wider stakeholders,
thereby supporting long-term value creation.
Fundamental to the board discharging its
responsibilities under section 172 are the governance
processes which support the board’s decision-making.
The chair, Group chief executive officer and the
company secretary ensure that the board’s decision
making is sufficiently informed by section 172 factors.
All board and committee papers and proposals include
comprehensive discussion regarding section 172
factors and the board’s debate and decisions are
documented in the minutes of the meetings. Wherever
possible, the board is provided with external assurance
on the integrity of the information it receives on
stakeholder engagement.
However, the board recognises that there is no room
for complacency in this area. With this in mind, a
review has been initiated by the company secretary
Acquisition of Drydens Limited
to ensure that the board’s reserved matters, and the
terms of reference of each committee, capture the
requirements of section 172 and that policies and
practices are in place to ensure that any decisions
delegated by the board, via the delegated authority
framework, give sufficient consideration to section
172 factors. Refresher training for the board and senior
management on directors’ duties under section 172 is
also scheduled for later in the year and it is planned to
extend this education programme across the Group.
Stakeholder interests are at the heart of every strategic
and operational decision taken by the board. For
example, the need to foster the Company’s business
relationships with its suppliers is evidenced by the
board’s detailed review and approval of the Company’s
2018 Modern Slavery Act (MSA) Statement. The board
reviewed the MSA Statement in April 2019 and
considered that the actions being taken by the Group
to identify and/or address any potential modern
slavery or human trafficking within its supply chain to
be appropriate in ensuring that any risks are
highlighted and mitigated accordingly. This includes
assessing the practices of the Group’s existing supply
chain and providing training to our employees to assist
with the identification of slavery-related risk factors.
The board is pleased to report that the assessments
undertaken in respect of the Group’s supply chain to
date have not identified any modern slavery or human
trafficking activity.
Set out below are examples of how the directors have
had regard to the matters set out in section 172 when
discharging their duties, and the impact of this regard
on the board’s decision-making.
In reviewing a proposal to acquire Drydens Limited
(DL), a specialist litigation and insolvency advisory firm,
the board considered the strategic fit with Arrow, the
history of DL, its product offering, its client base, the
migration plan, its operational capabilities, its
relationship with the Solicitors Regulation Authority
and the Financial Conduct Authority as its joint
regulator and the opportunities for efficiencies and
savings. Arrow has been a client of DL since 2006.
The risks and opportunities associated with the
transaction were discussed. The board considered the
impact of the proposed acquisition on a number of
stakeholders, including clients, employees and Arrow’s
UK panel solicitor firms who would be affected by the
in-sourcing of accounts.
A comprehensive account migration plan to mitigate
these stakeholder risks and impacts was reviewed and
agreed by the board.
The board also recognised that DL complemented the
overall Arrow customer journey ensuring consistent
policies, processes and outcomes within the UK market.
The consolidation of all the Group’s UK activity into one
firm, owned by the Group, ensured a much more
transparent and well controlled approach to managing
the risks around litigation and ensuring consistency of
treatment for customers in the litigation process.
The board concluded that DL was a well-respected
brand in debt recovery, litigation and insolvency, with
a broad range of capabilities, a diverse client base, a
motivated workforce, and a scalable platform. The
board was also satisfied that all potential and relevant
stakeholder issues and impacts had been considered
and appropriate mitigating actions put in place. The
transaction, which would benefit clients and
employees and be value accretive for Arrow and its
shareholders, was approved.
Arrow Global Annual Report and Accounts 2019
Considering
stakeholders in
decision making
Governance 68
Wider stakeholder engagement statement continued
Considering
stakeholders in
decision making
Considering
stakeholders in
decision making
Fund raising for inaugural pan- European Non-Performing Loan (NPL) Fund
In December 2019, the board approved the launch
of a €838.0 million pan-European NPL Fund, with
€628.5 million of the total sum subscribed by third-
party investors. This represents a key achievement
in the development of Arrow’s Fund Management
capabilities and is central to the Group’s strategy of
transforming the business towards a more capital light
model. The Fund launch is expected to generate the
following benefits for Arrow and its stakeholders:
• Fund Management businesses are high margin and
capital light delivering strong recurring revenues;
• The Fund launch will accelerate the achievement
of Arrow’s five-year targets while also providing
investors with access to a specialist and attractive
asset class through Arrow’s leading pan-European
platform;
• Faster reduction in leverage as a result of the
co-invest structure of the Fund;
• Increased future flexibility around Arrow’s capital
structure; and
• A scalable opportunity to grow capital light asset
Asset Management and Servicing activities by
offering these services to the Fund.
In advance of the Fund launch, the board undertook
extensive financial, operational and governance-
related due diligence on the proposed transaction.
In addition, the interests of a variety of stakeholder
groups (including potential investors, employees and
shareholders) were considered.
For example, when reviewing the design of the
governance structure for the Fund, the board
recognised the need for sensitivity in respect of the
required separation of the Investment Management
business and the interests of the Limited Partners as
investors in the Fund. The importance of ensuring
that the governance framework surrounding the
Fund provides the requisite comfort for investors and
regulators was also viewed as imperative by the board.
The impact of the Fund launch on employees,
particularly personnel employed by an Arrow entity
who would perform a dual role by also supporting
Fund entities, was also taken into account.
In addition, the board discussed at length the interests
of Arrow shareholders and, through scenario analysis
and modelling, assessed the potential impact of the
Fund launch on the Arrow share price.
Implementation of a Group Change Programme
The board recognised the need to simplify Arrow’s
operations after a series of acquisitions and the
importance of realigning the geographic cost base
to future market opportunities. In addition, the board
acknowledged that in order to scale the business to
an institutional standard there was a need to drive
accountability into the business and adjust central
oversight accordingly.
Therefore, a key priority for the board during the year
was to oversee the planning and implementation of a
change programme (the Programme) across the
Group’s businesses in the UK, Ireland, the Netherlands,
Italy and Portugal, the overriding objectives of which
are to:
• Design and deliver a more effective operating model
for the Group based around pan-European business
functions, moving away from country and entity
specific businesses;
• Establish clear accountability for all business and
central support activities, with a performance
driven focus and streamlined governance and
decision making;
• Create the conditions to drive more effective
collaboration, co-ordination and consistency across
the Group with an inherently interdependent
organisational design;
• Enable the scaling of the Group in a well controlled
and managed way to meet the future demands of
Arrow’s new Fund Management activities and the
needs of third-party investors;
• Streamline and improve the effectiveness and
efficiency of the central support functions,
removing duplication and improving standards; and
• Create opportunities for talented individuals across
the Group to take new roles with wider remits.
The board received regular updates throughout the
year on the Programme. In addition to reviewing the
expected performance and efficiency benefits, the
board considered at length the potential impact that
the Programme would have on all stakeholders
including the Group’s employees, regulatory bodies
and wider communities in which Arrow operates.
The internal communications plan supporting the
Programme was also regularly reviewed and adapted
to ensure clear, concise messages were conveyed to all
stakeholder groups across multiple different formats.
The cultural and behavioural elements of the
Programme were key focus areas for the board. The
importance of fostering a ‘One Arrow’ culture and at
the same time promoting performance-orientated and
collaborative behaviours across the organisation were
acknowledged by the board to be key drivers of the
Group’s long-term success.
Following a series of discussions and presentations, the
board concluded that the Programme is integral to the
Group’s SMART Strategy and building a differentiated
business model.
Arrow Global Annual Report and Accounts 2019
69
Considering
stakeholders in
decision making
Building Better Financial Futures for our Customers
The board considered updates on the Arrow customer
experience in order to assess the Group’s progress in
meeting its ambition of creating better financial
futures for its customers and improving the Group’s
commercial results. In particular, the board discussed:
• The initiatives and measures being developed across
the Group to improve the outcomes for customers
and the Company;
• The opportunities to improve the customer
experience;
• The opportunities to implement best practice
initiatives consistently across all of the Arrow Group
geographies;
• A new Customer Policy requiring all Arrow
businesses to adopt a clear road map to adhere to
standards and commitments to customers and
guiding principles for collections activity;
• A set of key customer-focused actions that had
been agreed in the Arrow customer forum; and
• The implementation and monitoring of new
customer outcome key performance indicators to
ensure that Arrow performs against its customer
ambitions. The board was very supportive of the
initiatives underway to improve the Arrow customer
experience. In addition to these measures,
management was requested to:
• Provide quarterly updates to the board on progress
achieved against the roadmap of customer
initiatives together with the improvements to the
customer experience that flow from it;
• Deliver greater consistency and automation around
customer affordability checks; and
• Consider how the Group can further promote and
develop financial literacy among its customers.
In concluding its review, the board reiterated its
commitment to building better financial futures for its
customers and in treating customers fairly since this
would, at the same time, deliver the right commercial
outcomes for Arrow.
“Making sure our
employees have an
independent voice
at the board is my
privilege, and I’m
delighted with my
appointment.”
Maria Luís Albuquerque,
Non-executive director
Employee Engagement Mechanism: Hearing the employee voice in the boardroom
I am delighted to be appointed as the board’s lead on
employee engagement. My previous experience in
leading large teams, as well as in public-facing roles,
(including as a Member of the Portuguese Parliament),
means I’m well acquainted with representing different
perspectives and continue to have open dialogue with
employees around the Group.
In September 2019, I attended our Senior Leadership
Conference (SLC) in Dublin, alongside our chair,
Jonathan Bloomer, and spent time engaging with
our 100 most senior leaders. Jonathan took this
opportunity to speak about the importance of culture
and why it is a priority for the board. Following the
SLC, a SMART roadshow was subsequently rolled out
across the Group, hosted by the executive team,
covering eight locations, 12 presentations and 2,500
employees. I attended the Manchester and Lisbon
roadshows, which gave me the opportunity to meet
our dedicated Values Champions and understand
important issues that were highlighted for the board’s
attention. Common themes included how our values
remain central to our decision making and the
importance of sharing best practices to enable us
treat customers fairly.
Our newly formed culture steering group, and our
Customer Forum are great examples of teams coming
together with a common aim – to improve customer
service. I would like to thank our dedicated Values
Champions for promoting our values, which they do
in addition to their day jobs.
Most recently, I attended WhiteStar’s Christmas Gala
in Lisbon and our annual Values Gala dinner in Porto,
where we celebrated the behaviours that have made
our business successful and meeting 80 ERS winners
and 60 Values Champions during the occasion. During
these events what struck me most, apart from the
dedication of our people, was their openness and their
willingness to raise issues that are important to them,
including vulnerable customers, recognition and
professional development.
During each visit to an Arrow operation, I chair a
session attended by Arrow’s non-executive directors
(NEDs) and employee representatives to enable NEDs
to better understand the views and of employees. At
the board meeting that follows, I brief the board on the
issues raised and a broad discussion of the key themes
occurs. Feedback is then provided by the board to local
senior management who are tasked with considering
how the issues raised by their employees might be
best addressed. On a periodic basis, I revisit these
operations to assess how the issues are progressing.
Issues raised at engagement sessions to date include
future business strategy, the implications of Brexit,
intra-group secondments and employee remuneration.
Future plans include visiting overseas sites, learning
more about our employee engagement forums,
attending keynote engagement events and working
hard to ensure the board continues to have an open
dialogue with employees from around the Group.
Arrow Global Annual Report and Accounts 2019
Governance 70
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.”
Andrew Fisher
Chair of the audit committee
Audit committee report
Members
Andrew Fisher (Chair)
Lan Tu
Maria Luís Albuquerque
Progress in 2019
• Accounting for the
acquisition of
Drydens Limited
• Embedding and
expansion of the
in-house internal
audit function
Focus for 2020
• Accounting
judgements linked to
the Fund Management
business
• Embedding new
controls and processes
related to the Fund
Management business
Dear Shareholder
I am pleased to provide a report of the audit
committee’s activities in 2019.
The principal issues on which the committee focused
in 2019 are set out in this report. They include the
measurement of purchased asset portfolios and
investments based on estimated future cash flows,
a review of the acquisition accounting of Drydens
Limited (including the fair value of net assets
acquired), the valuation of goodwill, the continued
embedding of IFRS 9 and implementation of IFRS 16.
In addition to its ordinary course of work programme,
the committee has overseen the Company’s
engagement with the Financial Reporting Council
(FRC) following receipt of a notification that the
Group’s annual report and accounts made up to
31 December 2018 had been selected as one of the
entities which would be reviewed as part of the FRC’s
ongoing programme of work in this area. Further detail
on this can be found on page 71.
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.
The committee’s effectiveness was considered as part
of the board evaluation process, further detail of which
can be found on pages 62 to 63, and I am pleased to
report that the committee was viewed as operating
effectively throughout the year and no significant
areas of concern were identified.
Responsibilities of the audit committee
The committee’s principal responsibility is to monitor
the Group’s financial reporting process and the
integrity of the Group and Company financial
statements and reviewing any significant financial
reporting judgements contained therein. In addition,
the committee also reviews the effectiveness of the
Group’s internal controls and risk management
systems, and the role and effectiveness of the Group
internal audit function and the external auditor.
The committee is also responsible for (amongst
other things):
• Oversight and approval of the scope and fee for the
audit and monitoring the Group’s compliance with
the non-audit fees policy;
• Assisting the board in assessing the Group’s ongoing
viability, including the basis of the assessment and
the period of time covered;
• Approving the Group internal audit plan on an
annual basis; and
• Assessing the independence and objectivity of
the external auditor.
Arrow Global Annual Report and Accounts 2019
71
Composition of the audit committee
For meetings held in 2019, the committee was comprised of the
following members: Andrew Fisher as chair, Lan Tu, Maria Luís
Albuquerque and Iain Cornish who resigned on 30 April 2019. The
committee met four times in 2019 at the appropriate times in the
financial reporting and audit cycle. The attendance of our members
is shown in the table.
During 2019, the committee also met separately with representatives
of the external auditor, KPMG LLP, and the head of the internal audit
function without any management present.
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 judgemental 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 2019:
Committee members
Andrew Fisher (chair)
Lan Tu
Maria Luís Albuquerque
Iain Cornish1
Eligible to attend
4
4
4
1
Attended
4
4
4
1
• 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;
1.
Iain Cornish resigned as a member of the committee on 30 April 2019.
The members of the committee are all independent non-executive
directors and the board has determined that Andrew Fisher has
recent and relevant financial experience, together with competence
in both accounting and auditing. All committee members have
extensive general business and management experience, which can
be seen from their biographies set out on pages 54 to 57, and the
board has determined that the committee, as a whole, has
competence relevant to the sector in which the Group operates.
Regulatory Oversight
During the period, the Group received communication from the FRC,
which stated that they had chosen to perform a review of the Group’s
annual report and accounts made up to 31 December 2018, and that
they had a number of questions for the Group in order to help them
understand how the relevant reporting requirements had been
satisfied. The FRC notes that its review was based on the Group’s 2018
annual report and accounts only and does not benefit from detailed
knowledge of the Group’s business or an understanding of the
underlying transactions.
The questions raised by the FRC included the following key areas:
interests in unconsolidated structured entities; disclosures under
IFRS 7 – Financial Instruments; disclosures; intercompany balances;
investment in subsidiaries and goodwill; estimation uncertainty
disclosures; and contingent consideration. Management provided a
detailed response to these questions and have also responded to a
small number of follow up questions, which the committee reviewed,
with a focus on the accuracy and balance of the response. Certain
disclosure enhancements committed to in our response have been
made in the 2019 annual report and accounts, including note 27 to
the accounts, relating to unconsolidated structured entities and the
associated accounting judgements made, additional disclosures in
relation to our portfolio assets held at amortised cost, enhancements
to the descriptions of accounting policies and additional commentary
where appropriate.
• 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 the Group internal audit function, and KPMG
as external auditor.
External auditor
Appointment and effectiveness of the external auditor
KPMG, the Group’s external auditor, was appointed in July 2014
following a comprehensive and competitive tender, the lead audit
partner is Alexander Simpson who was appointed in September 2018.
It is the Group’s policy to ensure that at least once every ten years the
external audit contract is put out to tender to enable the committee
to compare the quality and effectiveness of the services provided by
the incumbent external auditor with those of other external audit
firms. The reappointment of the external auditor is considered by the
committee annually, which includes an assessment of its performance
in the previous year, together with the independence of the external
auditor.
Independence and objectivity
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. The
committee has assessed the performance and independence of the
external auditor and recommended to the board the re-appointment
of KPMG.
Non-audit services
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. 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.
Arrow Global Annual Report and Accounts 2019
Governance 72
Audit committee report continued
External auditor continued
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 70.0% 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.
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 58 to 69 of the corporate governance
report relating to the Group’s systems of internal control and its
management of risk are appropriate.
As part of the review of the effectiveness of the internal audit function,
the committee reviewed the department’s resources, work
programme and management’s implementation of required actions,
The head of internal audit provided an overview of the internal audit
team’s performance during the year to the committee, which detailed
performance against key performance indicators and highlighted
certain areas for improvement with actions to address these. The
committee concluded that the internal audit function was effective.
The policy was last reviewed in November 2019.
The fees paid to KPMG LLP for non-audit work during the year were
£227,000, comprising £100,000 for the Interim accounts review,
£54,000 related to specific structured entity process assurance in
Italy, £53,000 related to compliance and monitoring agent work in
Portugal and £20,000 for work relating to the asset-backed
securitisation transaction. The ratio of non-audit fees to the average
of the last three years’ audit fees during the year was 19.5%.
The audit committee has concluded that the provision of non-audit
services to date has not compromised external auditor independence
and objectivity.
Group internal audit
The Group has operated an in-house Group internal audit function
since January 2019 that is managed by the Group head of internal audit
who was appointed in November 2018. The Group head of internal
audit reports to the committee on the work of the Group internal audit
function at each meeting of the committee, and reports directly to the
chair of the committee whom he meets not less than six times per year.
In 2019, the committee carried out the following:
• reviewed and approved the internal audit plan which defines the
scope of work that internal audit function will carry out;
• reviewed results from audits performed, having scrutiny over
unsatisfactory audit findings and related action plans;
• reviewed open audit actions, together with monitoring progress
against the actions;
• reviewed Group internal audit’s self-assessment of their
performance during the year;
• reviewed Group internal audit’s opinion on risk management and
internal control effectiveness;
• reviewed the assurance map to ensure there is clear and
comprehensive risk and assurance coverage; and
• met with the lead partner of the firm supporting the Group internal
audit function on four occasions.
The committee also maintained oversight of other important
accounting matters and judgements, as well as oversight of the
financial reporting process.
Arrow Global Annual Report and Accounts 2019
73
Significant issues considered by the committee
The committee, in conjunction with management and the Group’s external auditor, considered the following significant issues in relation to
the financial statements and how these were addressed.
Estimation of
future cash
collections
from portfolio
investments
Value of
portfolio
investments
and setting
of the EIR
Fair value of net
assets acquired
as part of
business
combinations
Implementation
of IFRS 16
Reporting matter
The estimation of remaining collections from portfolio investments is complex and requires management to make
significant judgments in relation to expected life, probability and value of related cash flows for each loan.
Role of the committee
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.
Conclusion/action taken
Having reviewed the key assumptions alongside historical collections data, and having considered the forecast impact of
changes in collection strategies, the committee agreed that the overall forecast remaining collections from debt portfolios
was an appropriate estimate.
Reporting matter
On acquisition of portfolio investments, the initial EIR is set based upon the initial best estimate of future cash flows arising
from the portfolios.
Role of the committee
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 audit review of this.
Conclusion/action taken
The committee considered the expected life used by management in the setting of the EIR for portfolios, and concluded
that this was appropriate given historical collections data, as well as in the context of industry practice. Regarding
impairment gains/losses, in addition to the committee’s review of estimated future cash flows, specific focus was given
to the review of how management have continued to ensure multiple economic scenarios were incorporated into the
forward-looking view of cash flow forecasts.
Reporting matter
During the year, the board completed the acquisition of Drydens Limited in the UK. The fair value of the opening balance
sheet acquired, including any customer intangibles in existence, was an area of judgment which impacted upon the
goodwill which was recognised on this acquisition.
Role of the committee
The committee considered the appropriateness of the valuation of the opening balance sheet, with particular focus on the
value of the customer intangible asset which was recognised, alongside the fair value of the consideration paid.
Conclusion/action taken
Upon reviewing the two key judgement areas in relation to this matter, being the fair value of the consideration paid and
the appropriate customer intangible value to be recognised, the committee concluded that the approach taken by
management to calculate the value of both of these items was reasonable and in line with the relevant IFRS guidance.
Reporting Matter
IFRS 16 – Leases became effective on 1 January 2019, replacing the previous standard on this topic. The primary impact of
this change for the Group was to bring operating leases, which were previously expensed through the income statement
only, onto the balance sheet.
Role of the committee
The committee considered the appropriateness of the approach taken by Management to bring the opening balance
position onto the Group’s balance sheet as at 1 January 2019, including any practical expedients used and accounting
choices made. The appropriateness of the discount rate used by Management on transition was also an area which the
committee specifically considered.
Conclusion/action taken
The committee concluded that all practical expedients employed and accounting choices were appropriate for the Group
to apply and in line with IFRS 16 requirements. The committee reviewed the methodology used to calculate the transitional
discount rates used, and concluded that it was reasonable and in line with IFRS 16 requirements.
Arrow Global Annual Report and Accounts 2019
Governance 74
Audit committee report continued
Other areas of consideration by the committee
The Group’s external auditor considered the following significant issues in relation to the financial statements and how these were addressed.
Goodwill
impairment
review
Accounting for
material
transactions
Going concern
and viability
reporting
Other
The year-end balance sheet includes goodwill of £267.7 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.
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.
Each year the board must make an assessment of whether or not the Group is expected to continue as a going concern for
at least 12 months following the issuance of the annual report and accounts. As in previous years, the directors have made
such an assessment and the committee has reviewed this assessment, with particular focus on the robustness of the
assumptions underlying the forecasts, the impact of any stresses applied to such forecasts, and the reasonableness of any
proposed management actions which would be taken in a stress scenario. In addition to the statement on going concern,
the board is required to make an assessment on its longer-term viability which requires the application of a number of
judgements and estimates. The committee has reviewed management’s assessment of the prospects of the Group for the
three years from 31 December 2019, which is considered a reasonable period for the assessment of key risks.
The committee received reports on the Group’s continued embedding of IFRS 9, covering the classification and
measurement of the loan portfolios and determination of loan portfolio impairment provisions.
Arrow Global Annual Report and Accounts 2019
75
Other areas of consideration by the committee
Work of the committee
During the period under review, the following work was carried out:
Reporting
• Monitoring 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
• Assessment of going concern review and approval of
longer-term viability statement for recommendation to
the board
• Assessment of fair, balanced and understandable concept
in respect of the 2019 report and accounts
• Reviewing the continuing appropriateness of and changes
• Reviewed accounting in respect of a corporate acquisition
to accounting policies and the use of estimates and
judgements as noted in the Group’s report and accounts
• Reviewing key judgements and estimates included in the
preparation of the financial statements
completed in the year
• Review and monitoring of continued embedding of IFRS 9
and IFRS 16 implementation plan and approval of
methodologies and judgements
External audit
• Review and approval of KPMG’s annual external audit
• Consideration of management letters from external
plan review
• Reviewing the 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
• Recommending reappointment of the external auditor
to the board
• Monitoring and effectiveness review of risk management
and internal control systems (including financial,
operational and compliance) across the Group.
Recommending the approval of statements regarding
effectiveness to the board for inclusion in the annual report
auditors and review of representation letters requested
by the external auditor
• Assessing the impact of new accounting standards
• Reviewing the supply of non-audit services by the external
auditor to avoid any threats to auditor objectivity and
independence and ensuring compliance with the non-audit
services 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
• 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 Company’s prospects
• Review of the Group’s internal audit charter which sets
out the objectives, accountability and independence,
authority, responsibilities, scope of work, and standards
and performance for internal audit
• Reviewing updates on the activities of internal audit,
including receipt of audit reports, to gain and provide
assurance that the control environment continued to
operate effectively
• Assessing the adequacy of the internal audit programme
• Reviewing status reports on the implementation and
over the Group’s processes and controls, including
coverage, prioritisation and allocation of resource
• Oversaw the Company’s engagement with the FRC
regarding their review of the annual report and financial
statements for the year ended 31 December 2018
follow-up of internal audit recommendations
• Assessing the effectiveness of the internal audit function
• Reviewing the effectiveness of the committee
• Reviewing the committee’s terms of reference and work
programme
• Considered the appointment and the procedures to be
• Reviewing and recommending to the board the adoption
undertaken by advisors to provide relevant assurance to
the satisfaction of the lenders regarding the entry into
an asset- backed security facility.
of a new Group tax policy
• Reviewing current and future funding structures
Risk management
and internal
controls
Internal audit
Other
This report was approved by the board and signed on its behalf by:
Andrew Fisher
Chair of the audit committee
12 March 2020
Arrow Global Annual Report and Accounts 2019
Governance 76
Risk committee report
“The Group continued to
invest in strengthening
and developing its risk
management culture and
framework in 2019, in line
with the growing scale,
diversity and complexity
of the business.”
Andrew Fisher
Interim chair of
the risk committee
Risk committee report
Members
Andrew Fisher
(Interim chair)
Lan Tu
Maria Luís Albuquerque
Progress in 2019
• Risk management was
central to strategic
decision-making,
driving business
evolution and our
culture
• The risk system
(RADAR) provided a
consistent approach to
risk assessments and
incident management
Focus for 2020
• Risk management
processes in support of
the Fund Management
business
• Operational Resilience
framework
• Ensuring SMCR is
embedded in the UK,
and oversee
operational resilience
planning as well as
broader conduct
related matters
Dear Shareholder
I am pleased to provide a report of the risk
committee’s activities in 2019.
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, given that I have chaired both
committees for the majority of 2019, facilitating
effective communication between committees.
Usually, the chairs of the audit and risk committees
would be a member of the other committee. During
the year, I chaired the audit committee as well as being
appointed interim chair of the risk committee. The
committee also works with the remuneration
committee, of which I am also a member, to ensure
that risk is appropriately considered when setting the
Group’s remuneration policy.
The Group continued to invest in strengthening and
developing its risk management culture and
framework in 2019, in line with the growing scale,
diversity and complexity of the business. This year, the
risk and legal teams have been brought together
under the leadership of Stewart Hamilton, company
secretary and Group chief legal and risk officer, which
has further enhanced the close relationship between
the legal, regulatory and compliance aspects of the
critical activities of underwriting and origination.
Additionally, the risk system (RADAR), including
incident management, has been implemented in four
of the five geographies in which we operate in order
to manage and resolve incidents more effectively.
This also provides functionality for risk and control
self-assessments and will be implemented in the
Netherlands in 2020. Greater transparency around
incident management is providing the committee with
insight into root cause and subsequent prioritisation of
effort on a risk-based approach to drive appropriate
mitigating actions. This is particularly pertinent for any
actions which can improve customer outcomes,
ensure our commitment to treating customers fairly is
maintained, allowing us to focus on fulfilling duties to
our regulators while remaining alert to areas of
operational stretch.
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 framework 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, as well as,
considering the risk management oversight required
for the new Fund Management business. The
committee visited the Group’s operations in the UK,
Italy 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
across sites scheduled in 2020.
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.arrowglobal.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.
Arrow Global Annual Report and Accounts 2019
77
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.
Biographies of the members of the committee are set out on pages
54 to 57.
The committee met five times in 2019. Committee membership and
attendance of our members is shown in the table opposite.
Committee members
Iain Cornish (chair)1
Lan Tu
Maria Luís Albuquerque
Andrew Fisher (Interim chair)2
Eligible to
attend
2
5
5
5
Attended
2
5
5
5
Iain Cornish resigned from the Board on 30 April 2019.
1.
2. Andrew Fisher was appointed interim chair of the risk committee upon the resignation
of Iain Cornish.
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 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 the money laundering reporting officer, including reports on protecting against fraud and
other forms of financial crime
• Systemised support for the Incident Management and Risk and Control Self-Assessment processes
• Emerging risks were considered throughout the year, with specific focus on the operational risks associated with business
expansion and scalability
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 committee effectiveness including forbearance, the General Data Protection
Regulation and the Senior Managers and Certification Regime
Fund
Management
implementation
• Oversight of updated governance approach – Fund Management is an integral part of the Company, and is subject to the
same level of scrutiny as any other part of the business
• Board and the risk committee have overseen the progress throughout the set-up of Fund Management capabilities
with the risk function having been heavily involved in developing the application of the risk framework into the Fund
Management business
• Update of investment risk appetite for the Fund Management business
Italy integration • Oversight of the integration of Parr and Europa Investimenti
Portugal
integration
New
acquisitions
Political risks
• Consideration of the risks that exist in Italy and the Group’s response to them
• Oversight of the integration of Norfin Investimentos
• Consideration of the risks that exist in Portugal and the Group’s response to them
• The acquisition of Drydens Limited
• Consideration of Brexit and the possibility of leaving the European Union without an agreement ,and/or any other changes
to the European and Global political landscape which may provide opportunities or challenges for the business
Governance
In addition to the risks and mitigants already noted, the Committee also ensured governance protocols were followed during 2019, including
a review of committee effectiveness, annual approval of the committee’s terms of reference, and work programme and ongoing oversight of
the development of the Group-wide risk management framework.
Overview of committee’s activities for 2020
In 2020, the committee will work on ensuring that the acquisition of Drydens Limited is fully incorporated into the Group’s risk management
framework and will continue to develop a robust fund risk management framework. It will also oversee the embedding of the new Senior
Managers and Certification Regime, and receive further themed analyses of key risks in the business, as well as monitoring the firm’s response
to its operational resilience planning. Finally, the committee will continue to ensure good customer outcomes in an environment of increasing
regulatory scrutiny.
This report was approved by the board and signed on its behalf by:
Andrew Fisher
Interim chair of the risk committee
12 March 2020
Arrow Global Annual Report and Accounts 2019
Governance
78
Nomination committee report
“The board recognises the
benefits and importance
of succession planning,
talent management
and diversity.”
Jonathan Bloomer
Chair of the nomination
committee
Nomination committee report
The committee was engaged in reviewing the Group’s
revised Diversity and Inclusion policy, together with
setting ambitious targets on gender balance in the
Group’s senior leadership team by 2023.
Further information regarding the committee’s activities
during the year, and its roles and responsibilities, are set
out in the remainder of this report.
Committee membership and meetings
I chair the nomination committee and I was regarded
as independent on appointment. I will not chair the
committee when it is dealing with the matter of
succession to the chairmanship of the board. The
committee also comprises three other independent
non-executive directors, Andrew Fisher, Lan Tu and
Maria Luís Albuquerque. The committee recommended
the appointment of Maria Luís Albuquerque as a
member of the committee to the board in November
2019, which the board unanimously approved. The
composition of the committee is compliant with the
provisions of the Code as all the committee members
are independent non-executive directors.
Members
Jonathan Bloomer
(Chair)
Andrew Fisher
Lan Tu
Maria Luís Albuquerque
Progress in 2019
• Appointment of
Matt Hotson as Group
chief financial officer
• Setting of new gender
diversity targets within
the senior leadership
team for 2023
Focus for 2020
• Appointment of new
board member to chair
the risk committee
• Continued monitoring
of progress toward
gender diversity
targets within the
senior leadership team
• Searching for a new
non-executive director
Dear Shareholder
I am pleased to provide a report of the nomination
Committee’s activities in 2019. It has been a busy year
for the committee where we have focused on the
appointment of a new Group chief financial officer and
our search for a new non-executive director following
the resignation of Iain Cornish, in addition to our usual
role of overseeing succession planning, talent
management and diversity.
The committee has continued to work closely with the
board and plays an important role in ensuring that the
Group operates effectively in the context of our
strategic objectives.
We announced in March 2019 that Iain Cornish would
be stepping down as a non-executive director and
chair of the risk committee, with effect from 30 April
2019 after almost six years in the role. The search for
a replacement is progressing, and we hope to be in a
position to update you on the appointment of a new
non-executive director shortly.
We were delighted to announce the appointment of
Matt Hotson as the Group’s new chief financial officer
in June 2019. Matt formally joined the board on
8 October 2019, and the committee was closely
involved in his recruitment and appointment process,
further detail of which is provided in the remainder of
this report.
The board recognises the benefits and importance of
succession planning, talent management and diversity,
and the impact this can have on the long-term success
of the business, which have continued to be key focus
areas for the committee in 2019.
Arrow Global Annual Report and Accounts 2019
Committee membership and meetings continued
Biographies of the members of the committee are set out on pages
54 to 55.
The committee held three scheduled meetings during the year and
two ad-hoc meetings. Details of attendance by all members who held
office during the year are set out below:
Committee members
Jonathan Bloomer (Chair)
Iain Cornish1
Andrew Fisher
Lan Tu
Maria Luís Albuquerque
Eligible to attend
5
1
5
5
0
Attended
5
1
5
5
52
1. Stepped down from the board on 30 April 2019.
2. Maria Luís Albuquerque was invited to attend meetings of the committee by the chair
prior to her appointment as a member of the committee in November 2019.
Role
The committee’s responsibilities are set out in its terms of reference.
They include responsibility for:
• regularly reviewing the structure, size and composition of the
board compared with its current position and making
recommendations to the board with regard to any changes;
• giving full consideration to a diverse pipeline for succession
planning for directors and other senior executives; and
• overseeing the development of key talent in the business as whole.
The work of the committee in 2019 has included:
• overseeing the search and recruitment of the Group chief financial
officer and recommending to the board the appointment of
Matt Hotson to the role;
• recommending to the board that Maria Luís Albuquerque and
Andrew Fisher be invited to serve additional three-year terms
following the expiry of their initial three-year tenure in accordance
with the terms of their appointments to the board;
• 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 Group’s commitment to diversity
and reviewing the Group’s diversity targets; and
• monitoring and overseeing the 2019 board evaluation.
Succession planning
Recruitment of Group chief financial officer
The committee oversaw the search and appointment of Matt Hotson
as the Group chief financial officer who joined the board on 8 October
2019 as successor to Paul Cooper. The appointment of Matt Hotson
followed an extensive search and rigorous selection process. For the
position, the committee assessed the skills and experience required
to fulfil the role and a role description detailing the capabilities
required for the appointment was prepared accordingly. The
executive search firm Heidrick and Struggles was retained in relation
to the appointment of Matt Hotson and does not have any other
connection with the Company or the individual directors.
The recruitment process for the role of Group chief financial officer
resulted in suitable candidates being shortlisted for interview.
Interviews with candidates were conducted by me and the executive
and non-executive directors. A number of informal meetings,
conference calls and discussions also took place between committee
members, search consultants and potential candidates throughout
the recruitment process.
79
The committee unanimously approved the recommendation of the
appointment of Matt Hotson as the Group’s chief financial officer to
the board. The board unanimously approved Matt Hotson’s
appointment, which was announced on 28 June 2019. Matt formally
joined the board on 8 October 2019.
Talent management
The board recognises the strategic importance of effective and
pragmatic succession planning and talent development as an important
contributory factor to the Group’s long-term success. The committee,
in conjunction with the board, continues to take an active interest in
monitoring talent development and receives reports on a biannual
basis on talent progression opportunities and initiatives via the
Group HR function. This year the Group appointed Oliver Stratton
from UK country head to the executive management team as Group
chief commercial officer, evidencing the commitment to internal
talent management.
Diversity and inclusion
The board and the business recognise the importance of diversity
and the purpose of the Group’s diversity and inclusion strategy, as
reflected in the Group’s culture statement, is to ensure the Group
is ‘a diverse community, enriched by our local identities, working
collaboratively to build a powerful, unified and dynamic organisation’.
To ensure this ethos is reflected in the Group’s day-to-day activities,
the business, in conjunction with the committee, undertook a review
of its Diversity and Inclusion Policy and defined new gender diversity
targets for 2023 for the senior leadership team, with 50.0% female
representation being the aspirational goal and 40.0% being the
minimum threshold. The committee will continue to monitor
progress toward these targets in 2020.
The board currently has two female non-executive Directors,
Lan Tu and Maria Luís Albuquerque, who together represent 33.0%
(2018: 29.0%) female board membership, which aligns with the
recommended target set by the Hampton-Alexander Review for
FTSE 350-listed companies. The executive committee has two
female members, Clare Dyer (Group chief people officer) and
Katie Hutchinson (chief of staff), representing 25.0% (2018: 29.0%)
of the committee’s membership. The direct reports to the executive
committee comprise 33.0% female membership.
Board evaluation and committee effectiveness
A detailed review of the board evaluation can be found on page 62.
The committee’s effectiveness was reviewed as part of the board
evaluation process and I am pleased to report that the committee
was found to be operating effectively throughout the year.
This report was approved by the board and signed on its behalf by:
Jonathan Bloomer
Chair of the nomination committee
12 March 2020
Arrow Global Annual Report and Accounts 2019
Governance 80
Directors’ remuneration report
“The business is well
placed to maximise
opportunities for growth
and to create value for all
our stakeholders.”
Lan Tu
Chair of the remuneration
committee
Directors’ remuneration report
Members
Lan Tu
Andrew Fisher
Jonathan Bloomer
Progress in 2019
• The committee
progressed the
remuneration policy
agenda in close
engagement with
our institutional
shareholders.
• Organisational
transformation and
culture were key topics
on the committee
agenda in 2019.
Focus for 2020
• Embedding the
Group’s aspirational
cultural characteristics
through a clear link
between high quality
behaviour, high
performance
and reward.
• Delivering a compelling
remuneration policy
for the triennial policy
approval from
shareholders.
Dear Shareholder,
The report complies with the Large and Medium-sized
Companies and Groups (Accounts and Reports)
Regulations 2008 (as amended), the 2018 version of
the UK Corporate Governance Code (the Code) and
the Financial Conduct Authority’s Listing Rules.
This engagement has assured the committee that
most shareholders support our remuneration
approach. However, we received comments on the
balance of metrics for the 2019 LTIP awards, and some
shareholders would like to see greater levels of
disclosure for the annual bonus out-turns.
On behalf of the board, I am pleased to present our
directors’ remuneration report for the year ended
31 December 2019. This report is split into three
sections: an at a glance summary of the remuneration
arrangements for our executive directors; the annual
report on remuneration; and relevant extracts from
the directors’ remuneration policy approved at the
2018 annual general meeting. The directors’
remuneration report will be subject to an advisory
vote at the 2020 annual general meeting.
Listening to our shareholders
At our 2019 annual general meeting, the directors’
remuneration report received support from a majority
of shareholders, with 73.9% of the votes cast in
favour of the resolution. The committee however
acknowledges that 26.1% of the votes cast opposed
the resolution. The committee was disappointed
with this level of support, which does not reflect
the historically high levels of support shown by
shareholders for our executive remuneration
arrangements. As a result, we have augmented our
regular interaction with shareholders and proxy
advisory bodies: the chair of the Company, Jonathan
Bloomer and I, have met many of our institutional
shareholders to understand more fully their views and
the rationale behind their votes regarding the 2018
directors’ remuneration report.
The committee is grateful for the feedback received
from investors, and in response we have sought to
significantly enhance the level of disclosure provided
on the annual bonus to provide shareholders with
more context on the achievements in the year and
the corresponding bonus amounts earned by the
executive directors. We intend to re-balance the LTIP
metrics for the 2020 award such that each metric
(underlying ROE, underlying FCF and relative TSR)
are equally weighted (subject to further consideration
on the impact of Covid-19, as set out below). The
committee strongly believes that the three metrics
are integral to aligning the executives with the delivery
of the Company’s long-term strategic priorities1.
The committee is mindful of external developments
linked to Covid-19. None of us are currently certain
on what the impact will be, nor how long it will be felt.
As such, the committee has considered it appropriate
to delay the grant of the 2020 LTIP awards and the
setting of performance targets relating to this award.
We will proceed with great care in determining the
timing, quantum, underlying performance conditions
and targets for the awards to ensure that they are
appropriate in the context of all relevant factors.
Details will be included in the regulatory announcement
that accompanies the grant of the awards1.
1. On 24 March 2020 the remuneration committee met to consider arrangements in light of Covid-19 and the content of this paragraph was amended subsequent to the date of
signing of this report, but before its publication.
Arrow Global Annual Report and Accounts 2019
81
Context of business performance and incentive out-turns
As set out in page 6 of the report, 2019 represented another year
where Arrow performed well against its key operating metrics, with
cash collections and returns in the Investments business remaining
strong on record investment volumes and improving revenues and
margins in the Asset Management and Servicing business. This
performance helped increase free cash flow allowing the business to
invest for future growth, pay dividends and deleverage.
This performance was achieved, whilst the business delivered a
transformational change, with Arrow accelerating its strategic
shift towards a more capital light model, which culminated in the
successful initial fund raise of €838.0 million. Arrow’s transition into
alternative asset management represents a shift into a space where,
as a true market leader, it can provide opportunities for attractive
and sustainable long-term return. In the context of this strategic
transformation and a highly competitive market, the board is pleased
with the Group’s results and believes the business is well placed to
maximise opportunities for growth and to create value for all
our stakeholders.
The build of the Fund Management business, which is centred on
delivering long-term shareholder value however, meant the delay
of smaller scale strategies which would have delivered shorter-term
profit performance.
Notwithstanding the excellent progress made in delivering this
strategic transformation, the hurdle for the 2019 profit after tax
element under the bonus was not met and therefore no bonuses
were earned by executive directors in respect of this metric
(weighted at 50.0% of the bonus).
The remainder of the bonus (weighted at 50.0%) is structured by
the committee to reflect that the business is in a transformative
stage of its development and therefore the committee considers it
important to incentivise the executives to deliver against strategic
objectives which will ultimately deliver long-term shareholder value.
Performance against long-term shareholder value creation metrics and
key strategic metrics (which are centred on Customer, Employee and
Community and Organisation objectives) exceeded the stretching
targets set, with details on key achievements in the year set out on
pages 88 to 89. In this context, the committee has approved bonuses
of 46.3% of maximum for the Group chief executive officer and Group
chief financial officer respectively. The committee believes that the
level of pay-out is reflective of the overall performance of the Group in
the year, and appropriate in the context of the shareholder experience.
Over the three-year performance period for the 2017 LTIP, the Group
delivered EPS growth of 6.98% per annum.; an average ROE of 32.4%
and total shareholder return of below median. Based on performance
against the stretching targets attached to the award, this resulted in
25.0% of the 2017 award vesting.
Board changes
In 2019, the committee determined the termination arrangements
for Paul Cooper, the former Group chief financial officer, who
stepped down from the board and left the business in August 2019.
No exit payments were made to Paul Cooper upon his departure from
the Group. The committee determined that Paul Cooper’s 2018 and
2019 LTIP awards would lapse, along with his 2019 DSBP award. As
detailed further in the report, clawback provisions were applied to
the buy-out awards that had already vested and his 2018 and 2019
buy-out awards lapsed. Paul Cooper’s 2018 bonus deferral was
forfeited, and he had no further deferred amounts. Paul Cooper
did not qualify for a bonus payment for the 2019 financial year.
Following the departure of Paul Cooper, we were delighted to
welcome Matt Hotson to the Company as Group chief financial
officer. On appointment, Matt Hotson’s remuneration was set
as follows:
• Base salary: £350,000, which has been set at discount to the ‘market
rate’ for the role, reflecting that this was his first appointment as the
Group chief financial officer of a listed company. The committee
intends to keep Matt Hotson’s salary under review over the
coming years.
• Pension: 5.0% of salary, in line with the contribution rate for the
wider workforce.
• Annual bonus: 125.0% of base salary.
• LTIP: 175.0% of base salary, in line with the proposed award level
for the previous CFO
Iain Cornish stepped down from the board, and as a member of the
committee, with effect from 30 April 2019. Details of Mr Cornish’s
remuneration throughout the year can be found in the remuneration
report on page 90. Andrew Fisher agreed to take on the role of
interim chair of the risk committee and details of his additional
compensation is also set out on page 90.
Remuneration in 2020
The base salary for the Group chief executive officer and Group chief
financial officer will be increased by 2.0%, in line with the average
increase for the wider UK workforce.
Details on the wider package, including details on the performance
metrics1, are set out on page 83.
Responding to the 2018 UK Corporate Governance Code
During the course of 2019, the committee carefully considered the
requirements of the Code in relation to executive remuneration at
Arrow. Following its review, two changes have been made to ensure
that the Company’s remuneration arrangements reflect best practice
and are compliant with the Code requirements.
• Pension contributions for new executive directors will be set in line
with the wider workforce rate (as demonstrated on the
appointment of Matt Hotson); and
• A post cessation shareholding policy has been developed, the
details of which can be found on page 84.
Role of the committee throughout the year and strategic
alignment of pay
The role of the Committee is ensuring that the board and executive
committee are appropriately rewarded for their performance
throughout the year, by setting and implementing the Company’s
remuneration policy, determining each executive director’s total
individual remuneration package and setting the performance
measures for performance-related pay.
These decisions are considered carefully in context of the Group’s
strategic goals, culture and wider workforce remuneration. The
committee’s aim is to ensure that remuneration and incentives
adhere to the principles of good corporate governance, support
good risk management practice and promote long-term sustainable
Company performance.
The committee is fully committed to ensuring that the Company’s
remuneration policy and out-turns are fully aligned to its culture
and values. ‘What’ has been achieved is equally balanced with ‘How’
this has been executed in the committee’s considerations of
performance, remuneration out-turns and use of discretion in the
committee’s decision-making. The approach is holistic and extends
from the Company’s board right through the wider workforce.
1. On 24 March 2020 the remuneration committee met to consider arrangements in light of Covid-19 and the content of this paragraph was amended subsequent to the date of
signing of this report, but before its publication.
Arrow Global Annual Report and Accounts 2019
Governance 82
Directors’ remuneration report continued
Wider workforce pay arrangements
In 2019, in addition to the focused review on executive director
performance and remuneration, the committee has carefully
reviewed the performance out-turn and pay arrangements for the
following groups of colleagues:
Gender pay
On 2 April 2019, the board reviewed and approved the April 2019
Gender Pay report. The board are satisfied that Arrow is making
progress in closing the Gender Pay Gap, although Arrow is mindful
that there is no room for complacency in this regard.
• Group executive committee and senior managers on an
individual basis
• Performance out-turns and pay arrangements for wider
workforce on an aggregate basis
The committee is pleased that across the Group executive committee
and senior management there is consistency in the distribution of
pay arrangements with the Company’s executive directors. The
average bonus as a percentage of maximum for high performing
colleagues in these populations is 62.75%, with an appropriate range
around this to reflect individual achievements in the year. This
reflects a strong pay for performance culture and the strategic
transformation achieved during the year.
As a Company, we also strongly believe in promoting alignment
between employees and shareholders through the operation of
Share Incentive Plan (SIP). The remuneration committee is pleased to
note that 45.0% of eligible colleagues are participating in the Share
Incentive Plan (SIP).
This year, for the first time, we have disclosed the comparison of our
chief executive officers’s single figure with those of our 25th, 50th and
75th percentile employees. The median chief executive officer pay
ratio is 31:1, and more information can be found on pages 85 to 90.
In 2020, the Company will be undergoing a formal benchmarking
review of the wider workforce pay arrangements. We will also be
undertaking a review of remuneration policy ahead of the triennial
policy renewal at the annual general meeting next year.
In the publicised April 2019 Gender Pay report, the committee was
pleased to report on the progress that had been made in both
median and mean reporting for pay and for bonus. The April 2020
Gender Pay report continues to demonstrate progress in the median
and mean gender pay gap for bonus. The gender pay gap for pay has
increased at the median point but decreased at the mean point. On
balance, the committee is confident that the gender pay agenda at
the Group continues to progress positively.
Further detail on gender pay can be found in the remuneration report
on page 85.
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 2019, we believe that the remuneration
of the executive directors and wider workforce in respect of 2019
continues to reflect our success in the delivery of our strategy and
the drive for profitable and sustainable long-term growth for our
shareholders.
Lan Tu
Chair of the remuneration committee
12 March 2020
Arrow Global Annual Report and Accounts 2019
83
Our remuneration at a glance and how we propose
to apply the remuneration policy in 2020
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 short-term
and 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 and how we
propose to apply the policy in 2020. The committee is not considering any material changes to our remuneration policy during 2020 other
than improvements to ensure further alignment with the Code. During 2020, the committee will review that policy in advance of seeking
approval from shareholders for a new policy at the 2021 annual general meeting.
Application of our remuneration policy
Our approach to executive remuneration
Our approach in 2020
Salaries
Base salaries are positioned within a broad range around the
mid-market opportunity for the role, to ensure that the majority
of the overall remuneration package is performance related.
Any increases take into account the individual’s performance, the
business performance and market conditions, and are normally
aligned with the range of increases awarded to the wider workforce.
Executive Directors receive a contribution to a defined contribution
pension or a cash equivalent.
Pension and
benefits
Salaries have been increased by 2.0% in line with the
average increase awarded to the wider workforce.
• Lee Rochford: £459,901
• Matt Hotson: £357,000
The current application of executive pension
contribution is compliant with the Code.
Benefits are provided that are appropriate to the role and which
take into account typical practice.
The maximum contribution of 15.0% of base salary is
awarded to Lee Rochford.
Annual
bonus
Bonuses are only earned for the achievement of stretching
performance measures. We balance profit growth with other
key longer-term strategic financial and non-financial targets,
and specific, personal objectives linked to our strategic goals
of protecting and enhancing our market-leading position,
transforming the business, delivering strong risk-adjusted
investment returns and developing our customer proposition.
We ensure that the personal objectives 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.
Ahead of the policy renewal at the annual general
meeting in 2021, the committee will continue to review
and consider evolving market practice and investor
views with regards to the existing contractual pension
arrangements for Lee Rochford (who was appointed in
December 2016).
Matt Hotson receives a pension contribution of 5.0% of
salary, in line with the wider workforce.
Going forward, the pension contribution for new recruits
(in line with the approach for Matt Hotson) will be in line
with the wider workforce.
No changes to the type or value of benefits provided is
expected for 2020.
Maximum bonus opportunity:
• Lee Rochford: 140.0% of salary; Matt Hotson: 125.0%
of salary
Performance measures will continue to be balanced
between a profit measure (50.0%) and a balanced range
of other long-term shareholder value measures (25.0%)
and strategic objectives (25.0%). The targets are
commercially sensitive but will continue to be disclosed
on a retrospective basis.
40.0% of any bonus earned by Lee Rochford and 33.0%
of any bonus earned by Matt Hotson will be deferred into
shares for two years.
Arrow Global Annual Report and Accounts 2019
Governance
84
Directors’ remuneration report continued
LTIP1
Our approach to executive remuneration
The LTIP is designed to encourage behaviours which facilitate
delivery of the sustainable growth of the business, whilst delivering
value to stakeholders and promoting the long-term success of
the Group. In line with best practice, LTIP awards granted to our
executive directors in 2019 were 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.
The Group’s strategy to move to a deleveraged and capital light
model was carefully considered in setting the Average RoE and
Underlying FCF targets.
Shareholding
requirements
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 200.0% of salary. The executive has
five years from appointment to build up a shareholding with a
market value equivalent to 150.0% and must achieve 200.0% as
soon as possible thereafter. The Group will retain 50.0% of all
vested LTIP awards, on behalf of the executive, until the agreed
threshold has been reached.
Fees are set at a level which enables the Group to attract high
calibre non-executive directors.
Non-executive
director fees
Non-executive
chair
Fees are set at a level which enables the Group to attract a high
calibre non-executive chair.
Our approach in 2020
Maximum LTIP opportunity:
• Lee Rochford: 200.0% of salary
• Matt Hotson: 175.0% of salary
As set out in the statement from the committee chair,
the committee is mindful of external developments
linked to Covid-19. None of us are currently certain
on what the impact will be, nor how long it will be felt.
As such, the committee has considered it appropriate
to delay the grant of the 2020 LTIP awards and the
setting of performance targets relating to this award.
Details will be included in the regulatory announcement
that accompanies the grant of the awards2.
During 2019, and in line with the Code, we adopted a
post-employment shareholding requirement which
requires shares up to the value of the shareholding
requirement to be held for one year post cessation of
employment and 50.0% of the requirement to be held
for two years post cessation of employment.
The base fee for non-executive directors is set at £55,000.
An additional amount of £10,000 is due to those who
chair a committee.
An additional amount of £10,000 is also provided for the
Senior Independent Director.
The base fee for the non-executive chair is £170,000.
1. As set out in the committee chair’s cover statement, the LTIP weightings for the 2020 award were revised to reflect shareholder feedback.
2. On 24 March 2020 the remuneration committee met to consider arrangements in light of Covid-19 and the content of this paragraph was amended subsequent to the date of
signing of this report, but before its publication.
Wider workforce remuneration
Fundamentally the structure of remuneration is consistently applied throughout the wider workforce, although alternative incentive
arrangements may be offered to reflect market practice (e.g. within the Fund Management Business or to comply with geographical market
norms). The approach to annual bonus performance outcomes is consistently applied across our executive directors and the wider workforce,
with a balanced split to account for financial performance and individual performance against our strategic objectives.
Arrow’s purpose is to build better financial futures for our stakeholders. We believe that to succeed as a business, our colleagues need to be
from a diverse range of backgrounds and work as part of an inclusive culture. Our aim is to attract and retain the best talent. We want to offer
all of our colleagues the opportunity to develop their careers with us, as well as the flexibility to achieve what’s important to them, both in
and outside of work. We have shared on the next page two core metrics which reflect the firm’s position in regards to wider workforce
remuneration; the 2019 chief executive officer to wider workforce pay ratio and a summary of our 2019 Gender Pay Gap Report.
Arrow Global Annual Report and Accounts 2019
85
Group chief executive officer to wider workforce pay ratio
The table below compares the 2019 Single Total Figure of Remuneration for the Group chief executive officer with that of employees who are
paid at the 25th percentile, 50th percentile and 75th percentile of the Group’s employee population, and also shows the total pay and benefits
at quartile points. The salary and benefits data is the median and percentiles of all of the Group’s employees.
Year
2019 – Single Total Figure Remuneration
Salary
Total Pay
Method
Option A
CEO
£448,694
£931,067
25th Percentile
Pay Ratio
44:1
25th Percentile
Pay Ratio
£20,000
£21,150
Median
Pay Ratio
31:1
Median
Pay Ratio
£27,867
£29,539
75th Percentile
Pay Ratio
18:1
75th Percentile
Pay Ratio
£48,000
£50,400
To calculate the ratio in accordance with the regulations, we ranked all our UK employees by their annualised full-time equivalent Single Figure
Total Remuneration (SFTR) as at 31 December 2019. From this we identified the three individuals at the 25th, 50th and 75th percentiles (known
as P25, P50 and P75, respectively). We elected to use Option A as it provides the most meaningful comparison. This methodology is supported
by stakeholders and institutional investors and compares the single figure of remuneration for the chief executive officer with the full-time
equivalent remuneration for all UK employees.
For the purpose of calculating the total pay figure for our UK employees we have excluded taxable benefits (other than the chief executive
officer) as it would be too time consuming to collate taxable benefits data and they are considered immaterial to the chief executive officer pay
ratio calculation.
The committee considers that the median pay ratio is consistent with the relative roles and responsibilities of the chief executive officer and
the identified employee and with the pay, reward and progression policies for the Group’s UK employees taken as a whole. The Group chief
executive officer’s remuneration package is weighted towards variable pay (including the annual bonus and LTIP) due to the nature of the role,
and this means the ratio is likely to fluctuate depending on the outcomes of incentive plans in each year.
2019 Gender Pay Report
The table below compares the mean and median gender pay and bonus gaps including the movements from the first publication in April 2018.
YoY
Measure
Change
+0.2%
-5.21%
+4.4%
+10.5%
Mean Gender Pay Gap
Median Gender Pay Gap
Bonus Mean Gender Pay Gap
Bonus Median Gender Pay Gap
2020 Report
(Tax Year 2018/2019)
32.8%
28.2%
68.6%
49.5%
2019 Report
(Tax Year 2017/2018)
33%
23%
73%
60%
2018 Report
(Tax Year 2016/2017)
40.8%
27.9%
79.2%
64.6%
YoY
Change
+7.8%
+4.9%
+6.2%
+4.6%
In the April 2019 Gender Pay report the committee was pleased to report on the progress that had been made in both median and mean
reporting for both pay and bonus. The April 2020 Gender Pay report continues to demonstrate progress in the median and mean gender pay
gap for bonus. The gender pay gap for pay has increased at the median point but decreased at the mean point. On balance the committee is
confident that the gender pay agenda of the Group continues to progress positively.
Arrow Global Annual Report and Accounts 2019
Governance
86
Directors’ remuneration report continued
Alignment with the key factors set out in the Corporate Governance Code 2018
Code provision
Alignment to culture
Simplicity and clarity
Risk
Approach at Arrow
The committee is focused on ensuring a healthy culture exists across the entire Group and believe that the executive
directors and the whole of the leadership team set the standards for behaviour and conduct across the Group.
Executive directors are rewarded on both what they deliver and how that is delivered. The launch of Arrow’s culture
statement in 2019 was pivotal to ensuring cultural alignment, as was the Culture Steering Group (CSG) that will act as
the central governance forum for ensuring the Arrow culture provides a clear, supportive and productive
environment for all stakeholders.
The remuneration framework at Arrow is made up of three key elements: fixed pay (including base salary, pension and
benefits); annual bonus and a separate long-term incentive.
The structure is simple to understand for both participants and shareholders, and is aligned to the strategic priorities
for the business.
Variable remuneration targets are set at levels which reward high performance, but which do not encourage
inappropriate business risk.
Annual bonus payments are determined by reference to the performance measures which are subject to a review
of the executive’s 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.
Predictability
Proportionality
All executive director annual bonus and LTIP awards are subject to both malus and clawback provisions.
The range of possible rewards for 2018 to individual executive directors in position at the start of 2018 are set out in
the scenario charts on page 76 of the 2017 annual report.
A significant proportion of an executive’s reward is linked to performance through the incentive framework, with a
clear line of sight between performance and the delivery of long-term shareholder value.
Performance measures and the underlying targets are regularly reviewed by the committee to ensure that they are
directly aligned to the Group’s strategic priorities, and targets are calibrated to reward executives for strong
performance over the course of the respective performance period.
Executives are also required to build material shareholdings in the Group (200.0% of base salary) and, going forward
will be subject to a post cessation shareholding requirement which will ensure that they are aligned to the Group’s
performance for two years post cessation of employment.
Annual report on remuneration
Directors’ remuneration (audited information)
Details of the executive directors’ remuneration are as follows:
Salary
and fees
£000
Taxable
benefits1
£000
Performance-
related bonus2
£000
Long-term
incentives3
£000
Pension-related
benefits4
£000
Recovery
£0005
Total
compensation
£000
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
449
223
164
–
836
436
365
–
53
854
4
2
–
–
6
4
3
–
–
7
292
-
102
–
394
506
260
–
–
766
120
-
–
–
120
–
426
–
–
426
67
34
9
–
110
65
55
–
8
128
–
(426)
–
–
(426)
–
–
–
–
–
932
(167)
275
–
1,040
1,011
1,109
–
61
2,181
Director
Lee Rochford
Paul Cooper6
Matt Hotson7
Rob Memmott8
Total
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 2019 is provided on pages 87 to 90.
3. Long-term incentives reflect the value of the awards vesting by reference to performance where the performance period ended in the relevant year. The value of the LTIP for 2017
reflects the LTIPs scheduled to vest in March 2020 based on performance over the three years to 31 December 2019. Further information is provided on page 90.
4. Each executive received a monthly cash allowance in lieu of participation in a pension arrangement (15% in the case of Lee Rochford and Paul Cooper and 5% in the case of
Matt Hotson). The cash allowance is not included in the annual bonus or LTIP allocation.
5. In the 2018 Directors’ Remuneration Report, long-term incentives figure for Paul Cooper were included, these were the value of his buy-out awards granted on 18 June 2018
(£426,000). In connection with Paul Cooper’s resignation, the awards that vested in 2018 and 2019 were subject to clawback and the awards which were due to vest in 2020 and 2021
lapsed. The recovered value set out above is calculated as: in the case of the awards which had not been exercised (over 145,540 shares in aggregate): £375,493 (based on a share
price of £2.58 on 8 August 2019, the day before Paul Cooper left the business resulting in the lapse of his awards); and in the case of the award which had been exercised (over 18,089
shares): £21,762 (being the value repaid by Paul Cooper of the after tax number of shares (9,587) multiplied by the share price of £2.27 on 28 June 2019).
6. Paul Cooper resigned as Group chief financial officer and left the business on 9 August 2019. The values in respect of 2019 in the table above reflect remuneration earned to that date
(and the value recovered from him in respect of his buy-out awards as described above).
7. Matt Hotson was appointed as Group chief financial officer on 8 October 2019, but his remuneration in the table above is from the date on which he joined the business 15 July 2019).
8. Rob Memmott stepped down from the board on 1 January 2018. His LTIP award granted in 2016 and 2017 lapsed in 2018 when he left the business.
Arrow Global Annual Report and Accounts 2019
87
Additional information in respect of variable remuneration earned in 2019
2019 annual bonuses (audited information)
For 2019, Lee Rochford was eligible for an annual performance-related bonus of up to 140.0% of salary and Matt Hotson was eligible for a
bonus of up to 125.0% of salary, subject to meeting stretching performance targets. To encourage behaviours that facilitate continued
profitable growth and future development of the business, the 2019 annual bonus was based on the following:
• 50.0% of the bonus was based on Group underlying profit after tax for the year;
• 25.0% of the bonus was based on performance against strategic objectives linked directly to long-term shareholder value creation; and
• 25.0% of the bonus was based on a balanced range of strategic objectives linked to Customer; Employee and Community; and Organisation.
Details on how the elements of the bonuses have been earned are shown below:
Underlying profit condition (50.0%) – out-turn
The financial element of the 2019 annual bonus was based on achieving underlying profit after tax for the year, in accordance with the schedule
below. The committee reviewed the vesting schedule for the financial element of the bonus for the executive directors and as the threshold
target has not been achieved, the committee has not awarded any bonus attributable to this element of the bonus.
The decision to prioritise the build out of the Fund Management business in the second quarter of 2019 has meant that the business has
delayed or cancelled smaller scale strategies in both the Investment business and Asset Management and Servicing businesses. This could have
yielded greater near-term profits at the expense of delivering on the medium-term strategy, therefore compromising shareholder value in the
longer term.
Performance level
Vesting (% of financial element)
1. Straight-line vesting between the points.
2. This is underlying profit after tax for the year.
Threshold 1
£62.9m
20.0%
Stretch Target 1
£68.0m
75.0%
Maximum
vesting target
£71.2m
100.0%
Actual2
£58.0m
0.0%
Strategic objectives (50.0%) – out-turn
This element of the bonus was measured on achievement of clear strategic objectives of the business linked to long-term shareholder value
creation; and a range of objectives that will evolve the strategy to position Arrow as a market leading alternative asset manager, including
customer, employee, community and organisational objectives.
The following factors were considered in the round by the committee in determining the executive directors’ level of performance in 2019
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 2019; and
• the views of the Group chief legal and risk officer and the risk committee chair on the effectiveness of the executives’ management
of conduct and risk during the year.
Arrow Global Annual Report and Accounts 2019
Governance
88
Directors’ remuneration report continued
The objectives, targets and relevant achievements are summarised below.
Element
Long-term
Shareholder
value
CFO
Weighting
Objective
CEO
25.0% 25.0% • Deliver return on equity
in the mid-20s through
the cycle.
• Deliver long-term AMS
EBITDA margins in the
mid-20s.
• Progress towards
doubling AMS revenue
growth over the
five-year period from
FY 2018.
• Maintain Group
leverage of between 3x
to 3.5x secured net debt
to adjusted EBITDA.
• Delivery of dividend
policy (pay-out ratio
of at least 35% of
underlying profit
after tax)
Key achievements
• 2019 has been a transformational year for Arrow, as the
business continues to focus on the shift to a more capital
light model and the evolution into a truly integrated asset
management business, which will serve to enhance
long-term shareholder value.
Out-turn
CEO
85.0% 85.0%
CFO
• Key highlights of performance delivered in the year against
pre-determined financial targets, which were all assessed
to be above and beyond expectations in 2019 include:
• Underlying ROE at 29.5% continues to exceed our target
to deliver in the mid-20’s through the cycle.
• Gross AMS revenue formed 36.4% of total Group revenue,
delivering long-term AMS EBITDA margins of 23.9%. The
Group therefore remains well on track to meet its five-year
target to double gross AMS revenues to form 50.0% of
total Group revenues and is well ahead of its five-year
target to increase AMS margins into the mid-20’s percent
from their starting point of high-teens percent.
• Strong operational performance in the Investment
Business and Asset Management and Servicing business
meant that free cash flow generation increased
significantly by over 13.3% to £261.4 million. This meant
that leverage finished the year within the Group’s new
lower leverage range of 3.0x-3.5x at 3.4x.
• The Group operates a progressive dividend policy and has
grown the dividend every year since its IPO in 2013. As a
result of confidence in the Group’s cash generation, the
dividend pay-out ratio policy was increased in 2019 to be
at least 35.0% of net underlying income. The board is
recommending a dividend of 13.1p at 40.0% in line with
our targets.
Strategic
Objectives
Strategic
Objectives
– Organisation
Strategic
Objectives
– Customer
25.0% 25.0%
100.0% 100.0%
• Implement the new
operating model and
organisational design
by launching Fund
Management in line
with capital light
strategy
• Full review of cost and
overhead base to
ensure all areas of the
business are operating
efficiently and are
operationally ready
to service Fund
Management activities
• Ensure consistency in
principles of customer
treatment, and
regulatory approach;
with servicing capability
aligned to the needs
of the Group’s
customer base
• This year, the Group’s focus has been on building a Fund
Management business. In 2019, the Group announced it
had received total capital commitments of €838.0 million,
with a plan to achieve €2.0 billion of total funds under
management by the end of 2020. This is an outstanding
result and unprecedented size for a first-time fundraise.
As funds under management continue to grow in the
coming years, this will drive significant value for
shareholders, as the Group delivers an increasing
proportion of its earnings from capital light fund
management and Servicing fees.
• Following a root and branch cost review, the Group has
taken significant steps to re-shape the organisation to
ensure business readiness in anticipation of scaled
activities as a result of the fund and is on track to remove
annual costs of £16.7 million.
• The business reputation for treating customers fairly and
responsibly has been enabled with excellent progress
made, including the launch of a new customer policy,
customer satisfaction scores being measured across all
jurisdictions and customer engagement forums have
been established for best practise sharing.
• Excellence in servicing capability is a key capability to
ensure the fair treatment of customers aligned with
efficient operations across the Group. Continuous
improvement principles have been rolled out across
the Group.
Arrow Global Annual Report and Accounts 2019
89
Out-turn
CEO
CFO
Weighting
CEO
CFO
Element
Strategic
Objectives
– Employee
and Community
Objective
• Exceptional delivery
of “One Arrow” –
transforming Group
wide culture and
behaviours aligned to
the Group’s strategy
to drive a high
performance culture
Key achievements
• Exceptional progress on the delivery of the “One Arrow”
strategy has been made in all geographies and functions
supported by the launch of the Group culture statement
and a CSG to monitor progress. The Group wide leadership
programme ‘DIPS’ continued to be rolled out to the top
100 leaders.
• The talent strategy (including Diversity and Inclusion agenda)
has been accelerated with high calibre hires including Group
chief finance officer, Group chief people officer, head of
portfolio risk and Fund chief financial officer increasing Arrow’s
leadership bench strength and Fund Management capability.
In 2019, Junior Achievement Europe (JAE) became Arrow’s
preferred partner for financial education across the Group.
This year over 3,000 young people and over 250 colleagues
have participated.
•
Based on performance set out above, the following table sets out an overview of bonus pay-outs in respect of the year
Individual
Lee Rochford
Matt Hotson1
Strategic
objectives
– long-term
shareholder value
(25%)
85.0%
85.0%
Strategic
objectives
– Organisation,
Customer,
Employee and
Community (25%)
100.0%
100.0%
Underlying profit
element (50%)
0.0%
0.0%
% of salary
64.75%
57.81%
% of
maximum
opportunity
46.25%
46.25%
£
292,000
101,200
1. Matt Hotson joined Arrow on 15 July 2019 and his bonus out-turn is based on his pro-rata opportunity
The committee strongly believes that the level of pay-out is reflective of the overall performance of the Group in the year, and is appropriate
in the context of the shareholder experience (including but not limited to the appreciation in the share price during the year).
For Lee Rochford, 40.0% of the bonus earned will be deferred into shares for a period of three years. For Matt Hotson, 33.0% of the bonus
earned will be deferred into shares for a period of three years.
Vesting of 2017 LTIP (audited information)
LTIP awards were granted on 31 March 2017, which are scheduled to vest on 31 March 2020. The performance conditions, performance
achieved and vesting outcomes are summarised below.
Performance condition
Growth in underlying basic EPS (50% of the award)
Underlying ROE (three-year average) (25% of the award)
TSR relative to the FTSE 350 (excluding investment trusts) (25% of the award)
Overall 2017 LTIP vesting
Maximum target
Threshold target
(100% of element
(25% of element
vests)
vests
20.0% per
10.0% per
annum
annum
20.0%
32.4%
26.0%
Median Upper quartile Below median
Actual
performance
6.98%
Actual vesting
0.0%
100.0%
0.0%
25.0%
Following a review of performance against the underlying targets and the wider performance of the Group, the committee approved the level
of vesting as set out above.
Lee Rochford was granted an award of 184,248 shares, which are expected to vest in respect of 46,062 shares. In the single figure table above, in
accordance with the applicable regulations, the value is calculated as the number of shares that are expected to vest multiplied by the average
share price over the three-month period ending 31 December 2019 (£2.60), plus the value of dividends to be paid to Lee Rochford in respect of
the period from grant to vesting (£16,029.57). The share price at the date of the grant was £3.46. The LTIP award granted to Lee Rochford
included a tax advantaged option of 8,670 shares at a per share exercise price of £3.46. The option was subject to the same performance
conditions as applied 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; accordingly, the tax-advantaged option is ignored when calculating the single figure value.
Arrow Global Annual Report and Accounts 2019
Governance
90
Directors’ remuneration report continued
Non-executive directors’ remuneration (audited information)
Details of the non-executive directors’ remuneration are as follows:
Director
Jonathan Bloomer
Iain Cornish 1
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
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
170
251
65
55
772
392
170
75
65
55
65
430
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
170
25
65
55
77
392
170
75
65
55
65
430
Iain Cornish stepped down from the board on 30 April 2019 and his salary is pro-rated.
1.
2. Andrew Fisher’s fees are pro-rated based on his appointment as interim chair of the risk committee and senior independent director on 28 May 2019. The above figure is rounded
to the nearest thousand. The actual figure is £76,974.
In 2019, Andrew Fisher’s non-executive director fees increased to reflect his appointment as interim chair of the risk committee and the role
of senior independent director.
2019 LTIP awards (audited information)
The table below outlines LTIP awards made to executive directors during 2019:
Date of grant
20 June 2019
20 June 2019
Participant
Lee Rochford 1
Paul Cooper 2
Basis of award
200.0% of salary
150.0% of salary
Number
of shares
390,780
237,259
Face value
of award £1
901,764
547,499
Performance period
1 January 2019 to 31 December 2021
1 January 2019 to 31 December 2021
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 £2.3076
2. Paul Cooper’s award lapsed on his departure from the business.
The performance conditions attaching to the 2019 LTIP awards are summarised below. The 2019 LTIP awards will not receive a dividend equivalent.
Measure and alignment with strategy and shareholder value creation
Underlying ROE (three-year average)
Underlying FCF1 (three year cumulative)
TSR relative to FTSE 350
(excluding investment trusts)
Weighting
50.0%
25.0%
25.0%
Threshold
Maximum
Threshold
Maximum
Threshold
Maximum
Performance
target
24.0%
30.0%
£715m
£757m
Median
Upper quartile
Vesting level
(% of maximum)
18.75%2
100.0%
18.75%2
100.0%
18.75%2
100.0%
1. Cash from operations after interest and taxes, but before exceptional business disposals and excluding adjusted items and subject to such other adjustments as the committee
determines.
2. The 18.75% vesting at threshold is the threshold vesting for Lee Rochford’s award and reflects the increase in his award to 200.0% of salary. Had Paul Cooper’s award not lapsed,
25.0% of it would have vested for threshold performance.
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 Group over the performance period
having regard to such factors as the Committee considers, which may include, but are not limited to, objective measurement of other financial
metrics, customer satisfaction, assessment of regulatory compliance and assessment of risk management.
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).
Each executive director is required to acquire and retain shares with a value equal to 200.0% of salary, and until such time as the required
holding has been achieved, the executive director must retain 50.0% 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 2019 are: 212.7% of salary for Lee Rochford and 0.0% of salary for
Matt Hotson (given his recent appointment to the board); Paul Cooper’s shareholding at the date at which he stepped down from the board
(9 August 2019) is also stated.
Arrow Global Annual Report and Accounts 2019
91
Shares owned
374,352
–
159,179
Shares owned
– value
£1
959,089
–
407,817
% of salary2
212.7
–
111.7
a. Executive directors – share ownership
Director
Lee Rochford
Matt Hotson
Paul Cooper
1. Based on the closing share price on 31 December 2019 of £2.562.
2. Based on the salary applying as at 31 December 2019.
b. Executive directors – share plan interests
Matt Hotson was not granted any share plan awards in 2019.
In line with the applicable regulations, Paul Cooper’s share interests are stated at the date at which he left the business (9 August 2019).
Director
Lee
Rochford
Paul
Cooper
Plan
LTIP
LTIP5
LTIP5
DSBP
DSBP
SIP3
LTIP
LTIP
Buy-out award
Buy-out award
Buy-out award
DSBP
SIP6
Award
date
31 March
2017 1
27 June
2018
20 June
2019
26 March
2018
26 March
2019
–
27 June
20184
20 June
2019
18 June
2018
18 June
2018
18 June
2018
26 March
2019
–
Number of
shares at
1 January 2019
184,248
Granted
during the
year
–
Lapsed
during the
year
–
Exercised
during
the year
–
263,598
–
– 390,780
43,205
–
–
93,198
–
–
–
–
1,974
219,791
1,662
–
–
219,791
–
237,259
237,259
31,862
70,098
25,491
–
–
–
31,862
70,098
25,491
–
39,539
39,539
1,068
986
1,027
–
–
–
–
–
–
–
–
–
–
–
–
Number
of shares at
31 December
2019 (or if
earlier date of
leaving the
business)
184,248
263,598
390,780
43,205
93,198
3,636
0
0
0
0
0
0
1,027
Status
Unvested, subject
to performance
condition2
Unvested, subject
to performance
condition
Unvested, subject
to performance
condition
Unvested
Performance
period
1 January 2017
– 31 December
2019
1 January 2018
– 31 December
2020
1 January 2019
– 31 December
2021
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Unvested
Unvested
Lapsed5
Lapsed5
Lapsed5
Lapsed5
Lapsed5
Lapsed5
Matching shares
forfeited. Partnership
shares which had been
purchased were
transferred to Paul
Cooper in accordance
with the plan rules.
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. This award is scheduled to vest on 31 March 2020.
3. 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 Group
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. 238 shares have been
allocated to Lee Rochford under the SIP, from 1 January 2020 to 12 March 2020.
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. Each of these awards lapsed in connection with Paul Cooper leaving the business.
6. 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
gave Paul Cooper one matching share for each Partnership share bought on his behalf. The matching shares were forfeited on Paul Cooper’s departure from the business due to the
three-year forfeiture period.
Arrow Global Annual Report and Accounts 2019
Governance
92
Directors’ remuneration report continued
c. Non-executive directors – share ownership
Non-executive directors
Jonathan Bloomer
Lan Tu
Maria Luís Albuquerque
Andrew Fisher
Iain Cornish1
Shares owned
50,896
23,309
0
40,000
0
1.
Iain Cornish stepped down from the board on 30 April 2019 and the number of shares owned is stated as of that date.
There were no changes in the interests of executive or non-executive directors between 31 December 2019 and 12 March 2020, other than the
SIP allocation to Lee Rochford under his monthly allocation for January and February 2020 as referred to on page 91.
Payments to past directors and payments for loss of office (audited information)
Paul Cooper stepped down from the board and left the business on 9 August 2019. His remuneration between 1 January 2019 and 9 August 2019
is disclosed in the single figure table on page 93.
As set out in the section 430 (2B) statement on stepping down, which can be found on the Company’s website (www.arrowglobal.net),
in accordance with the rules of the LTIP and the Deferred Bonus Share Plan all outstanding awards made to Paul in 2018 and 2019 lapsed in full.
In addition, the buy-out award made to Paul in 2018 was conditional upon him remaining in employment for a period of two years from the
award being made. As Paul left within this period, the committee has applied clawback to awards that have already vested (with details set out
in the single figure table) and awards due to vest in 2020 and 2021 lapsed in full.
Paul Cooper has not received and will not receive any remuneration payment beyond his remuneration for the period to 9 August. Paul Cooper
has not received and will not receive any payment for loss of office.
TSR performance
The graph below shows TSR performance of the Company from IPO to 31 December 2019 compared with the FTSE SmallCap index. Throughout
the year ended 31 December 2019, 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.
Return
£
260
240
220
200
180
160
140
120
100
80
7 Oct 2013
31 Dec 2014
31 Dec 2015
31 Dec 2016
31 Dec 2017
31 Dec 2018
31 Dec 2019
Arrow Global Group Plc
FTSE Small Cap
(excluding investment trusts)
Arrow Global Annual Report and Accounts 2019
93
Chief executive officer disclosures
a. Chief executive officer remuneration for previous years
The table below sets out the total pay of the 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.
2019 (Lee Rochford)
2018 (Lee Rochford)
2017 (Lee Rochford)
2016 (Tom Drury)
2015 (Tom Drury)
2014 (Tom Drury)
2013 (Tom Drury)
CEO single figure
£000
932
1,011
942
1,421
722
631
154
CEO bonus
(as a % of maximum)
£000
46.25
82.5
85.0
80.0
70.3
62.5
80.0
CEO LTIP vesting
(as a % of maximum)
25
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.
b. Percentage change in chief executive officer remuneration
The table below shows how the percentage change in the chief executive officer’s salary, taxable benefits and annual bonus pay-out between
2018 and 2019 compared with the percentage change in the average of each of those components for the workforce as a whole.
Chief executive officer
Workforce
% change in salary
and fees
3.0%
4.7%
% change in
performance-related bonus
(42.3%)
(1.0%)
Relative importance of spend on pay
The table below illustrates the relative importance of spend on pay compared with distributions to shareholders:
2019
2018
Difference
Total employee
remuneration 1
£000
98,931
94,446
4,485
Shareholder
distributions
£000
23,062
21,158
1,904
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
Matt Hotson
Jonathan Bloomer
Lan Tu
Maria Luís Albuquerque
Andrew Fisher
Date of service agreement/
letter of appointment
6 December 2016
15 July 2019
7 October 20131
2 March 20153
7 March 20164
9 December 20162
Expiry
N/A
N/A
5 October 2022 *
8 March 2021 *
7 March 2022 *
9 December 2022 *
Notice period
12 months
12 months
1 month
1 month
1 month
1 month
* Subject to re-election at the 2019 annual general meeting.
1. As amended by extension letter dated 2 October 2019.
2. As amended by extension letter dated 28 January 2020, effective from 9 December 2019.
3. As amended by extension letter dated 23 February 2018.
4. As amended by extension letter dated 2 April 2019.
Arrow Global Annual Report and Accounts 2019
Governance
94
Directors’ remuneration report continued
The remuneration committee
Throughout the year, the committee consisted of Lan Tu (as chair) and Andrew Fisher, each of whom is an independent non-executive
director. The Company chair, Jonathan Bloomer, who was considered independent on appointment, is a member of the committee.
Iain Cornish was a member of the committee until he stepped down from the board on 30 April 2019.
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 Cornish1
Andrew Fisher
Eligible to attend
3
3
1
3
Attended
3
3
1
3
1. Stepped down as Non-executive director on 30 April 2019.
The terms of reference of the committee are on the Company website at www.arrowglobal.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 £51,700 for the year ended 31 December 2019. Deloitte LLP also provided advice in relation to internal audit services,
taxation and share plans 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 has 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 and is similarly not in
attendance when his own remuneration is discussed.
Statement of shareholder voting
At the 2019 annual general meeting, the annual report on remuneration (excluding the directors’ remuneration policy) was approved by
shareholders with the following votes:
% of votes for
73.86%
% of votes against
26.14%
Number of votes withheld
13,732,439
Details of the actions taken by the committee in response to the vote are set out in the committee chair’s statement.
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
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 Company’s website
(www.arrowglobal.net).
Operation
• Positioned within a broad range around the
mid-market level for the role.
• Paid monthly and ordinarily reviewed annually.
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.
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 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.
Arrow Global Annual Report and Accounts 2019
95
Element and link
to business strategy
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.
LTIP
Rewards the
achievement of
long-term objectives,
promotes and aligns
interests of executives
with those of
shareholders.
Operation
• Typically comprises private medical and dental cover, life insurance and
permanent health insurance.
• Reviewed from time to time to ensure it remains market 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.
Applicable performance measures
and maximum opportunity
• None.
• The cost of providing benefits is
borne by the Group and varies
from time to time.
• Contribution to a defined contribution pension arrangement or monthly
cash allowance in lieu of pension (or a combination of contribution and
cash allowance).
• Performance targets set annually.
• Pay-outs determined by the committee following the end of the
performance period.
• 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 would have been paid over the period to 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 below this table.
• Nil-cost share options, conditional awards or 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.
• 15% of basic salary.
• Update agreed during 2019 –
Pension contributions for new
executive directors will be set
to be in line with the wider
workforce rate (currently 5.0%
of salary)
• Maximum bonus opportunity
of 140% of annual base salary
per year.
• Split between financial and
strategic/personal 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.
• Maximum award of 200% of
annual base salary 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 FCF,
ROE and TSR.
• 25% of award vests for threshold
performance rising to 100% for
maximum performance.
Arrow Global Annual Report and Accounts 2019
Governance
96
Directors’ remuneration report continued
Element and link
to business strategy
Share incentive plan
(SIP)
Promotes alignment
with shareholders
across the Group’s
entire employee base.
Save as you earn plan
(‘sharesave’)
Promotes further
alignment with
shareholders across
Group’s entire
employee base.
Operation
• 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.
• 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.
Applicable performance measures
and maximum opportunity
• No performance targets.
• Under the UK plan, maximum awards and matching
share ratio reflect the limits in the applicable tax
legislation (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 (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 20.0% to the value of a
share when invited to participate).
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 Company, 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 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 free cash flow, 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 and
Customs qualifying plans) operated by the Group instead of pursuing clawback on the cash bonuses.
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.
Arrow Global Annual Report and Accounts 2019
97
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 and Customs qualifying plans) operated by the Group.
Clawback will apply to HM Revenue and Customs qualifying plans to the extent permitted by HM Revenue and 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.
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.
Operation and link to business strategy
• A base fee is paid for holding the office of
non-executive director or Chairman.
Maximum opportunity
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.
Element and purpose
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
12 March 2020
Arrow Global Annual Report and Accounts 2019
Governance
98
Report of the directors
Report of the directors
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 2019. The corporate governance report set
out on pages 58 to 66 forms part of this report. The risks to which the
Group is subject, and the policies in respect of such risks, are set out
on pages 31 to 38. The Company’s principal subsidiaries are listed in
note 23.
The following information is set out in the strategic report on pages
1 to 53:
• 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 Chair’s statement, Group chief executive
officer’s review and Group chief financial officer’s review on pages 4,
6 and 26 respectively, which are incorporated into this report
by reference.
Consideration of the Company and the Group as a going concern
can be seen on page 39. 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 2018 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 finance team 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.
So far as the board is aware, there is no relevant audit information
of which the auditors are unaware and the board has taken all
reasonable steps to ascertain any relevant audit information and
ensure the auditors are aware of such information.
Dividends
The directors recommend the payment of a final dividend of 8.7p
per ordinary share for the financial year ended 31 December 2019
(2018: 8.7p) to be paid (assuming shareholder approval is obtained)
on 17 July 2020 to ordinary shareholders on the register on 12 June
2020. The ex-dividend date for the final dividend is 11 June 2020 and
the dividend reinvestment plan election date is 26 June 2020.
Arrow Global Annual Report and Accounts 2019
The recommended final dividend, together with the interim dividend
of 4.4p per share (2018: 4.0p) paid on 11 October 2019, brings the
total dividend declared and proposed for the year to 13.1p per share
(2018: 12.7p).
The Company held £152.5 million distributable reserves at
31 December 2019, sufficient to pay the dividend.
Share capital
As at 31 December 2019, the Company had 176,858,244 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 19 to
the Group financial statements on page 138. 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 2019 annual general meeting, shareholders authorised the
Company to make market purchases of up to 17,626,334 ordinary
shares representing 10.0% of the Company’s issued share capital at
that time, and to allot shares in the Company up to an aggregate
nominal amount of £587,544.48 These authorities expire at the 2020
annual general meeting. During the year ended 31 December 2019, no
shares were repurchased. Resolutions to renew these authorities will
be proposed at the 2020 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 Group 2016 Employee Benefit
Trust (the “Estera Trust”). On 10 April 2019, 594,901 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 10 April 2019. 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 Equiniti, the
Group’s share plan administrator, to satisfy DSBP and LTIP awards and to the
trustee of the Arrow Share Incentive Plan (SIP) to satisfy awards of shares to
participating employees under the SIP.
As at 31 December 2019, the Estera Trust held 628,874 ordinary
shares (2018: 1,030,766 shares) representing 0.36% (2018: 0.58%)
of the Company’s issued share capital. The Trust deed contains a
dividend waiver provision in relation to these shares.
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 make
a transfer of shares.
99
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 2019, the Company had been notified under Rule 5
of the Disclosure, Guidance and Transparency Rules of the Financial
Conduct Authority, of the following holdings representing 3.0% or
more of the voting rights in its shares:
Shareholder
Jupiter Asset Management Limited
Fifth Street Station LLC
Schroders Plc
M&G Plc
Devon Equity Management Limited
Legal and General Investment Management Ltd
Odin Fortvaltning AS
No. of ordinary shares/
voting rights notified
17,487,837
16,139,622
17,477,696/15,098,4151
9,327,549
8,170,8512
5,414,829
5,272,421
% of ordinary share capital/
voting rights notified
9.88%
9.13%
8.62%
5.27%
4.62%
3.07%
3.01%
1. The number of shares and voting rights notified for this shareholder are different.
2. The number of ordinary shares and voting rights were not disclosed in the last TR-1 notification.
The following changes to the above voting rights have been notified to the Company under Rule 5 of the Disclosure, Guidance and
Transparency Rules from 1 January 2020 up until 12 March 2020:
Shareholder
Devon Equity Management Limited
Blackrock Inc
M&G Plc
No. of ordinary shares/voting rights notified
N/A1
9,295,000
8,064,850
% of ordinary share capital/voting rights notified
5.25%
5.46%
4.56%
1. The number of ordinary shares and voting rights were not disclosed in the TR-1 notification submitted on 2 March 2020.
Directors
The directors who served during the financial year were as follows:
Director
Jonathan Bloomer
Lee Rochford
Lan Tu
Maria Luís Albuquerque
Andrew Fisher
Matt Hotson
Iain Cornish
Paul Cooper
Position
Non-executive chair
Group chief executive officer
Independent non-executive director
Independent non-executive director
Senior Independent non-executive director
Group chief financial officer
Senior independent non-executive director
Group chief financial officer
Service in the year ended 31 December 2019
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Served throughout the year
Appointed on 8 October 2019
Resigned on 30 April 2019
Resigned on 9 August 2019
Biographical details of the directors of the Company during the year and to the date of this report can be seen on pages 54 to 55.
Arrow Global Annual Report and Accounts 2019
Governance 100
Report of the directors continued
Directors continued
Further details relating to board and committee composition are
disclosed in the corporate governance report and committee reports
on pages 58 to 97.
The directors are aware of the provisions in the Code that all directors
should be subject to annual re-election and having adopted these
provisions, all directors will offer themselves for election and
re-election at the 2020 annual general meeting.
Directors’ interests
The directors’ interests in the share capital of the Company at
31 December 2019 are set out on pages 90 to 92.
Directors’ indemnities
During the financial year ended 31 December 2019 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 2020 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.arrowglobal.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 2019 annual report and notice
of annual general meeting 2020 will be distributed electronically
again and via the Company’s website to shareholders who have
consented or deemed to have consented to receive electronic
communications. Shareholders who have requested shareholder
information in hard copy form will continue to receive this.
Employee consultation
Further information concerning employees is given on page 44.
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,
employee engagement sessions with the board, use of the employee
engagement forum, the distribution of a weekly newsletter, focus
group meetings, employee surveys and regular Group-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. More
information on workforce engagement by our non-executive
director Maria Luis Albuquerque can be found on page 69.
Employees are encouraged to be involved in the Company’s
performance via the SIP, the detail of which is set out at note 28.
The Group also has a whistleblowing policy and employees are
made aware of this at induction and through regular ongoing
refresher training. An anonymous, externally facilitated
whistleblowing helpline has also been implemented to listen to the
concerns of employees and to help to enhance a culture of openness.
Disabled persons
The Group adopts a consistent, non-discriminatory approach to all
applicants during both the recruitment and the on-boarding process,
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. 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.
Policies and Practices on Payments to Creditors
We recognise the importance of good supplier relationships to the
overall success of our business. We publish key statistics and other
information on our payment practices in line with the Duty to Report
on Payment Practices and Performance on the Department for
business, Energy and Industrial Strategy’s Website. Information is
published on a six-monthly basis. For the six months to 31 December
2019, our average time taken to pay invoices was 27 days; in the
previous six months it was 33 days.
Environmental policy
Due to the nature of its business activities, the Group’s environmental
impact is considered minimal. An environmental policy, as part of the
Group’s corporate social responsibility 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 by using electronic alternatives 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.
Arrow Global Annual Report and Accounts 2019
101
The reporting period aligns to the financial period (i.e. the year ended 31 December 2019) and the Group’s carbon reporting falls under
three scopes:
Scope
1
2
3
Type
Direct emissions by the Company
Indirect energy consumed but not owned by the Company
Other indirect emissions not included in scope 2
Reportable items
Air conditioning and refrigerated leaks1
Electricity usage
Business travel
1. Considered under the screening method with an estimated 5% leakage.
Activities that the Group was responsible for led to 2,859.9 tonnes of annual CO2 emissions in 2019 (2018: 2,450.5 tonnes) as documented below:
C02 emissions (tonnes)
per annum 2018
465.3
1,403.1
1,868.4
582.1
2,450.5
1.4
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 2019
485.2
1,499.1
1,984.3
875.6
2,859.9
1.2
Branches outside of the UK
The Company has no overseas branches. The Company’s subsidiaries are detailed in note 23 to the financial statements.
Risk management
Please refer to the strategic report, on pages 31 to 33.
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
The process for evaluation of board effectiveness is detailed in the Corporate Governance report on page 58.
Arrow Global Annual Report and Accounts 2019
Governance 102
Report of the directors continued
Disclosures required under Listing Rule 9.8.4R
In accordance with Listing Rule 9.8.4R, the Company is required to disclose certain information within the Directors’ Report or advise where
such relevant information is contained. The information required to be disclosed, where applicable to the Company, can be located in the
Annual Report and Accounts at the references set out below:
Topic
Interest capitalised
Publication of unaudited financial information
Details of long-term incentive schemes
Waiver of emoluments by a director
Waiver of future emoluments by a director
Non pre-emptive issues of equity for cash
Non pre-emptive issues of equity for cash in relation to major subsidiary undertakings
Parent participation in a placing by a listed subsidiary
Contracts of significance
Provision of services by a controlling shareholder
Shareholder waivers of dividends
Shareholder waivers of future dividends
Agreements with controlling shareholders.
Location in Annual Report
Not applicable
Additional information
(unaudited)
Remuneration Report
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Report of the Directors
Report of the Directors
Not applicable
Page Numbers
–
170
80
–
–
–
–
–
–
–
98
98
–
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 2 June 2020 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.arrowglobal.net.
This report was approved by the board and signed on its behalf by:
Stewart Hamilton
Company secretary
12 March 2020
Arrow Global Annual Report and Accounts 2019
Directors’ responsibilities statement
103
Statement of directors’ responsibilities in respect
of the Annual Report and the financial statements
The directors are responsible for preparing the Annual Report and
the Group and parent 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 International Financial Reporting Standards as
adopted by the European Union (IFRSs 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 judgements and estimates that are reasonable, relevant
and reliable;
• 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.
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 of the directors in respect of the annual
financial report
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the
applicable set of accounting standards, 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 and directors’ report include 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.
Matt Hotson
Group chief financial officer
12 March 2020
Lee Rochford
Group chief executive officer
12 March 2020
Arrow Global Annual Report and Accounts 2019
Governance 104
Independent
auditor’s report
to the members of Arrow Global Group plc
1. Our opinion is unmodified
We have audited the financial statements of Arrow
Global Group plc (“the Company”) for the year
ended 31 December 2019 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:
— the financial statements give a true and fair
view of the state of the Group’s and of the
parent Company’s affairs as at 31 December
2019 and of the Group’s profit for the year then
ended;
— the Group financial statements have been
properly prepared in accordance with
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
accordance with the provisions of the
Companies Act 2006; and
— 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.
Basis for opinion
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 were first appointed as auditor by the directors on
2 July 2014. The period of total uninterrupted
engagement is for the 6 financial years ended 31
December 2019. 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.
Overview
Materiality:
group financial
statements as a
whole
Coverage
£3.0m (2018:£3.3m)
5.0% (2018: 4.4%) of normalised
profit before tax
100% (2018:100%) of group profit
before tax
Key audit matters vs 2018
Event driven
Recurring risks
◄►
◄►
◄►
◄►
The impact of
uncertainties due to
the UK exiting the
European Union on our
audit
Estimation of future
cash collections from
portfolio investments
Fair value of intangible
assets acquired as part
of business
combinations
Recoverability of
parent company’s
investment in
subsidiaries and intra-
group debtor balance
due
2. Key audit matters: including our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, 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.
Key audit matter
The risk
Our response
The impact of
Unprecedented levels of uncertainty:
We developed a standardised firm-wide approach to the
uncertainties due to
the UK exiting the
European Union on
our audit
All audits assess and challenge the
reasonableness of estimates, in
particular as described in ‘Estimation of
included:
consideration of the uncertainties arising from Brexit in
planning and performing our audits. Our procedures
future cash collections from portfolio
— Our Brexit knowledge: We considered the directors’
Refer to page 35
investments’ below, and related
assessment of Brexit-related sources of risk for the
(principal risks), page
disclosures and the appropriateness of
Group’s business and financial resources compared
39 (viability
the going concern basis of preparation
with our own understanding of the risks. We
statement), page 76
of the financial statements (see below).
considered the Directors’ plans to take action to
(Risk Committee
All of these depend on assessments of
mitigate the risks;
Report).
the future economic environment and
the Group’s future prospects and
performance.
— Sensitivity analysis: When addressing ‘Estimation of
future cash collections from portfolio investments’ and
other areas that depend on forecasts, we compared the
In addition, we are required to consider
Directors’ analysis to our assessment of the full range
the other information presented in the
of reasonably possible scenarios resulting from Brexit
Annual Report including the principal
uncertainty and, where forecast cash flows are required
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 its
effects are subject to unprecedented
levels of uncertainty of consequences,
with the full range of possible effects
unknown.
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 we considered all of the Brexit related
disclosures 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 of the impact of
uncertainties due to the UK exiting the European Union
and disclosures in relation to going concern 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.
105
2. Key audit matters: including our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, 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.
Key audit matter
The risk
Our response
The impact of
uncertainties due to
the UK exiting the
European Union on
our audit
Refer to page 35
(principal risks), page
39 (viability
statement), page 76
(Risk Committee
Report).
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 its
effects are subject to unprecedented
levels of uncertainty of consequences,
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 we considered all of the Brexit related
disclosures 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 of the impact of
uncertainties due to the UK exiting the European Union
and disclosures in relation to going concern 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.
Arrow Global Annual Report and Accounts 2019
Financial statements 106
2. Key audit matters: including our assessment of risks of material misstatement (cont.)
Key audit matter
The risk
Our response
Estimation of future
cash collections from
portfolio investments
(£1,163.6 million; 2018:
£1,087.0 million)
Refer to page 70 (Audit
Committee Report),
page 118 (accounting
policy) and page 145
(financial disclosures).
Forecast based valuation:
Our procedures included:
The Group’s estimate of the remaining
future cash collections (ERCs) from
portfolio investments is the key
variable in determining the portfolio
carrying amount and any subsequent
revenue adjustments. Portfolio
investments comprise of amortised
cost portfolios, fair value portfolios and
real estate owned inventories.
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 ERCs 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 observed
performance against previous
forecasts.
Given the diverse nature of the
Group’s Portfolio Investments,
estimation of future cash collections
for more bespoke assets involves a
greater degree of management
judgement. Dependent on the level of
complexity of the asset, management
use various forecasting models to
derive the ERCs.
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.
The effect of these matters is that, as
part of our risk assessment, we
determined that estimation of future
cash collections from Portfolio
Investments has a high degree of
estimation uncertainty, with a potential
range of reasonable outcomes greater
than our materiality for the financial
statements as a whole.
— Controls design: We assessed the design,
implementation and operating effectiveness of 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 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 cover the outputs of the models
and manual adjustments to inform the extent of our
substantive testing.
— Methodology implementation: We assessed the
methodology and implementation of the cash flow
forecasting models used in valuing the portfolio
investments, incorporating our own IT, modelling and
valuation specialists to consider the appropriateness of
the most significant models, review model code and
challenge certain specific inputs into the forecasting
models;
— Critical assessment of cash flows: Informed by our
assessment of the controls and models noted above, we
assessed the modelled cash flows by portfolio to identify
those portfolios where more judgement may have been
exercised (for example due to changes in approach by
management to managing the portfolios) and/or where
we consider greater risk may exist (for example due to
under/over-performance against historic forecasts).
Taking into account these risk factors and our cumulative
audit experience, we undertook a risk based selection
process to critically assess the cash flow forecasts and
any manual adjustments made by the Group with
reference to actual historic collections and our
understanding of the Group; and
— Assessing transparency: We critically assessed the
adequacy of the disclosures regarding the degree of
estimation uncertainty involved in arriving at the valuation
and the accounting judgements made in determining the
measurement basis and valuation.
Our results
— We found the resulting forecast based valuation to be
acceptable (2018 result: acceptable).
2. Key audit matters: including our assessment of risks of material misstatement (cont.)
Key audit matter
The risk
Our response
107
Fair value of
intangible assets
acquired as part of
business
combinations
(£0.7 million; 2018:
£1.9 million)
Refer to page 70 (Audit
Committee Report),
page 124 (accounting
policy) and page 165
(financial disclosures).
Recoverability of
parent company’s
investment in
subsidiaries and intra-
group debtor balance
due from Group
entities
(Investment in
subsidiary £307.5
million; 2018: £307.5
million)
(Intra-group debtors
£212.5 million; 2018:
£222.3 million)
Parent only
Refer to page 70 (Audit
Committee Report),
page 117 (accounting
policy) and page 141
(financial disclosures).
Forecast based valuation:
Our procedures included:
On 8 April 2019, the Group acquired
Drydens Limited in the UK for £10.2m,
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 a discounted cash flow
model to arrive at its estimates of the
acquired intangible assets including
customer contracts.
This required the Group to exercise
judgement in determining the
expected cash flows from the assets
and the discount rates to be applied.
— Accounting analysis: We assessed the Group’s
accounting policy against the requirements of the
relevant accounting standard including the acquisition
date and the recognition of intangible assets;
— Our sector experience: We challenged the
completeness of the acquired net assets and associated
assumptions with reference to our business
understanding of the acquired entity 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 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
and judgement involved in arriving at the fair value.
Our results
— We found the fair value of the acquired intangible assets
to be acceptable (2018 result: acceptable).
Low risk, high value:
Our procedures included:
The carrying amount of the parent
company’s investment in subsidiaries
and intra-group debtor balance due
from Group entities represents 100%
(2018: 100%) of the company’s total
assets.
Their recoverability does not contain
an inherent 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.
— Test of detail: We compared the carrying amount of the
investments, representing 100% (2018: 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 risk 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 relied upon 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 cash flows of the underlying subsidiaries.
Our results
— We found the parent company’s assessment of the
recoverability of the their investment in subsidiaries and
intra-group debtor balances to be acceptable (2018 result:
acceptable).
Arrow Global Annual Report and Accounts 2019
Financial statements 108
3. Our application of materiality and an overview
of the scope of our audit
Normalised profit before tax
£59.7m (2018: £73.4m)
Group Materiality
£3.0m (2018: £3.3m)
Materiality for the Group financial statements as a
whole was set at £3.0m (2018: £3.3m), determined
with reference to a benchmark of profit before tax
normalised to provide a more stable measure year
on year by excluding £1.5m acquisition costs and
£6.9m in relation to the expansion of the fund
management business (2018: profit before tax
normalised to exclude £14.7m of costs in relation to
acquisitions and £18.7m in relation to the Group’s
bond finance), of which it represents 5.0% (2018:
4.4%).
Materiality for the parent company financial
statements as a whole was set at £1.9m (2018:
£1.6m), determined with reference to a benchmark
of company total assets, of which it represents
0.4% (2018: 0.4%).
We agreed to report to the audit committee any
corrected or uncorrected identified misstatements
for the Group financial statements exceeding
£150,000 (2018: £165,000), in addition to other
identified misstatements that warranted reporting
on qualitative grounds.
How we scoped our audit
Of the group's 3 (2018: 10) reporting components,
we subjected 3 (2018: 6) to full scope audits for
group purposes.
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 £1.2m to £2.7m
(2018: £1.6m to £2.6m), having regard to the mix of
size and risk profile of the Group across the
components.
The work on the overseas components was
performed by overseas component auditors. The
audit of the UK component (including the audit of
the parent company), was performed by the Group
team.
The Group team visited the 3 (2018: 3) key
overseas locations, being Portugal, Italy and the
Netherlands (2018: Portugal, Italy and the
Netherlands) to assess the audit risk and strategy.
Telephone conference meetings were also held
with the overseas component auditors throughout
the audit. During these visits and meetings, the
findings reported to the Group team were
discussed in more detail, key audit working papers
were reviewed, and any further work required by
the Group team to be performed by the component
auditor was instructed.
Arrow Global Annual Report and Accounts 2019
£3.0m
Whole financial
statements materiality
(2018: £3.3m)
£2.7m
Range of materiality at 3
components (£1.2m to £2.7m)
(2018: £1.6m to £2.6m)
Normalised profit before tax
Group materiality
£0.15m
Misstatements reported to the
audit committee (2018:
£0.17m)
Group revenue
Group profit before tax
100%
(2018 100%)
100
100
100%
(2018 100%)
100
100
Group total assets
100%
(2018 100%)
100
100
Key:
Full scope for group audit purposes 2019
Full scope for group audit purposes 2018
3. Our application of materiality and an overview
of the scope of our audit
Normalised profit before tax
£59.7m (2018: £73.4m)
Group Materiality
£3.0m (2018: £3.3m)
Materiality for the Group financial statements as a
whole was set at £3.0m (2018: £3.3m), determined
with reference to a benchmark of profit before tax
normalised to provide a more stable measure year
on year by excluding £1.5m acquisition costs and
£6.9m in relation to the expansion of the fund
management business (2018: profit before tax
normalised to exclude £14.7m of costs in relation to
acquisitions and £18.7m in relation to the Group’s
bond finance), of which it represents 5.0% (2018:
4.4%).
Materiality for the parent company financial
statements as a whole was set at £1.9m (2018:
£1.6m), determined with reference to a benchmark
of company total assets, of which it represents
0.4% (2018: 0.4%).
We agreed to report to the audit committee any
corrected or uncorrected identified misstatements
for the Group financial statements exceeding
£150,000 (2018: £165,000), in addition to other
identified misstatements that warranted reporting
on qualitative grounds.
How we scoped our audit
Of the group's 3 (2018: 10) reporting components,
we subjected 3 (2018: 6) to full scope audits for
group purposes.
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 £1.2m to £2.7m
(2018: £1.6m to £2.6m), having regard to the mix of
size and risk profile of the Group across the
components.
The work on the overseas components was
performed by overseas component auditors. The
audit of the UK component (including the audit of
the parent company), was performed by the Group
team.
The Group team visited the 3 (2018: 3) key
overseas locations, being Portugal, Italy and the
Netherlands (2018: Portugal, Italy and the
Netherlands) to assess the audit risk and strategy.
Telephone conference meetings were also held
with the overseas component auditors throughout
the audit. During these visits and meetings, the
findings reported to the Group team were
discussed in more detail, key audit working papers
were reviewed, and any further work required by
the Group team to be performed by the component
auditor was instructed.
Normalised profit before tax
£0.15m
Group materiality
Misstatements reported to the
audit committee (2018:
£0.17m)
Group revenue
Group profit before tax
£3.0m
Whole financial
statements materiality
(2018: £3.3m)
£2.7m
Range of materiality at 3
components (£1.2m to £2.7m)
(2018: £1.6m to £2.6m)
100%
(2018 100%)
100
100
Group total assets
100%
(2018 100%)
100
100
100%
(2018 100%)
100
100
Key:
Full scope for group audit purposes 2019
Full scope for group audit purposes 2018
4. We have nothing to report on going concern
5. We have nothing to report on the other information in
109
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 3 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 102 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, on page 39, 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 and uncertainties 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.
Arrow Global Annual Report and Accounts 2019
Financial statements 110
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.
We are required to report to you if the Corporate
Governance Statement does not properly disclose a
departure from the provisions of the UK Corporate
Governance Code specified by the Listing Rules for our
review.
We have nothing to report in these respects.
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
103, 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.
Arrow Global Annual Report and Accounts 2019
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, certain aspects of company legislation
and 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. Through
these procedures, we became aware of actual or suspected
non-compliance and considered the effect as part of our
procedures on the related financial statement items. The
identified actual or suspected non-compliance was not
sufficiently significant to our audit to result in our response
being identified as a key audit matter.
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
12 March 2020
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, certain aspects of company legislation
and 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. Through
these procedures, we became aware of actual or suspected
non-compliance and considered the effect as part of our
procedures on the related financial statement items. The
identified actual or suspected non-compliance was not
sufficiently significant to our audit to result in our response
being identified as a key audit matter.
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
12 March 2020
111
Arrow Global Annual Report and Accounts 2019
Financial statements 112
Financial statements
Consolidated statement of profit or loss
and other comprehensive income
For the year ended 31 December 2019
Note
2019
£000
2018
£000
24
24
24
24
6
10
10
7
8
11
199,094
32,397
12,714
561
244,766
94,360
–
392
339,518
(109,798)
(123,902)
(233,700)
105,818
61
(54,559)
51,320
(14,033)
37,287
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
(7,077)
161
30,371
1,370
(241)
31,098
35,223
2,064
37,287
29,969
–
29,969
28,307
2,064
30,371
0.20
0.19
31,098
–
31,098
0.17
0.17
12
12
Income from portfolio investments at amortised cost
Fair value gain on portfolio investments at FVTPL
Impairment gains on portfolio investments
Income from real estate inventories
Total income from portfolio investments
Income from asset management and servicing
Profit from sale of property
Other income
Total income
Operating expenses:
Collection activity costs
Other operating expenses
Total operating expenses
Operating profit
Finance income
Finance costs
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
Total comprehensive income
Profit after tax attributable to:
Owners of the Company
Non-controlling interest
Comprehensive income attributable to:
Owners of the Company
Non-controlling interest
Basic EPS (£)
Diluted EPS (£)
The parent company’s profit after tax for the year was £11,897,000 (2018: £154,298,000).
Arrow Global Annual Report and Accounts 2019
113
Consolidated and parent company
statement of financial position
As at 31 December 2019
Assets
Cash and cash equivalents
Trade and other receivables
Portfolio investments – amortised cost
Portfolio investments – FVTPL
Portfolio investments – real estate inventories
Property, plant and equipment
Intangible assets
Deferred tax asset
Investment in subsidiary undertakings
Goodwill
Total assets
Liabilities
Bank overdrafts
Revolving credit facility
Derivative liability
Trade and other payables
Current tax liability
Other borrowings
Asset-backed loans
Senior secured notes
Deferred tax liability
Total liabilities
Equity
Share capital
Share premium
Retained earnings
Hedging reserve
Other reserves
Total equity attributable to shareholders
Non-controlling interest
Total equity
Total equity and liabilities
Group
2019
£000
Group
2018
£000
Company
2019
£000
Company
2018
£000
Note
16
24
24
24
15
14
11
23
13
29
29
26
17
29
29
29
11
19
19
88,765
75,094
932,199
169,799
61,626
24,521
38,159
10,759
–
267,700
1,668,622
1,386
230,963
509
223,001
7,645
3,672
84,077
897,875
17,637
1,466,765
1,769
347,436
129,240
(423)
(280,630)
197,392
4,465
201,857
1,668,622
92,001
94,206
869,056
217,974
–
7,761
44,264
8,113
–
262,679
1,596,054
2,696
242,121
502
197,657
7,915
11,635
–
926,340
14,930
1,403,796
1,763
347,436
116,589
(584)
(273,547)
191,657
601
192,258
1,596,054
18
212,717
–
–
–
–
–
–
307,500
–
520,235
–
–
–
2,007
697
–
–
–
120
2,824
1,769
347,436
174,012
–
(5,806)
517,411
–
517,411
520,235
8
222,579
–
–
–
–
–
–
307,500
–
530,087
–
–
–
2,251
697
–
–
–
–
2,948
1,763
347,436
183,740
–
(5,800)
527,139
–
527,139
530,087
Note – the balance sheet has been re-presented on a reducing liquidity basis and portfolio investments have been split out into their constituent parts. Prior periods have been
re-presented accordingly on this basis.
Approved by the board of directors on 12 March 2020, signed and authorised for issue on its behalf by:
Matt Hotson
Group chief financial officer
Lee Rochford
Group chief executive officer
Company number: 08649661
Arrow Global Annual Report and Accounts 2019
Financial statements
114
Financial statements continued
Consolidated and parent company
statement of changes in equity
For the year ended 31 December 2019
Group
Balance at 1 January 2018
Profit after tax
Exchange differences
Recycled to profit after tax
Net fair value losses – cash flow hedges
Tax on hedged items
Total comprehensive income for the year
Share-based payments net of tax
Shares issued
Repurchase of own shares
Dividend paid
Dividend paid by NCI
Non-controlling interest on acquisition
Balance at 31 December 2018
Impact of adopting IFRS 16
Balance post IFRS adjustments
at 1 January 2019
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 net of tax
Dividend paid
Non-controlling interest on acquisition
Balance at 31 December 2019
Share
Ordinary
premium
shares
£000
£000
1,753 347,436
Retained
earnings
£000
104,511
– 29,969
–
–
–
–
–
–
–
–
29,969
–
3,267
–
–
–
–
–
(21,158)
–
–
–
–
–
116,589
1,763 347,436
(947)
–
–
–
–
–
–
–
–
10
–
–
–
–
–
Hedging
reserve
£000
(343)
–
–
–
(291)
50
(241)
–
–
–
–
–
–
Own
share
reserve 1
£000
(3,291)
–
–
–
–
–
–
–
–
(2,509)
–
–
–
(584) (5,800)
–
–
Translation
reserve 1
£000
7,844
–
2,572
(1,202)
–
–
1,370
–
–
–
–
–
–
9,214
–
Merger
reserve 1
£000
Total
£000
(276,961) 180,949
– 29,969
2,572
–
(1,202)
–
(291)
–
50
–
31,098
–
3,267
–
10
–
(2,509)
–
(21,158)
–
–
–
–
–
(276,961) 191,657
(947)
–
Non-
controlling
interest
£000
173
Total
£000
181,122
– 29,969
2,572
–
(1,202)
–
(291)
–
50
–
31,098
–
3,267
–
10
–
(2,509)
–
(21,158)
–
(43)
(43)
471
471
601 192,258
(947)
–
115,642
1,763 347,436
35,223
–
–
–
–
–
–
–
–
–
35,223
–
–
–
–
–
–
1,437
– (23,062)
–
–
1,769 347,436 129,240
–
–
–
–
–
–
6
–
–
–
–
(584) (5,800)
–
–
–
–
–
–
–
(6)
–
–
–
(423) (5,806)
–
–
7
187
(33)
161
–
–
–
–
–
9,214
–
(7,077)
–
–
–
(7,077)
–
–
–
–
–
2,137
(276,961) 190,710
35,223
–
(7,077)
–
7
–
187
–
(33)
–
28,307
–
6
–
(6)
–
–
1,437
– (23,062)
–
–
(276,961) 197,392
191,311
601
37,287
2,064
(7,077)
–
7
–
187
–
(33)
–
30,371
2,064
6
–
(6)
–
–
1,437
– (23,062)
1,800
1,800
4,465 201,857
1. Other reserves total £280,529,000 deficit (2018: £273,547,000 deficit).
Company
Balance at 1 January 2018
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
Impact of adopting IFRS 16
Balance post IFRS adjustments at 1 January 2019
Profit after tax
Total comprehensive income for the year
Shares issued
Repurchase of own shares
Share-based payments
Dividend paid
Balance at 31 December 2019
Arrow Global Annual Report and Accounts 2019
Share
premium
£000
347,436
Ordinary
shares
£000
1,753
–
–
10
–
–
–
1,763
–
Retained
earnings
£000
47,333
– 154,298
– 154,298
–
–
–
–
3,267
–
(21,158)
–
347,436 183,740
–
–
183,740
1,763 347,436
11,897
–
11,897
–
–
–
–
–
–
1,437
– (23,062)
174,012
1,769 347,436
–
–
6
–
–
–
Own share
reserve
£000
(3,291)
Total
£000
393,231
– 154,298
– 154,298
10
–
(2,509)
(2,509)
3,267
–
–
(21,158)
527,139
(5,800)
–
–
(5,800) 527,139
11,897
–
11,897
–
6
–
(6)
(6)
–
1,437
– (23,062)
(5,806) 517,411
115
Consolidated and parent company
statement of cash flows
For the year ended 31 December 2019
Net cash generated by/(used in) 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
Acquisition of subsidiaries, net of cash acquired
Movements in deferred consideration related to subsidiary acquisitions
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
Proceeds from ABS issuing
Increase in non-controlling interest on acquisition
Repayment of interest on senior notes
Repurchase of own shares
Issue of share capital
Bank interest received
Bank and other similar fees paid
Finance lease payments
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
31
15
14
30
7
21
Group
2019
£000
20,516
(1,269)
(11,830)
18
(2,850)
(12,004)
(27,935)
(7,499)
–
–
–
85,604
1,800
(35,870)
(6)
6
61
(8,452)
(5,061)
(23,062)
–
7,521
102
92,001
(3,338)
88,765
Group
2018
£000
(19,021)
(2,367)
(11,077)
3,759
(57,022)
(11,612)
(78,319)
90,621
345,847
(203,467)
(13,623)
–
471
(36,522)
(2,509)
10
76
(6,248)
–
(21,201)
(257)
153,198
55,858
35,943
200
92,001
Company
2019
£000
23,072
Company
2018
£000
23,656
–
–
–
–
–
–
–
–
–
–
–
–
–
(6)
6
–
–
–
(23,062)
–
(23,062)
10
8
–
18
–
–
–
–
–
–
–
–
–
–
–
–
–
(2,509)
10
–
–
–
(21,158)
–
(23,657)
(1)
9
–
8
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
116
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, which is the
Company’s functional currency. All amounts have been rounded to
the nearest thousand except when otherwise indicated.
The Company’s subsidiaries, both direct and indirect, at 31 December
2019 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 2019 have been prepared in accordance with
IFRS as adopted for use in the EU, and therefore comply with Article 4
of the EU IFRS Regulation. The accounting policies have been applied
consistently in the current and prior periods, except for the new
standards 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 2019:
• IFRS 16 Leases;
• IFRIC 23 Uncertainty over Income Tax Treatments;
• Prepayment Features with Negative Compensation (Amendments
to IFRS 9);
• Long-term Interests in Associates and Joint Ventures
(Amendments to IAS 28);
• Plan Amendment, Curtailment or Settlement (Amendments to
IAS 19);
• Annual Improvements to IFRS Standards 2015–2017 Cycle – various
standards; and
• IFRIC 22 Foreign Currency Transactions and Advance
Consideration.
The Group also chose to early adopt the ‘Interest Rate Benchmark
Reform – Amendments to IFRS 9, IAS 39 and IFRS 7’ in the period.
During 2019, these new standards and interpretations had
an insignificant effect on the consolidated financial statements,
apart from IFRS 16 which is discussed in note 2.1.
2.1 IFRS 16 ‘Leases’
IFRS 16 replaces the previous standard IAS 17 ‘Leases’, bringing a
number of leases on balance sheet, which were previously off-
balance sheet and accounted for as operating leases under IAS 17.
As lessee, under IFRS 16, in respect of leased properties previously
accounted for as operating leases the Group now recognises a
right-of-use asset and a corresponding liability at the date at which
Arrow Global Annual Report and Accounts 2019
the leased asset is available for use. Assets and liabilities arising from
a lease are initially measured on a present value basis. The lease
payments are discounted using the interest rate implicit in the lease,
if that rate can be determined, or the Group’s incremental borrowing
rate. Lease payments are allocated between the liability and
finance cost.
The finance cost is charged to profit or loss over the lease period so
as to produce a constant periodic rate of interest on the remaining
balance of the liability for each period. The right-of-use asset is
depreciated over the shorter of the asset’s useful life and the lease
term on a straight-line basis. Payments associated with leases with a
lease term of twelve months or less and leases of low-value assets are
recognised as an expense in profit or loss on a straight-line basis.
The Group is not required to restate comparatives on the initial
adoption of IFRS 16, and has applied the modified retrospective
approach. The Group has applied exemptions where appropriate for
short-term leases of twelve months or less and low value assets to be
expensed and has also applied ‘grandfathering’ to all IAS 17
judgements previously made, including lease terms. The incremental
borrowing rates used to measure lease liabilities at initial application
ranged between 4.2% and 7.2%, with a weighted average of 5.8%.
Transition to this new standard has led to a one-off opening 2019
reserves reduction of £0.9 million, a right-of-use asset disclosed in
property, plant and equipment of £23.7 million and a lease liability of
£27.3 million and a release of lease accruals of £2.6 million, both of
which are classified in trade and other payables.
2.2 Standards issued but not yet adopted
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 as they do not have a material effect on the
Group’s financial statements.
The following amended standards are not expected to have a
significant impact on the Group’s consolidated financial statements:
• Amendments to References to Conceptual Framework in IFRS
Standards;
• Definition of a Business (Amendments to IFRS 3); and
• IFRS 17 Insurance Contracts.
3. Significant accounting policies
Basis of preparation and consolidation
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
accounting for other financial assets and liabilities.
The Group has elected to present the statement of financial position
on a liquidity basis. Assets and liabilities have been presented in order
of liquidity as this method of presentation is more relevant to the
sector which the Group operates within.
117
3. Significant accounting policies continued
Business combinations
The Group accounts for business combinations using the acquisition
method when control is transferred to the Group. The consideration
transferred in the acquisition is measured at fair value, as are the
identifiable net assets acquired. Any goodwill that arises is tested
annually for impairment. Any gain on a bargain purchase is
recognised in profit or loss immediately. Transaction costs are
expensed as incurred, except if they are related to the issue of debt
or equity securities.
The consideration transferred does not include amounts related
to the settlement of pre-existing relationships. Such amounts are
recognised in profit or loss.
Contingent consideration
Any contingent consideration is measured at fair value at the date
of acquisition. If an obligation to pay contingent consideration that
meets the definition of a financial instrument is classified as equity,
then it is not remeasured and settlement is accounted for within
equity. Otherwise, other contingent consideration is remeasured
at fair value at each reporting date and subsequent changes in the
fair value of the contingent consideration are recognised in profit
or loss.
Non-controlling interests (NCI)
NCI are measured at their proportionate share of the acquiree’s
identifiable net assets at the date of acquisition. Changes in the
Group’s interest in a subsidiary that do not result in a loss of control
are accounted for as equity transactions.
Subsidiaries
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
(its subsidiaries) made up to 31 December 2019 and the comparative
period.
‘Subsidiaries’ are entities controlled by the Group. The Group
‘controls’ an entity if it is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability to affect those
returns through its power over the entity. The Group reassesses
whether it has control if there are changes to one or more of the
elements of control. This includes circumstances in which protective
rights held (e.g. those resulting from a lending relationship) become
substantive and lead to the Group having power over an investee.
The financial statements of subsidiaries are included in the
consolidated financial statements from the date on which control
commences until the date on which control ceases. 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).
Securitisation vehicles
Securitisation vehicles in which the Group holds an economic
interest are usually operated according to predetermined criteria
that are part of the initial design of the vehicles. The Group is
exposed to variability of returns from the vehicles through its
holding of various securities in the vehicles.
Outside the day-to-day servicing of the receivables (which may be
carried out by the Group under a servicing contract), key decisions
are usually required only when the intent of the participants
regarding the design of the economic structure or the strategy
for the collection of the underlying assets changes.
In assessing whether it has control, the Group considers whether it
manages the key decisions that most significantly affect these
vehicles’ returns, alongside its total variability related to its economic
interests in the vehicles. As a result, the Group has concluded that it
controls some of these vehicles, but not all (for more information on
consolidated vehicles, see Note 27).
Investment funds
The Group acts as fund manager to a number of investment funds.
Determining whether the Group controls such an investment fund
usually focuses on the assessment of the aggregate economic
interests of the Group in the Fund (comprising any carried interests
and expected management fees) and the investors’ rights to remove
the Fund manager. For all funds managed by the Group, the investors
are able to vote by simple majority to remove the Group as fund
manager without cause.
Given the low number of investors who are required to act together
to remove the Group as Fund manager without cause, despite the
Group’s aggregate economic interest is some cases being above 30%
(depending on which items are included/excluded), the Group has
concluded that it acts as agent for the investors in all cases, and
therefore has not consolidated these funds.
For further disclosure in respect of unconsolidated securitisation
vehicles and investment funds in which the Group has an interest
or for which it is a sponsor, see Note 27.
i. Loss of control
When the Group loses control over a subsidiary, it derecognises the
assets and liabilities of the subsidiary, and any related NCI and other
components of equity. Any resulting gain or loss is recognised in
profit or loss. Any interest retained in the former subsidiary is
measured at fair value when control is lost.
ii. Transactions eliminated upon consolidation
Intra-group balances and transactions, and any unrealised income
and expenses (except for foreign currency transaction gains or
losses) arising from intra-group transactions, are eliminated in
preparing the consolidated financial statements. Unrealised losses
are eliminated in the same way as unrealised gains, but only to the
extent that there is no evidence of impairment.
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 in the statement of viability.
In scenarios considered to be reasonable by management, as well
as 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.
Arrow Global Annual Report and Accounts 2019
Financial statements 118
Notes to the financial statements continued
3. Significant accounting policies continued
Foreign Currency
i. Foreign currency transactions
Transactions in foreign currencies are translated into the respective
functional currencies of Group entities at the spot exchange rates at
the date of the transactions. The functional currency of the Group
is pounds sterling, which is also the presentational currency of
the Group.
Monetary assets and liabilities denominated in foreign currencies are
translated into the functional currency at the spot exchange rate at
the reporting date. The foreign currency gain or loss on monetary
items is the difference between the amortised cost in the functional
currency at the beginning of the year, adjusted for effective interest
and payments during the year and the carrying amount in the foreign
currency, translated at the spot exchange rate at the end of the year.
Non-monetary assets and liabilities that are measured at fair value in
a foreign currency are translated into the functional currency at the
spot exchange rate at the date on which the fair value is determined.
Non-monetary items that are measured based on historical cost in a
foreign currency are translated using the spot exchange rate at the
date of the transaction.
Foreign currency differences arising on translation are generally
recognised in profit or loss.
ii. Foreign operations
The assets and liabilities of foreign operations, including goodwill
and fair value adjustments arising on acquisition, are translated into
sterling at the spot exchange rates at the reporting date. The income
and expenses of foreign operations are translated into sterling at the
monthly average exchange rates at the dates of the transactions.
Foreign currency differences are recognised in OCI and accumulated
in the foreign currency translation reserve (translation reserve).
When a foreign operation is disposed of in such a way that control is
lost, the cumulative amount in the translation reserve related to that
foreign operation is reclassified to profit or loss as part of the gain
or loss on disposal. If the Group disposes of only part of its interest
in a subsidiary that includes a foreign operation whilst still retaining
control, then the relevant proportion of the cumulative amount is
reattributed to NCI.
Interest
i. Effective interest rate
Interest income and expense are recognised in profit or loss using
the effective interest method. The ‘effective interest rate’ is the rate
that exactly discounts estimated future cash payments or receipts
through the expected life of the financial instrument to:
• the gross carrying amount of the financial asset; or
• the amortised cost of the financial liability.
When calculating the effective interest rate for financial instruments
other than purchased or originated credit-impaired assets, the
Group estimates future cash flows considering all contractual terms
of the financial instrument, but not ECL.
For purchased or originated credit impaired financial assets, a
credit-adjusted effective interest rate is calculated using estimated
future cash flows including ECL. This is the case for all the Group’s
portfolio investments held at amortised cost, recognised since the
introduction of IFRS 9.
Additionally, for such assets, the future cash flows are forecast across
the next 84 months following the balance sheet date. This is the
point by which substantially all of the cash flows will have been
received from a normal portfolio investment, and the point at which
the Group is comfortable in forecasting to.
The calculation of the effective interest rate includes transaction
costs and fees paid or received that are an integral part of the
effective interest rate. Transaction costs include incremental costs
that are directly attributable to the acquisition or issue of a financial
asset or financial liability, such as legal and due diligence fees.
ii. Amortised cost and gross carrying amount
The ‘amortised cost’ of a financial asset or financial liability is the
amount at which the financial asset or financial liability is measured
on initial recognition minus the principal repayments, plus or minus
the cumulative amortisation, using the effective interest method,
of any difference between that initial amount and the expected
cash flows and, for financial assets, adjusted for any expected credit
loss allowance.
The ‘gross carrying amount of a financial asset’ is the amortised cost
of a financial asset before adjusting for any expected credit loss
allowance. However, for amortised cost portfolio assets the concept
of a separable expected credit loss allowance is not applied, because
due to the nature of the portfolio assets, expected cash flows are
forecast including an estimate of expected credit losses, including
multiple economic scenarios.
iii. Calculation of interest income and expense
The effective interest rate of a financial asset or financial liability is
calculated on initial recognition. In calculating interest income and
expense, the effective interest rate is applied to the gross carrying
amount of the asset (when the asset is not credit impaired) or to the
amortised cost of the liability. The effective interest rate is revised
as a result of periodic re-estimation of cash flows of floating-rate
instruments to reflect movements in market rates of interest. The
effective interest rate is also revised for fair value hedge adjustments
at the date on which amortisation of the hedge adjustment begins.
For financial assets that have become credit-impaired subsequent
to initial recognition, interest income is calculated by applying the
effective interest rate to the amortised cost of the financial asset.
If the asset is no longer credit-impaired, then the calculation of
interest income reverts to the gross basis.
For financial assets that were credit-impaired on initial recognition,
which includes all of the Group’s portfolio investments held at
amortised cost, interest income is calculated by applying the
credit-adjusted effective interest rate to the amortised cost of the
asset. The calculation of interest income does not revert to a gross
basis, even if the credit risk of the asset improves.
Interest income and expense on other financial assets and financial
liabilities at FVTPL are presented in fair value gains on portfolio
investments at FVTPL.
Fair value gains on portfolio investments at FVTPL
Fair value gains on portfolio investments at FVTPL represents all
of the income and expenses relating to the Group’s portfolio
investments which are classified as FVTPL. The line item includes
fair value changes, interest and dividends.
Arrow Global Annual Report and Accounts 2019
119
3. Significant accounting policies continued
Dividend income
Dividend income is recognised when the right to receive income is
established. Usually, this is the ex-dividend date for quoted equity
securities. Dividends are presented in fair value gains on portfolio
investments at FVTPL or other income based on the underlying
classification of the equity investment.
Leases
The Group has applied IFRS 16 using the modified retrospective
approach and therefore the comparative information has not been
restated and continues to be reported under IAS 17 and IFRIC 4. The
details of accounting policies under IAS 17 and IFRIC 4 are disclosed
separately.
• the exercise price under a purchase option that the Group is
reasonably certain to exercise, lease payments in an optional
renewal period if the Group is reasonably certain to exercise an
extension option, and penalties for early termination of a lease
unless the Group is reasonably certain not to terminate early.
The lease liability is measured at amortised cost using the effective
interest method. It is remeasured when there is a change in future
lease payments arising from a change in an index or rate, if there is
a change in the Group’s estimate of the amount expected to be
payable under a residual value guarantee, if the Group changes its
assessment of whether it will exercise a purchase, extension or
termination option or if there is a revised in-substance fixed
lease payment.
i. Group acting as a leasee
Policy applicable from 1 January 2019
At inception of a contract, the Group assesses whether a contract is,
or contains, a lease. A contract is, or contains, a lease if the contract
conveys the right to control the use of an identified asset for a period
of time in exchange for consideration. To assess whether a contract
conveys the right to control the use of an identified asset, the Group
uses the definition of a lease in IFRS 16.
This policy is applied to contracts entered into (or changed) on, or
after 1 January 2019.
At commencement or on modification of a contract that contains a
lease component, the Group allocates consideration in the contract
to each lease component on the basis of its relative standalone price.
However, for leases of premises the Group has elected not to
separate non-lease components and accounts for the lease and
non-lease components as a single lease component.
The Group recognises a right-of-use asset and a lease liability at the
lease commencement date. The right-of-use asset is initially
measured at cost, which comprises the initial amount of the lease
liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an
estimate of costs to dismantle and remove any improvements made
to premises.
The right-of-use asset is subsequently depreciated using the
straight-line method from the commencement date to the end of
the shorter of its useful economic life and the lease term. In addition,
the right-of-use asset is periodically reduced by impairment losses, if
any, and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease
payments that are not paid at the commencement date, discounted
using the interest rate implicit in the lease or, if that rate cannot be
readily determined, the Group’s incremental borrowing rate.
Generally, the Group uses its incremental borrowing rate as the
discount rate.
The Group determines its incremental borrowing rate by analysing
its borrowings from various external sources and makes certain
adjustments to reflect the terms of the lease and type of asset leased.
Lease payments included in the measurement of the lease liability
comprise the following:
• fixed payments, including in-substance fixed payments;
• variable lease payments that depend on an index or a rate, initially
measured using the index or rate as at the commencement date;
• amounts expected to be payable under a residual value guarantee;
and
When the lease liability is remeasured in this way, a corresponding
adjustment is made to the carrying amount of the right-of-use asset.
The adjustment is recorded in profit or loss if the carrying amount of
the right-of-use asset has been reduced to zero.
The Group presents right-of-use assets in ‘property, plant and
equipment’ and lease liabilities in ‘trade and other payables’ in the
statement of financial position.
ii. Short-term leases and leases of low-value assets
The Group has elected not to recognise right-of-use assets and lease
liabilities for leases of low-value assets and short-term leases,
including leases of IT equipment. The Group recognises the lease
payments associated with these leases as an expense on a straight-
line basis over the lease term.
iii. Policy applicable before 1 January 2019
For contracts entered into before 1 January 2019, the Group
determined whether the arrangement was or contained a lease
based on the assessment of whether:
• fulfilment of the arrangement was dependent on the use of a
specific asset or assets; and
• the arrangement had conveyed a right to use the asset.
The Group did not have any finance leases under IAS 17.
Assets held under other leases were classified as operating leases and
were not recognised in the Group’s statement of financial position.
Payments made under operating leases were recognised in profit
or loss on a straight-line basis over the term of the lease. Lease
incentives received were recognised as an integral part of the total
lease expense, over the term of the lease.
iv. Group acting as a lessor
None of the arrangements which the Group has entered into have
been determined to constitute the Group acting as a lessor under
the definitions of IFRS 16.
Taxation
i. Income tax
Income tax expense comprises current and deferred tax. It is
recognised in profit or loss except to the extent that it relates to
a business combination, or items recognised directly in equity or
in OCI.
The Group has determined that interest and penalties related to
income taxes, including uncertain tax treatments, do not meet the
definition of income taxes, and therefore has accounted for them
under IAS 37 Provisions, Contingent Liabilities and Contingent Assets
and has recognised the related expenses in ‘other expenses’.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 120
Notes to the financial statements continued
3. Significant accounting policies continued
ii. Current tax
Current tax comprises the expected tax payable or receivable on
the taxable profit or loss for the year and any adjustment to the
tax payable or receivable in respect of previous years. The amount
of current tax payable or receivable is the best estimate of the tax
amount expected to be paid or received that reflects uncertainty
related to income taxes, if any. It is measured using tax rates enacted
or substantively enacted at the reporting date. Current tax also
includes any tax arising from dividends.
Current tax assets and liabilities are offset only if certain criteria
are met.
iii. Deferred tax asset
Deferred tax is recognised in respect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognised for:
• temporary differences on the initial recognition of assets or
liabilities in a transaction that is not a business combination and
that affects neither accounting nor taxable profit or loss;
• temporary differences related to investments in subsidiaries to the
extent that the Group is able to control the timing of the reversal
of the temporary differences and it is probable that they will not
reverse in the foreseeable future; and
• taxable temporary differences arising on the initial recognition
of goodwill.
Deferred tax assets are recognised for unused tax losses, unused tax
credits and deductible temporary differences to the extent that it is
probable that future taxable profits will be available against which
they can be used. Future taxable profits are determined based on the
reversal of relevant taxable temporary differences. If the amount of
taxable temporary differences is insufficient to recognise a deferred
tax asset in full, then future taxable profits, adjusted for reversals of
existing temporary differences, are considered, based on business
plans for individual subsidiaries in the Group.
Deferred tax assets are reviewed at each reporting date and are
reduced to the extent that it is no longer probable that the related
tax benefit will be realised; such reductions are reversed when the
probability of future taxable profits improves.
Unrecognised deferred tax assets are reassessed at each reporting
date and recognised to the extent that it has become probable that
future taxable profits will be available against which they can be used.
Deferred tax is measured at the tax rates that are expected to be
applied to temporary differences when they reverse, using tax rates
enacted or substantively enacted at the reporting date, and reflects
uncertainty related to income taxes, if there is any.
The measurement of deferred tax reflects the tax consequences that
would follow from the manner in which the Group expects, at the
reporting date, to recover or settle the carrying amount of its assets
and liabilities. For this purpose, the carrying amount of investment
property measured at fair value is presumed to be recovered through
sale, and the Group has not rebutted this presumption.
Deferred tax assets and liabilities are offset only if certain criteria
are met.
Financial assets and financial liabilities
i. Recognition and initial measurement
The Group initially recognises portfolio investments, debt securities
issued and other financial liabilities on the date on which they are
acquired. All other financial instruments (including regular-way
purchases and sales of financial assets) are recognised on the trade
date, which is the date on which the Group becomes a party to the
contractual provisions of the instrument.
A financial asset or financial liability is measured initially at fair value
plus, for an item not at FVTPL, transaction costs that are directly
attributable to its acquisition or issue. The fair value of a financial
instrument at initial recognition is generally its transaction price.
ii. Classification
Financial assets
On initial recognition, a financial asset is classified as measured at:
amortised cost, FVOCI or FVTPL.
A financial asset is measured at amortised cost if it meets both of the
following conditions and is not designated as at FVTPL:
• the asset is held within a business model whose objective is to hold
assets to collect contractual cash flows; and
• the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest (SPPI).
A debt instrument is measured at FVOCI only if it meets both of the
following conditions and is not designated as at FVTPL:
• the asset is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling
financial assets; and
• the contractual terms of the financial asset give rise on specified
dates to cash flows that are SPPI.
On initial recognition of an equity investment that is not held for
trading, the Group may irrevocably elect to present subsequent
changes in fair value in OCI. This election is made on an investment-
by-investment basis. No such elections have been made by the Group.
All other financial assets are classified as measured at FVTPL.
In addition, on initial recognition, the Group may irrevocably
designate a financial asset that otherwise meets the requirements
to be measured at amortised cost or as at FVOCI as FVTPL if doing
so eliminates or significantly reduces an accounting mismatch that
would otherwise arise. No such designations have been made by
the Group.
Business model assessment
The Group makes an assessment of the objective of a business model
in which an asset is held at a portfolio level because this best reflects
the way the business is managed and information is provided to
management. The information considered includes:
• the stated policies and objectives for the portfolio and the
operation of those policies in practice. In particular, whether
management’s strategy focuses on earning contractual interest
revenue, maintaining a particular interest rate profile, matching
the duration of the financial assets to the duration of the liabilities
that are funding those assets or realising cash flows through the
sale of the assets;
Arrow Global Annual Report and Accounts 2019
121
3. Significant accounting policies continued
• how the performance of the portfolio is evaluated and reported
to the Group’s management;
• the contractual terms of the instrument itself give rise to cash
flows that are SPPI without looking through to the underlying pool
of financial instruments;
• the risks that affect the performance of the business model
(and the financial assets held within that business model) and
its strategy for how those risks are managed;
• how managers of the business are compensated (e.g. whether
compensation is based on the fair value of the assets managed
or the contractual cash flows collected); and
• the frequency, volume and timing of sales in prior periods,
the reasons for such sales and its expectations about future
sales activity.
However, information about sales activity is not considered in
isolation, but as part of an overall assessment of how the Group’s
stated objective for managing the financial assets is achieved and
how cash flows are realised.
The Group’s portfolio investments are comprised of various types of
underlying credit positions. These investments are held by the Group
for the primary purpose of collecting the underlying cash flows to
the fullest extent possible. Sales of such portfolio investments are not
a common occurrence and are not part of management’s strategy
for such investments when they are purchased.
Assessment of whether contractual cash flows are solely payments
of principal and interest
For the purposes of this assessment, ‘principal’ is defined as the fair
value of the financial asset on initial recognition. ‘Interest’ is defined
as consideration for the time value of money and for the credit risk
associated with the principal amount outstanding during a particular
period of time and for other basic lending risks and costs (e.g.
liquidity risk and administrative costs), as well as profit margin.
In assessing whether the contractual cash flows are SPPI, the Group
considers the contractual terms of the instrument. This includes
assessing whether the financial asset contains a contractual term that
could change the timing or amount of contractual cash flows such
that it would not meet this condition. In making the assessment, the
Group considers:
• contingent events that would change the amount and timing
of cash flows;
leverage features;
•
• prepayment and extension terms;
• terms that limit the Group’s claim to cash flows from specified
assets (e.g. non-recourse loans); and
• features that modify consideration of the time value of money
(e.g. periodical reset of interest rates).
Equity and similar instruments have contractual cash flows that do
not meet the SPPI criterion. Accordingly, all such financial assets are
measured at FVTPL unless the FVOCI option is selected.
Contractually linked instruments
The Group has some investments in securitisations that are
considered contractually linked instruments. Contractually linked
instruments each have a specified subordination ranking that
determines the order in which any cash flows generated by the pool
of underlying investments are allocated to the instruments. Such
an instrument meets the SPPI criterion only if all of the following
conditions are met:
• the underlying pool of financial instruments (i) contains one or
more instruments that give rise to cash flows that are SPPI; and
(ii) may also contain instruments, such as derivatives, that reduce
the cash flow variability of the instruments under (i) and the
combined cash flows (of the instruments under (i) and (ii)) give
rise to cash flows that are SPPI; or align the cash flows of the
contractually linked instruments with the cash flows of the pool of
underlying instruments under (i) arising as a result of differences in
whether interest rates are fixed or floating or the currency or
timing of cash flows; and
• the exposure to credit risk inherent in the contractually linked
instruments is equal to or less than the exposure to credit risk of
the underlying pool of financial instruments.
Reclassifications
Financial assets are not reclassified subsequent to their initial
recognition, except in the period after the Group changes its
business model for managing financial assets.
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 of 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 profit or loss.
Any cumulative gain/loss recognised in OCI in respect of equity
investment securities designated as at FVOCI is not recognised in
profit or loss on derecognition of such securities. 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.
In transactions in which the Group neither retains nor transfers
substantially all of the risks and rewards of ownership of a financial
asset and it retains control over the asset, the Group continues to
recognise the asset to the extent of its continuing involvement,
determined by the extent to which it is exposed to changes in the
value of the transferred asset.
In certain transactions, the Group retains the obligation to service
the transferred financial asset for a fee. The transferred asset is
derecognised if it meets the derecognition criteria. An asset or
liability is recognised for the servicing contract if the servicing fee
is more than adequate (asset) or is less than adequate (liability) for
performing the servicing.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 122
Notes to the financial statements continued
absence, the most advantageous market to which the Group
has access at that date. The fair value of a liability reflects its
non-performance risk.
When one is available, the Group measures the fair value of an
instrument using the quoted price in an active market for that
instrument. A market is regarded as ‘active’ if transactions for the
asset or liability take place with sufficient frequency and volume
to provide pricing information on an ongoing basis.
If there is no quoted price in an active market, then the Group uses
valuation techniques that maximise the use of relevant observable
inputs and minimise the use of unobservable inputs. The chosen
valuation technique incorporates all of the factors that market
participants would take into account in pricing a transaction.
The best evidence of the fair value of a financial instrument on initial
recognition is normally the transaction price – i.e. the fair value of
the consideration given or received. If the Group determines that
the fair value on initial recognition differs from the transaction
price and the fair value is evidenced neither by a quoted price in
an active market for an identical asset or liability nor based on a
valuation technique for which any unobservable inputs are judged
to be insignificant in relation to the difference, then the financial
instrument is initially measured at fair value, adjusted to defer the
difference between the fair value on initial recognition and the
transaction price.
Subsequently, that difference is recognised in profit or loss on an
appropriate basis over the life of the instrument but no later than
when the valuation is wholly supported by observable market data
or the transaction is closed out.
The fair value of a financial liability with a demand feature (e.g. a
demand deposit) is not less than the amount payable on demand,
discounted from the first date on which the amount could be
required to be paid.
The Group recognises transfers between levels of the fair value
hierarchy as of the end of the reporting period during which the
change has occurred.
iv. Impairment
The Group recognises loss allowances for ECL on financial assets that
are debt instruments, and that are not measured at FVTPL. No
impairment loss is recognised on equity investments. The Group has
not taken the low credit risk exemption for any of its financial assets.
The Group measures loss allowances at an amount equal to lifetime
ECL, except for financial instruments (other than lease receivables)
on which credit risk has not increased significantly since their initial
recognition (excluding credit-impaired assets), for which they are
measured as 12-month ECL.
12-month ECL are the portion of lifetime ECL that result from default
events on a financial instrument that are possible within the 12
months after the reporting date. Financial instruments for which
12-month ECL are recognised are referred to as ‘Stage 1 financial
instruments’. Financial instruments allocated to Stage 1 have not
undergone a significant increase in credit risk since initial recognition
and are not credit-impaired.
3. Significant accounting policies continued
Financial liabilities
The Group derecognises a financial liability when its contractual
obligations are discharged, cancelled or expire.
i. Modifications of financial assets and financial liabilities
If the terms of a financial asset are modified, then the Group
evaluates whether the cash flows of the modified asset are
substantially different.
If the cash flows are substantially different, then the contractual
rights to cash flows from the original financial asset are deemed to
have expired. In this case, the original financial asset is derecognised
and a new financial asset is recognised at fair value plus any eligible
transaction costs. Any fees received as part of the modification are
accounted for as follows:
• fees that are considered in determining the fair value of the new
asset and fees that represent reimbursement of eligible transaction
costs are included in the initial measurement of the asset; and
• other fees are included in profit or loss as part of the gain or loss
on derecognition.
If the modification of a financial asset measured at amortised cost or
FVOCI does not result in derecognition of the financial asset, then
the Group first recalculates the gross carrying amount of the financial
asset using the original effective interest rate of the asset and
recognises the resulting adjustment as a modification gain or loss in
profit or loss. Any costs or fees incurred and modification fees
received adjust the gross carrying amount of the modified financial
asset and are amortised over the remaining term of the modified
financial asset. The gain or loss is presented as interest income
calculated using the effective interest rate method.
The Group derecognises a financial liability when its terms are
modified and the cash flows of the modified liability are substantially
different. In this case, a new financial liability based on the modified
terms is recognised at fair value. The difference between the carrying
amount of the financial liability derecognised and the consideration
paid is recognised in profit or loss. Consideration paid includes
non-financial assets transferred, if any, and the assumption of
liabilities, including the new modified financial liability.
If the modification of a financial liability is not accounted for as a
derecognition, then the amortised cost of the liability is recalculated
by discounting the modified cash flows at the original effective
interest rate and the resulting gain or loss is recognised in profit or
loss. Any costs and fees incurred are recognised as an adjustment to
the carrying amount of the liability and amortised over the remaining
term of the modified financial liability by re-computing the effective
interest rate on the instrument.
ii. Offsetting
Financial assets and financial liabilities are offset and the net amount
presented in the statement of financial position when, and only
when, the Group has a legally enforceable right to set off the
amounts and it intends either to settle them on a net basis or to
realise the asset and settle the liability simultaneously.
Income and expenses are presented on a net basis only when
permitted under IFRS Standards, or for gains and losses arising from
a group of similar transactions such as in the Group’s trading activity.
iii. Fair value measurement
‘Fair value’ is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal or, in its
Arrow Global Annual Report and Accounts 2019
123
3. Significant accounting policies continued
Lifetime ECL are the ECL that result from all possible default
events over the expected life of the financial instrument or the
maximum contractual period of exposure. Financial instruments for
which lifetime ECL are recognised but that are not credit-impaired
are referred to as ‘Stage 2 financial instruments’. Financial
instruments allocated to Stage 2 are those that have experienced
a significant increase in credit risk since initial recognition but are
not credit-impaired.
Financial instruments for which lifetime ECL are recognised and that
are credit-impaired are referred to as ‘Stage 3 financial instruments’.
Measurement of ECL
ECL are a probability-weighted estimate of credit losses. They are
measured as follows:
Credit-impaired financial assets
At each reporting date, the Group assesses whether financial assets
carried at amortised cost are credit impaired (referred to as ‘Stage 3
financial assets’). A financial asset is ‘credit-impaired’ when one or
more events that have a detrimental impact on the estimated future
cash flows of the financial asset have occurred. Evidence that a financial
asset is credit-impaired includes the following observable data:
• significant financial difficulty of the borrower or issuer;
• a breach of contract such as a default or past-due event;
• the restructuring of a loan or advance by the Group on terms that
the Group would not consider otherwise;
it is becoming probable that the borrower will enter bankruptcy
or other financial reorganisation; or
•
• the disappearance of an active market for a security because of
• financial assets that are not credit-impaired at the reporting date:
financial difficulties.
as the present value of all cash shortfalls (i.e. the difference
between the cash flows due to the entity in accordance with the
contract and the cash flows that the Group expects to receive);
• financial assets that are credit-impaired at the reporting date,
except POCI financial assets: as the difference between the gross
carrying amount and the present value of estimated future cash
flows; or
• POCI financial assets: the ECL is incorporated into the estimated
future cash flows, therefore it is not possible to separate this from
a ‘gross carrying amount’ of these assets. As such, although ECL is
incorporated into the carrying amount, a separate loss allowance
is not held for POCI financial assets. The only material assets in this
category are the portfolio investments held at amortised cost.
When discounting future cash flows, the following discount rates
are used:
• financial assets other than purchased or originated credit-impaired
(POCI) financial assets and lease receivables: the original effective
interest rate or an approximation thereof;
• POCI assets: a credit-adjusted effective interest rate; or
•
lease receivables: the discount rate used in measuring the
lease receivable.
Restructured financial assets
If the terms of a financial asset are renegotiated or modified, then
an assessment is made of whether the financial asset should be
derecognised and ECL are measured as follows:
• If the expected restructuring will not result in derecognition
of the existing asset, then the expected cash flows arising from
the modified financial asset are included in calculating the cash
shortfalls from the existing asset; or
• If the expected restructuring will result in derecognition of the
existing asset, then the expected fair value of the new asset is
treated as the final cash flow from the existing financial asset at
the time of its derecognition. This amount is included in
calculating the cash shortfalls from the existing financial asset that
are discounted from the expected date of derecognition to the
reporting date using the original effective interest rate of the
existing financial asset.
POCI financial assets
POCI financial assets are assets that are credit-impaired on initial
recognition. For POCI assets, lifetime ECL are incorporated into the
calculation of the effective interest rate on initial recognition.
Consequently, POCI assets do not carry an impairment allowance
on initial recognition. The amount recognised as a loss allowance
subsequent to initial recognition is equal to the changes in lifetime
ECL since initial recognition of the asset.
Designation at fair value through profit or loss
The Group has not designated any financial assets or liabilities as
FVTPL in either the current or previous periods.
Cash and cash equivalents
‘Cash and cash equivalents’ include notes and coins on hand and
highly liquid financial assets with original maturities of three months
or less from the date of acquisition that are subject to an insignificant
risk of changes in their fair value, and are used by the Group in the
management of its short-term commitments.
Cash and cash equivalents are carried at amortised cost in the
statement of financial position.
Derivatives held for risk management purposes and hedge
accounting
All derivatives are measured at fair value in the statement of financial
position. The Group designates certain derivatives held for risk
management as hedging instruments in qualifying hedging
relationships.
On initial designation of the hedge, the Group formally documents
the relationship between the hedging instrument(s) and hedged
item(s), including the risk management objective and strategy in
undertaking the hedge, together with the method that will be used
to assess the effectiveness of the hedging relationship.
The Group makes an assessment, both on inception of the hedging
relationship and on an ongoing basis, of whether the hedging
instrument(s) is (are) expected to be highly effective in offsetting the
changes in the fair value or cash flows of the respective hedged
item(s) during the period for which the hedge is designated, and
whether the actual results of each hedge are within a range of
80–125%. For a cash flow hedge of a forecast transaction, the Group
makes an assessment of whether the forecast transaction is highly
probable to occur and presents an exposure to variations in cash
flows that could ultimately affect profit or loss.
Other assets
No ECL has been recognised for intercompany loans, cash and cash
equivalents or trade and other receivables, on the basis that the ECL
on such items is deemed to be immaterial.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 124
Notes to the financial statements continued
3. Significant accounting policies continued
Cash flow hedges
When a derivative is designated as the hedging instrument in a
hedge of the variability in cash flows attributable to a particular risk
associated with a recognised asset or liability or highly probable
forecast transaction that could affect profit or loss, the effective
portion of changes in the fair value of the derivative is recognised
in OCI and presented in the hedging reserve within equity. Any
ineffective portion of changes in the fair value of the derivative is
recognised immediately in profit or loss. The amount recognised
in the hedging reserve is reclassified from OCI to profit or loss as a
reclassification adjustment in the same period as the hedged cash
flows affect profit or loss, and in the same line item in the statement
of profit or loss and OCI.
If the hedging derivative expires or is sold, terminated or exercised,
or the hedge no longer meets the criteria for cash flow hedge
accounting, or the hedge designation is revoked, then hedge
accounting is discontinued prospectively. However, if the derivative
is novated to a CCP by both parties as a consequence of laws or
regulations without changes in its terms except for those that are
necessary for the novation, then the derivative is not considered
expired or terminated. If the hedged cash flows are no longer
expected to occur, then the Group immediately reclassifies the
amount in the hedging reserve from OCI to profit or loss. For
terminated hedging relationships, if the hedged cash flows are still
expected to occur, then the amount accumulated in the hedging
reserve is not reclassified until the hedged cash flows affect profit or
loss; if the hedged cash flows are expected to affect profit or loss in
multiple reporting periods, then the Group reclassifies the amount in
the hedging reserve from OCI to profit or loss on a straight-line basis.
Property, plant and equipment
i. Recognition and measurement
Items of property, plant and equipment are measured at cost less
accumulated depreciation and any accumulated impairment losses.
Purchased software that is integral to the functionality of the related
equipment is capitalised as part of that equipment.
If significant parts of an item of property, plant and equipment have
different useful lives, then they are accounted for as separate items
(major components) of property and equipment.
Any gain or loss on disposal of an item of property, plant and
equipment is recognised within other income in profit or loss.
ii. Subsequent expenditure
Subsequent expenditure is capitalised only if it is probable that the
future economic benefits associated with the expenditure will flow
to the Group. Ongoing repairs and maintenance are expensed
as incurred.
iii. Depreciation
Depreciation is calculated to write off the cost of items of property,
plant and equipment less their estimated residual values using the
straight-line method over their estimated useful lives, and is
generally recognised in profit or loss. Land is not depreciated.
The estimated useful lives of property and equipment for the current
and comparative periods are as follows:
Furniture
Computer equipment
Leasehold improvements
five years
three years
five years
Depreciation methods, useful lives and residual values are reviewed
at each reporting date and adjusted if appropriate.
Arrow Global Annual Report and Accounts 2019
Intangible assets and goodwill
i. Software licences and IT platforms
Software acquired by the Group is measured at cost less accumulated
amortisation and any accumulated impairment losses.
Expenditure on internally developed software, such as IT platforms,
is recognised as an asset when the Group is able to demonstrate that
the product is technically and commercially feasible, its intention
and ability to complete the development and use the software in a
manner that will generate future economic benefits, and that it can
reliably measure the costs to complete the development.
The capitalised costs of internally developed software include all
costs directly attributable to developing the software plus capitalised
borrowing costs and are amortised over its useful life. Internally
developed software is stated at capitalised cost less accumulated
amortisation and any accumulated impairment losses.
Subsequent expenditure on software assets is capitalised only when
it increases the future economic benefits embodied in the specific
asset to which it relates. All other expenditure is recognised in profit
or loss as it is incurred.
Software, including IT platforms, is amortised on a straight-line basis
in profit or loss over its estimated useful life, from the date on which
it is available for use. The estimated useful life of software for the
current and comparative periods is three to ten years. Amortisation
is disclosed within other expenses within the statement of profit
and loss.
Amortisation methods, useful lives and residual values are reviewed
at each reporting date and adjusted if appropriate.
ii. Customer intangibles
When the Group acquires businesses which have material ongoing
customer relationships, whether they are contractual or not, the
principles of IFRS 3 dictate that the fair value of such customer
relationships must be estimated and recognised on the balance
sheet at the acquisition date. The impact of this is to effectively
reduce the goodwill recognised on acquisition.
Subsequent to the initial recognition of such assets, they are
amortised over the expected life of the customer relationships with
the Group. This amortisation is recognised within operating expenses.
The useful lives and carrying values of customer intangibles are
reviewed at each reporting date and adjusted if appropriate.
iii. Goodwill
Goodwill arising on the acquisition of subsidiaries is measured at cost
less accumulated impairment losses.
Impairment of non-financial assets
At each reporting date, the Group reviews the carrying amounts of
its non-financial assets (other than investment properties and
deferred tax assets) to determine whether there is any indication of
impairment. If any such indication exists, then the asset’s recoverable
amount is estimated. Goodwill is tested annually for impairment.
For impairment testing, assets are grouped together into the
smallest group of assets that generates cash inflows from continuing
use that is largely independent of the cash inflows of other assets or
CGUs. Goodwill arising from a business combination is allocated to
CGUs or groups of CGUs that are expected to benefit from the
synergies of the combination.
125
3. Significant accounting policies continued
The recoverable amount of an asset or CGU is the greater of its value
in use and its fair value less costs to sell. Value in use is based on the
estimated future post-tax cash flows, discounted to their present
value using a post-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the
asset or CGU.
An impairment loss is recognised if the carrying amount of an asset
or CGU exceeds its recoverable amount.
The Group’s corporate assets do not generate separate cash inflows
and are used by more than one CGU. Corporate assets are allocated
to CGUs on a reasonable and consistent basis and tested for
impairment as part of the testing of the CGUs to which the corporate
assets are allocated.
Impairment losses are recognised in profit or loss. They are allocated
first to reduce the carrying amount of any goodwill allocated to the
CGU, and then to reduce the carrying amounts of the other assets in
the CGU on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. For other
assets, an impairment loss is reversed only to the extent that the
asset’s carrying amount does not exceed the carrying amount that
would have been determined, net of depreciation or amortisation,
if no impairment loss had been recognised.
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.
The Group classifies capital instruments as financial liabilities or
equity instruments in accordance with the substance of the
contractual terms of the instruments.
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 with an
outflow of economic resources. 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.
Employee benefits
i. Share-based payment transactions
Share-based payment 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 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’.
ii. 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.
iii. 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.
Inventories
As part of the Group’s investment activities, it sometimes acquires
real estate positions as part of a transaction. Where such real estate
is acquired for the purposes of immediate resale, or where a sale
will immediately follow a period of time where capital expenditure
is being applied to the asset, such investments fall under the scope
of IAS 2 – Inventories.
In line with IAS 2, all assets classified as inventories are held at initial
cost, plus any subsequent cost of capital expenditure. Such assets are
held at the lower of cost and net realisable value, but apart from this,
no gain or loss will be taken on the value of the assets until the point
at which they are sold, or partially sold.
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.
Share capital and reserves
i. Share capital
Incremental costs that are directly attributable to the issue of an
equity instrument are deducted from the initial measurement of the
equity instruments.
ii. Other reserves
Other reserves include the own share reserve, the translation
reserve and the merger reserve. These reserves are further explained
in note 19.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 126
Notes to the financial statements continued
3. Significant accounting policies continued
Intercompany receivables
The Company holds material intercompany receivables within its statement of financial position. These have been assessed under the IFRS 9
ECL criteria, measuring expected losses over the longest contractual period the Company is exposed to credit risks. The Company has
concluded that these assets have no material ECL.
Operating expenses
Operating expenses relate to administration and costs associated with collection activities. All operating costs are accounted for on an
accruals basis.
Earnings per share
The Group presents basic and diluted EPS data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss that is attributable
to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is
determined by adjusting the profit or loss that is attributable to ordinary shareholders and the weighted-average number of ordinary shares
outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees.
Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses,
including revenues and expenses relating to transactions with any of the Group’s other components, whose operating results are regularly
reviewed by the Group’s chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess
its performance, and for which discrete financial information is available. Segment results that are reported to the Group’s Board (being the
CODM) include items that are directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Deferred and contingent consideration
During the normal course of business, the Group enters in agreements with third-parties to purchase portfolios of financial assets, and the
consideration paid may include an element of deferred consideration. Such consideration is discounted at the Group’s weighted average cost
of debt to its present value at the point of initial recognition of the acquired portfolio asset, and this discounted amount is included within the
purchase price of the portfolio asset. A liability for the discounted amount of deferred consideration is also recognised at this time.
Subsequent to this, the discount taken from the gross deferred consideration payable to the initial present value is recognised in the income
statement as a finance cost over time.
Usually as part of business acquisitions, the Group also enters into arrangements with third-parties to pay amounts in the future which are
contingent on the outcome of a future event, such as the acquired business meeting certain operational or financial targets. In such instances,
the Group forms an initial estimation of the fair value of such consideration by assessing the likelihood of paying out a range of amounts,
and using this analysis to calculate the probability-weighted average expected pay out. This amount is then discounted at the Group’s cost
of debt to bring it to its present value at the point of acquisition. An assessment is made at this point as to whether the payments constitute
a post-employment benefit arrangement with former owners, or not. If this is not the case, the present value is included within the
consideration paid to acquire the business and within goodwill, if relevant. Each period the discount is unwound to the income statement
as a finance cost, and the liability is remeasured to its current fair value at that point in time.
4. Critical accounting judgements and estimates
In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the
application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ
from these estimates. Estimates and assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.
Judgements
Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in
the consolidated financial statements is set out below.
i. Classification of amortised cost financial assets
The Group holds the majority of its portfolio investments at amortised cost, due to the fact that management have determined that these
assets that meet the SPPI criteria, and are held in a ‘hold to collect’ business model. The SPPI criteria for each portfolio are assessed at the
point each portfolio is being approved for purchase, and are based on the nature of the underlying loans which are being purchased. This
determination is made for each purchase individually, unless it is a follow-on purchase of the same or very similar assets, which have already
been assessed.
Regarding the ‘hold to collect’ business model, the Group has determined that this is the most appropriate IFRS 9 business model classification
for its general portfolio holding activities, as although in the past a small number of portfolios have been sold outright to a third-party, such
sales do not comprise a material component of the Group’s ERC at any point in time. Therefore, such infrequent sales activity is not deemed
to invalidate the ‘hold to collect’ business model which the Group employs for the vast majority of its portfolio assets.
Another judgement which has been made regarding the Group’s amortised cost portfolio assets is that they all fall within the POCI classification
for IFRS 9 impairment measurement purposes. This judgement has been made by the Group, based upon the fact that historic purchase history
and the current composition of the amortised cost portfolio investments shows that such assets tend to be bought at a point in time where
they are credit impaired in some manner. This is supported by not only the nature of the assets, but by the fact that they are usually purchased
at a deep discount, which is reflective of their incurred credit losses to date.
Arrow Global Annual Report and Accounts 2019
127
4. Critical accounting judgements and estimates continued
ii. Determination of control over investees
Arrow holds an economic interest in a number of entities which it has been deemed to not control. As such, these entities are not consolidated
into the Group’s financial statements, but rather, the investment in such entities is recognised as a single asset within the appropriate balance
sheet classification, usually within portfolio investments. Conversely the Group also consolidates entities into its financial statements which it
does not have 100% ownership of, but the Group has been judged to control such entities regardless.
The judgement as to whether or not the Group has control over an entity is taken on a case-by-case basis by management, and is firstly based
upon whether the Group can exercise any power over the relevant activities of the entity, and if this is the case, whether there is deemed to be
a link between such power and the variability of the Group’s returns which arise from the entity.
In many cases the determination of control is clear. Cases where management must apply more judgement can occur where the Group
holds a minority equity-level financial interest in a structured entity, as well as providing various services to these entities in a typical
supplier-customer relationship capacity. In these cases, the Group mainly assesses the relative share of marginal variable returns which flow
to third-parties versus the share which flows to the Group as a primary indicator of whether the Group is exercising any power it may have to
influence the variable returns of the structured entity primarily for its own benefit, or for the benefit of third-parties in the structure. In the
case of the former fact pattern, the entity will usually be consolidated, whereas under the latter, the entity will usually not be consolidated.
Assumptions and estimation uncertainties
i. 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 net assets acquired. 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 judgement,
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 of amounts 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 ii. below. Note 30 provides further detail on acquisitions in the period and the net assets acquired on each.
ii. Carrying value of portfolio investments
The carrying value of portfolio investments is £1,163,624,000 at 31 December 2019 (2018: £1,087,030,000). The majority of these portfolio
investments are measured at amortised cost. 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 number of FVTPL portfolios where it is
necessary to forecast cash flows over a 120-month period to capture all of the material cash flows. The 84-month period is deemed to be the
most appropriate time frame over which expected cash flows are measured, as this is the point that modelling accuracy begins to fall below a
supportable threshold.
The cash flow (ERC) forecasts are generated using a mixture of asset-specific forecasts and 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, which may include placing these accounts into litigation. Operational factors that may
impact future estimated ERCs 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 bench-marked 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 also
include specific consideration of multiple economic scenarios and the impact these are likely to have on collections in the future. For further
information on this please see note 25.
The estimated future cash flows generated by the above process are the key estimate/judgement in these financial statements. Flexing the
expected future gross cash flows by +1/-1% would impact the closing carrying value of the amortised cost and FVTPL portfolio investments as
at 31 December 2019 by +/- £11,020,000 (2018: +/- £10,870,000). The forecasting period over which ERCs are calculated is also a key estimate/
judgement in these financial statements. Adding or removing six months to the cash flow forecasting period would increase/(reduce) the
closing carrying value of the portfolio investments as at 31 December 2019 by £12,453,000/(£17,326,000) (2018: £13,796,000/(£16,360,000)).
Note that there are a large number of inputs which are used to derive the ERC and hence the carrying value of portfolios. However, many of
these are factual historical data points which do not individually involve significant estimation uncertainty, and as such, an overall combined
sensitivity has been provided.
iii. Impairment assessment of goodwill balances
The carrying amount of goodwill is £267,700,000 at 31 December 2019. 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 2019. 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.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 128
Notes to the financial statements continued
5. Segmental reporting
The Group reports under three separate reportable segments. Segmental information has been provided in line with what is reviewed on a
regular basis by the chief operating decision maker (CODM), which is the board of directors collectively, as defined in IFRS 8. The principal
business categories are as follows:
Investment Business (IB)
Asset Management
and Servicing Business (AMS)
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. Our Fund Management business is reported under this segment.
Costs not directly associated with either the Investment or Asset Management and Servicing Business, but
relevant to overall oversight and control of the Group’s activities
These segments represent how the Group manages the wider business, and the organisational structure is aligned to these segments.
Therefore, this has been deemed to be the appropriate level of disaggregation to provide information to the CODM. Further granularity, such
as type of AMS contract, or type of IB portfolio, is not how the business is managed or organised, and hence such further detail has not been
presented to the CODM, or in the segmental disclosures.
The intra-segment elimination column below removes charges made from the AMS business segment to the IB segment on behalf of the
Group for servicing and collection of the Group’s portfolio investments. The intra-segment charge is calculated on equivalent commercial
terms to charging third parties. For further information on adjusting items, please see the additional information section.
2019
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
Profit before tax
2018
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
Profit before tax
Investment
business
£000
AMS
business
£000
Group
functions
£000
Intra-segment
elimination
£000
Adjusting
items
Total
2019
£000
244,766
(92,682)
152,084
62.1%
140,054
(62,495)
77,559
55.4%
392
(315)
77
(45,694)
45,694
–
–
–
–
339,518
(109,798)
229,720
(24,339)
127,745
52.2%
–
127,745
–
–
127,745
Investment
business
£000
269,404
(94,617)
174,787
64.9%
(20,715)
154,072
57.2%
–
154,072
–
–
154,072
(44,155)
33,404
23.9%
–
33,404
–
–
33,404
AMS
business
£000
132,306
(63,989)
68,317
51.6%
(41,613)
26,704
20.2%
–
26,704
–
–
26,704
(9,166)
(9,089)
(19,453)
(28,542)
(54,498)
–
(83,040)
–
–
–
–
–
–
–
Group
functions
£000
731
–
731
Intra-segment
elimination
£000
(40,645)
40,645
–
(26,789)
(26,789)
(104,449)
125,271
–
(26,789)
–
–
(26,789)
Adjusting
items
–
(1,080)
(1,080)
(19,453)
105,818
(54,498)
–
51,320
Total
2018
£000
361,796
(119,041)
242,755
(36,733)
(36,002)
(14,235)
(50,237)
(48,134)
–
(98,371)
–
–
–
–
–
–
–
(22,676)
(23,756)
(121,737)
121,018
–
(23,756)
–
(18,658)
(42,414)
(14,235)
106,783
(48,134)
(18,658)
39,991
Total income includes income from portfolio investments, asset management and servicing and other income.
Arrow Global Annual Report and Accounts 2019
129
5. Segmental reporting continued
2019
Geographical information
Total Income
Income from AMS contracts with customers
Non-current assets
2018
Geographical information
Total Income
Income from AMS contracts with customers
Non-current assets
UK and Ireland
£000
134,066
35,261
114,110
UK and Ireland
£000
139,990
30,593
82,419
Portugal
£000
100,722
34,201
74,535
Portugal
£000
117,971
27,153
69,686
Italy
£000
84,077
34,632
82,226
Italy
£000
64,712
30,041
77,927
Netherlands
£000
66,347
35,960
59,509
Netherlands
£000
79,768
44,519
84,672
Intra-Group
trading
£000
(45,694)
(45,694)
–
Intra-Group
trading
£000
(40,645)
(40,645)
–
Total
£000
339,518
94,360
330,380
Total
£000
361,796
91,661
314,704
Income from contracts with customers has been disaggregated on a geographical basis, as a similar set of services are provided to customers
across the geographies, and therefore this was deemed to be the most appropriate level of disaggregation for this disclosure.
Non-current assets are assets with a useful life of more than one year with the exception of deferred tax which has been excluded.
Gross AMS income includes commission income, debt collection, due diligence, real estate management, advisory fees and intra-Group
income for these services.
Third-party AMS Business income
Intra-Group AMS income
Gross AMS income
Investment business Income
Other income
Gross income
2019
£000
94,360
45,694
140,054
244,766
392
385,212
2018
£000
91,661
40,645
132,306
269,404
731
402,441
Gross income includes commission income, debt collection, due diligence, real estate management, advisory fees and intra-Group income for
Asset Management and Servicing, total income for the Investment Business and other income.
6. Income from asset management and servicing
Income from Asset Management and Servicing (AMS) contracts with customers is measured based on the consideration specified in a contract
with a customer. The Group recognises revenue when it satisfies a performance obligation related to a service it has undertaken to provide to
a customer.
Asset management and servicing income
Servicing income makes up the majority of AMS income, and in itself comprises a broad range of services, including secured and unsecured
collection activity, real estate asset realisation, legal title holding, due diligence activities, initial platform migration and on-boarding activities,
securitisation vehicle set-up and ongoing management activities, new origination activities, litigation and court process management and
third-party sub-servicer management.
In all material cases, the services are provided at a point in time which corresponds to the satisfaction of the related performance obligations.
As such, revenue arising from servicing income is normally recognised as the services are provided to the customer, with no deferral or
acceleration of revenue across the life of the contract.
Fund management income
Fund management income encompasses services provided in relation to the discretionary and semi-discretionary allocation and management
of third-party capital. Fees for fund management services are normally calculated based on a fixed percentage of the value of assets managed
and deducted from the customer’s account balance on a regular basis. Revenue from fund management services is recognised over time as the
services are provided.
Contract balances
At 31 December 2019, the Group had assets relating to contracts with customers in the amount of £3.1m (31 December 2018: £nil). These assets
relate to up-front costs which were incurred to acquire customers, and will be released to the income statement across the same period as the
associated revenue will be recognised. The weighted average life remaining on these contract balances is 8 years (31 December 2018: n/a).
None of the contract balances have impacted the Group’s income to date.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
130
Notes to the financial statements continued
7. Finance income
Bank interest
Total finance income
8. Finance costs
Interest and similar charges on bank loans
Interest and similar charges on senior secured notes
Interest and similar charges on asset backed securitisation
Interest rate swap and forward exchange contract hedge costs
Lease liability interest
Other interest
Bond refinancing costs
Total finance costs
2019
£000
61
61
2019
£000
8,028
38,232
2,509
515
1,395
3,880
–
54,559
2018
£000
76
76
2018
£000
7,168
37,458
–
1,568
–
2,016
18,658
66,868
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.
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
Fees payable for other assurance services
Total fees payable for assurance services
Fees payable for transaction services
Total fees payable for non-audit services
Total fees payable
10. Collection activity costs, other operating expenses and staff costs
Collection activity costs
External collection costs
Staff costs
Direct temp labour
Direct operating costs
Legal disbursements
Other collection activity costs
Total collection activity costs
Other operating expenses
Staff costs
Other staff related costs
Premises
IT
Depreciation and amortisation
Write off of PPE and intangible assets
Net foreign exchange losses/(gains)
Acquisition related expenses
Deferred consideration release
Other operating expenses
Total other operating expenses
2019
£000
55
1,420
1,475
100
107
207
20
227
1,702
2019
£000
31,490
42,789
4,807
15,057
14,416
1,239
109,798
2019
£000
56,142
11,591
5,401
13,830
18,435
6,377
1,018
1,457
(21,119)
30,770
123,902
2018
£000
55
1,072
1,127
88
209
297
100
397
1,524
2018
£000
40,417
41,100
5,347
13,876
15,348
2,953
119,041
2018
£000
53,346
8,625
8,242
11,520
14,235
–
(2)
14,717
–
25,289
135,972
Note
10.b
Note
10.b
In 2019, £8,817,000 of the other staff-related costs relates to temporary labour, recruitment and training (2018: £7,537,000).
Arrow Global Annual Report and Accounts 2019
10. Collection activity costs, other operating expenses and staff costs continued
b. Staff costs
Wages, bonuses and salaries
Pension costs
Social security costs
Share-based payments
Staff restructuring
131
2019
£000
77,698
2,833
12,576
1,437
4,387
98,931
2018
£000
73,749
2,595
10,126
3,267
4,709
94,446
The total executive and non-executive directors’ remuneration during the year was £1,432,000 (2018: £2,611,000), including £110,000 in
relation to pension costs (2018: £128,000). See the remuneration report for further disclosures relating to directors’ remuneration.
The average monthly number of employees (including executive directors) are analysed below:
Operations and asset servicing
Commercial asset management
Finance
Fund management and origination
Legal and risk
HR and communications
Management and support
The Group restructured its business units during the year. The prior year average employees have been updated in line with the new structure.
11. Taxation
The Group’s activities are predominantly UK based. The analysis below therefore uses the UK rate of corporation tax.
a. Amounts recognised in profit and loss
Current tax expense
Tax charge at standard UK corporation tax rate
Changes in estimate related to prior years
Total current tax expense
Deferred tax expense
Origination and reversal of temporary differences
Adjustment in relation to prior years
Recognition of previously unrecognised tax losses
Total deferred tax expense
2019
1,707
217
197
142
105
58
15
2,441
2019
£000
14,152
1
14,153
(1,332)
2,421
(1,209)
(120)
2018
1,207
154
140
101
74
41
13
1,730
2018
£000
13,328
(849)
12,479
(2,373)
(84)
–
(2,457)
Total income tax expense
14,033
10,022
The differences in the effective tax rate for the period and the standard rate of corporation tax in the UK at 19% (2018: 19%) are as follows:
b. Reconciliation of effective tax rate
Profit before tax
Tax charge at standard UK corporation tax rate
Effect of tax rates in foreign jurisdictions
Expenses not deductible for tax purposes
Changes in corporate tax rates in the year
Movements in unrecognised deferred tax
Changes in estimate relating to prior years
Total income tax expense
c. Amounts recognised in OCI
Items that are/may be reclassified to profit or loss
Movement in hedging reserve:
Effective portion of changes in fair value
Net amount reclassified to profit or loss
Total movement in hedging reserve
2019
£000
51,320
9,751
2,052
(358)
(1,209)
1,376
2,421
14,033
2018
£000
39,991
7,598
2,606
768
(17)
–
(933)
10,022
2019
Tax (expense)/
benefit
£000
Before tax
£000
Net of tax
£000
Before tax
£000
2018
Tax (expense)/
benefit
£000
Net of tax
£000
187
7
194
(33)
–
(33)
154
7
161
(291)
–
(291)
50
–
50
(241)
–
(241)
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
132
Notes to the financial statements continued
11. Tax continued
The rate of UK corporation tax, as enacted under previous Finance Acts, was expected to reduce to 17% from 1 April 2020. Although the UK
Government has announced its intention to pass revised legislation under which the rate would remain at 19%, no legislation has been
introduced at the balance sheet date and therefore deferred tax balances in relation to the UK have been calculated using a rate of 17%.
In December 2019, a new corporate tax law was enacted in the Netherlands. Consequently, as of 1 January 2020, the corporate tax rate in the
Netherlands will be reduced from 25% to 21.7%. This change resulted in a gain of €1,147,000 related to the remeasurement of deferred tax
assets and liabilities of the Group’s Dutch subsidiaries being recognised during the year ended 31 December 2019.
Deferred tax
The Group has not recognised a deferred tax asset in respect of £2,560,000 (2018: £859,000) of tax losses carried forward, due to uncertainties
over the future utilisation of the losses, including the future profitability of the relevant subsidiaries. These losses may be available for offset
against future profits and have no expiry date. There are no unrecognised deferred tax liabilities.
Movement in deferred tax balances
Fixed assets
IFRS transitional adjustments
Share schemes
Hedging reserve
Other temporary differences
Losses
Fair value and IFRS 9 adjustments
IFRS 16 transitional adjustments
Fixed assets
IFRS transitional adjustments
Share schemes
Hedging reserve
Other temporary differences
Losses
Fair value and IFRS 9 transitional adjustments
Net balance
1 January
£000
463
(1,416)
704
120
828
5,682
(13,198)
–
(6,817)
Recognised
in profit or
loss
£000
(9)
252
285
–
329
486
(1,383)
160
120
Recognised
in OCI/
equity
£000
–
–
(121)
(33)
–
–
–
–
(154)
Net balance
1 January
£000
303
(1,748)
1,225
70
750
5,432
(20,192)
(14,160)
Recognised
in profit or
loss
£000
160
332
(328)
–
523
(796)
2,566
2,457
Recognised
in OCI/
equity
£000
–
–
(193)
50
–
–
–
(143)
2019
Transferred
in on
acquisition
£000
273
–
–
–
–
–
(693)
–
(420)
2018
Transferred
in on
acquisition
£000
–
–
–
–
(310)
1,004
1,305
1,999
Opening
reserves
£000
–
–
–
–
–
–
–
–
–
Opening
reserves
£000
–
–
–
–
–
–
3,000
3,000
Foreign
exchange
£000
–
8
–
–
(436)
185
636
–
393
Net balance
31 December
£000
727
(1,156)
868
87
721
6,353
(14,638)
160
(6,878)
Deferred
tax assets
£000
727
–
868
87
721
6,353
1,843
160
10,759
Deferred
tax liabilities
£000
–
(1,156)
–
–
–
–
(16,481)
–
(17,637)
Foreign
exchange
£000
–
–
–
–
(135)
42
123
30
Net balance
31 December
£000
463
(1,416)
704
120
828
5,682
(13,198)
(6,817)
Deferred
tax assets
£000
463
–
704
120
1,144
5,682
–
8,113
Deferred
tax liabilities
£000
–
(1,416)
–
–
(316)
–
(13,198)
(14,930)
Fair value of net assets acquired as part of business combinations is considered in note 4.
Tax impact of the UK giving notice to withdraw from the EU
Given that the UK has now exited the EU (at 31 January 2020), the Group has considered the impact of Brexit from a tax perspective. The UK is
in a transition period until 31 December 2020, during which time all EU directives will continue to be in force. As such, no impact to the Group’s
tax position is expected in 2020.
It is too soon to know what the arrangements may be with the EU from 1 January 2021 onwards, however the Group does not expect there to
be any significant impact from a tax perspective.
Uncertainty over income tax treatments
The current tax liability of £7,645,000 represents the amount of income taxes payable in respect of current and prior year periods, including
a provision in relation to uncertain tax positions.
As for most multinationals, the current tax environment is creating increasing levels of uncertainty and the Group is potentially subject to
tax audits in many jurisdictions. By their nature, these are often complex and could take a significant period of time to be agreed with the
tax authorities. The Group estimates and accrues taxes that will ultimately be payable when reviews or audits by tax authorities of tax returns
are completed. The levels of risk arising from tax audits may change as a result of legislative change, tax authority guidance or practice and
correspondence with the tax authorities during a specific audit. It is not possible to quantify the impact that such future developments may
have on the tax positions taken in the financial statements.
Arrow Global Annual Report and Accounts 2019
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 (£)
133
2019
£000
35,223
175,859
4,942
180,801
0.20
0.19
2018
£000
29,969
174,939
4,515
179,454
0.17
0.17
Refer to table of alternative performance measures in the ‘additional information’ section for details of underlying earnings per share.
13. Goodwill
Cost
At 1 January 2018
Additions
Exchange rate differences
At 31 December 2018
Additions1
Adjustment of the discounted value of deferred consideration paid for EI
Modification to Drydens’ opening balance sheet fair value post-acquisition
Exchange rate differences
At 31 December 2019
Amortisation and impairment
At 31 December 2018 and 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
The following table provides a breakdown of goodwill acquired during the current and prior year:
Goodwill on acquisition
At 1 January 2018
Parr Credit s.r.l.
Europa Investimenti S.p.A (EI)
Norfin Investimentos S.A. (Norfin)
Bergen Capital Management Limited (Bergen)
Modification to EI opening balance sheet fair value post-acquisition
Exchange rate differences
At 31 December 2018
Drydens Limited (Drydens)1
Exchange rate differences and goodwill adjustments
At 31 December 2019
1. See note 30 for a detailed analysis of additions to goodwill during the year.
£000
155,088
107,984
1,916
264,988
14,519
462
693
(10,653)
270,009
2,309
267,700
262,679
£000
155,088
22,533
48,219
31,335
5,164
733
1,916
264,988
14,519
(9,498)
270,009
Goodwill acquired in a business combination is allocated, at acquisition, to the CGUs that are expected to benefit from that business
combination. The carrying amount of goodwill has been allocated to four aggregated CGUs on the basis that these represent the lowest level
at which goodwill is monitored for internal management purposes and are not larger than the single operating segment defined under IFRS 8
(Operating Segments).
Goodwill CGU allocation
In relation to goodwill, the four CGUs identified are UK and Ireland, comprising all Group companies acquired in the Capquest acquisition,
Arrow Global Receivables Management Limited, Mars Capital, Bergen and Drydens; Portugal, comprising of all the Group companies acquired
in the Whitestar, Gesphone, Redrock and Norfin acquisitions; Benelux, comprising all the Group companies acquired in the Vesting acquisition;
and Italy, comprising Zenith, Parr Credit and Europa Investimenti S.p.A. The UK and Ireland, Portugal, Benelux, and Italy CGUs, represent the
cash flows generated principally from collections on acquired portfolio investments and management and servicing of third-party debt.
Given the structure and operating model of the Group, it has been deemed appropriate to combine a number of CGUs for impairment testing
purposes. This is in line with the Group’s stated strategy of providing a range of services in each geographic region in which the Group
operates and represents the lowest level at which the Group’s resources and assets are allocated internally.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
134
Notes to the financial statements continued
13. Goodwill continued
The discount rate was a post-tax rate based on the yield of average European 10-year government bonds, adjusted for a risk premium to reflect
both the increased risk of investing in equities generally and the systemic risk of the specific CGU.
Five years of cash flows were included in the discounted cash flow model. A long-term growth rate into perpetuity has been determined as
the lower of the nominal GDP rates for the countries in which the CGU operates and the long-term compound annual profit before taxes,
depreciation and amortisation growth rate estimated by management.
Budgeted profit before taxes, depreciation and amortisation were based on expectations of future outcomes taking into account past
experience, adjusted for the anticipated revenue growth. Revenue growth was projected taking into account the average growth levels
experienced over the past five years and the estimated growth for the next five years.
The key assumptions described above may change as economic and market conditions change. The Group estimates that likely possible
changes in these assumptions would not cause the recoverable amount of any CGU to decline below the carrying amount.
The Group’s goodwill balance has been assessed and no part of the overall balance is deemed to be deductible for tax purposes.
For the purposes of impairment testing, goodwill is allocated to the Group’s CGUs as follows:
UK and Ireland
Portugal
Benelux
Italy
2019
£000
79,476
69,156
40,824
78,244
267,700
2018
£000
64,312
73,061
43,132
82,174
262,679
An impairment review was carried out at 31 December 2019 that resulted in no impairment to goodwill. The goodwill was assessed to be
appropriately stated. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be
impaired. The recoverable amount of the CGUs is determined as the higher of fair value, less cost to sell and value in use. The key assumptions
for the value in use calculations were as follows:
Discount rate %
Growth rate used to
extrapolate forecasts
UK and Ireland
8.6%
2019
Portugal
9.0%
Benelux
8.2%
Italy UK and Ireland
8.5%
9.0%
2018
Portugal
8.9%
Benelux
8.2%
Italy
8.9%
2.0%
2.2%
2.0%
1.7%
2.0%
2.2%
2.0%
1.7%
Discount rates
Management estimates discount rates using post-tax rates that reflect current market assessments of the time value of money and the risks
specific to the CGUs. Post-tax rates are used alongside post-tax cash flows, as the post-tax discount rate is more readily derived from
observable market information. Any potential differences between post-tax discount rates and cash flows and the pre-tax method under
IAS 36 – Impairment of assets have been considered, and no material differences between approaches have been identified.
The starting point for determining the discount rates for each CGU was to use the Group’s weighted average cost of capital (WACC) and adjust
this for specific factors for each of the CGUs to derive a market participant’s rate. The factors took into account the risks inherent in each of
the CGUs; such as currency, regulatory, and economic risks and the different operations in the CGUs were also considered.
The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next five years and
extrapolates cash flows into perpetuity. The forecasts assume growth rates in collection activity which in turn drive forecast collections and
cost figures. These assumptions are in keeping with the directors’ expectations of future growth. Appropriate tax rates are applied to the cash
flow forecasts for each CGU. The analysis has been prepared using post-tax cash flows and discount rates, as post-tax discount rates can be
more readily derived from observable market data. The Group is satisfied that this is materially equal to performing the analysis on pre-tax cash
flows and discount rates.
The Group has conducted a sensitivity analysis on the impairment test of the CGU’s carrying value. The CGUs would become impaired based on
a net post-tax cash flow reduction set out below, or based on an increase in the discount rate noted below:
UK and Ireland
Portugal
Benelux
Italy
Arrow Global Annual Report and Accounts 2019
A cash flow
reduction of
58%
41%
23%
59%
A discount rate
increase of
11%
5%
2%
8%
14. Intangible assets
Cost
At 1 January 2018
Assets acquired on acquisition of a subsidiary
Exchange differences
Additions
Reclassifications
Disposals
At 31 December 2018
Assets acquired on acquisition of a subsidiary
Exchange differences
Additions
Reclassifications
Disposals
At 31 December 2019
Accumulated amortisation
At 1 January 2018
Exchange differences
Amortisation charge for the year2
Reclassifications
Disposals
At 31 December 2018
Exchange differences
Amortisation charge for the year2
Reclassifications
Write-off
Disposals
At 31 December 2019
Carrying amount
At 31 December 2019
At 31 December 2018
135
Total
£000
66,462
1,946
437
11,077
–
(1,320)
78,602
688
(2,425)
11,830
–
(273)
88,422
22,969
214
11,967
–
(812)
34,338
(1,207)
11,638
–
5,763
(269)
50,263
Customer
intangibles
£000
Contractual
rights
£000
IT platform1
£000
Software
licences
£000
30,001
–
93
8,751
–
(619)
38,226
–
(705)
8,706
–
–
46,227
7,347
35
4,485
(22)
(226)
11,619
(153)
4,879
–
5,769
–
22,114
9,831
191
50
1,841
(7)
(701)
11,205
–
(269)
3,001
–
(273)
13,664
7,139
31
2,146
22
(586)
8,752
(239)
1,821
–
(6)
(269)
10,059
25,686
1,718
282
–
–
–
27,686
688
(1,372)
117
–
–
27,119
7,998
151
5,120
–
–
13,269
(768)
4,694
–
–
–
17,195
9,924
14,417
944
37
12
485
7
–
1,485
–
(79)
6
–
–
1,412
485
(3)
216
–
–
698
(47)
244
–
–
–
895
517
787
24,113
26,607
3,605
2,453
38,159
44,264
1. An intangible asset relating to a software upgrade in the is included within IT Platforms. The asset has a carrying value of €6,000,00 and a remaining amortisation period of 10 years.
2. Amortisation is shown within the other operating expenses line of the consolidated statement of profit or loss.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
136
Notes to the financial statements continued
15. Property, plant and equipment
Cost
At 1 January 2018
Assets acquired on acquisition of a subsidiary
Exchange differences
Additions
Reclassifications
Disposals
At 31 December 2018
Assets acquired on acquisition of a subsidiary
Adoption of IFRS 16 as at 1 January 2019
Exchange differences
Additions
Reclassifications
Disposals
At 31 December 2019
Accumulated depreciation
At 1 January 2018
Exchange differences
Disposal
Reclassifications
Charge for the year
At 31 December 2018
Adoption of IFRS 16 as at 1 January 2019
Exchange differences
Charge for the year
Reclassifications
Write-off leasehold improvements
Disposal
At 31 December 2019
Carrying amount
At 31 December 2019
At 31 December 2018
1. See note 21 for a detailed analysis of right of use assets.
16. Trade and other receivables
Land and
Buildings
£000
Leasehold
improvements
£000
Computer
equipment
£000
Furniture
£000
Vehicles
£000
Right-of-use
asset1
£000
Total property,
plant and
equipment
£000
3,114
–
(128)
1
–
(2,987)
–
–
–
–
–
–
–
–
63
2
(111)
–
46
–
–
–
–
–
–
–
–
–
–
6,517
103
56
701
–
(128)
7,249
118
–
(227)
385
–
–
7,525
2,020
14
(106)
–
1,050
2,978
–
(79)
920
–
509
–
4,328
3,197
4,271
3,621
127
93
1,309
–
(43)
5,107
244
–
2
338
–
(292)
5,399
2,081
11
(36)
–
780
2,836
–
210
811
–
–
(168)
3,689
1,710
2,271
2,079
93
16
356
–
(604)
1,940
14
–
12
42
–
(9)
1,999
1,005
7
(481)
–
386
917
–
28
290
–
104
(6 )
1,333
666
1,023
7
182
15
–
–
–
204
–
–
17
120
–
(42)
299
1
1
–
–
6
8
–
78
66
–
–
(21)
131
–
–
–
–
–
–
–
578
26,386
–
384
–
(674)
26,674
–
–
–
–
–
–
3,199
(15)
4,710
–
–
–
7,894
15,338
505
52
2,367
–
(3,762)
14,500
954
26,386
(196)
1,269
–
(1,017)
41,896
5,170
35
(734)
–
2,268
6,739
3,199
222
6,797
–
613
(195 )
17,375
168
196
18,780
–
24,521
7,761
Current
Trade receivables
Other receivables
Due from subsidiary undertakings
Prepayments
Bank balances not classified as cash and cash equivalents
Group
2019
£000
31,748
10,839
–
5,896
26,611
75,094
2018
£000
45,436
2,672
–
5,427
40,671
94,206
Company
2019
£000
–
182
212,535
–
–
212,717
2018
£000
–
–
222,371
208
–
222,579
Other receivables includes contract balances of £3.1 million and £3.4 million of receivables related to contracts with customers. Bank balances
not classified as cash and cash equivalents are those cash balances which, while controlled by the Group, are not readily available for
immediate use by the Group. This is usually because the cash payments are subject to constraints regarding when the balance can be remitted,
such as in a securitisation structure awaiting a payment date.
Arrow Global Annual Report and Accounts 2019
17. 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
Lease liability
Non-current
Trade payables
Deferred consideration on acquisition of subsidiaries
Other liabilities
Lease liability
Total trade and other payables
137
2018
£000
198
–
–
–
2,053
–
–
–
2,251
–
–
–
–
–
2,251
Group
2019
£000
15,635
11,332
62,944
356
–
35,006
19,495
5,312
150,080
15,278
19,040
20,411
18,192
72,921
223,001
2018
£000
24,133
11,119
12,031
163
–
53,954
43,781
–
145,181
3,673
48,803
–
–
52,476
197,657
Company
2019
£000
489
–
–
–
1,518
–
–
–
2,007
–
–
–
–
–
2,007
Deferred consideration on acquisition of subsidiaries has reduced as amounts were repaid in the period, alongside remeasurements of
deferred contingent consideration liabilities in the period which reduced their value. Deferred consideration on portfolio investments have
increased in the period as significantly more portfolio acquisitions had an element of deferred consideration outstanding at 31 December 2019
than 31 December 2018.
Included within other liabilities is €2,463,000 (£2,095,000) (31 December 2018: €1,970,000 (£1,771,000)) relating to deferred pay for the Italian
employees. The employees 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 at a future date,
when the employees leave employment. The liability is included within trade and other payables on the statement of financial position and 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)
2019
0.67% to 1.5%
1.0% to 1.5%
2.0% to 3.0%
2.3% to 10.0%
per annum
2018
1.3% to 1.6%
1.5%
2.0% to 3.5%
2.6% to 10.0%
per annum
18. Contingent liabilities
Through the ordinary course of business, the Group exposes itself to potential liabilities which at present it is not aware of, and may or may not
arise in the future. As such, it would not be practical to try and quantify their future financial impact. However, set out below are broad areas of
the Group’s ordinary business activities which may in the future lead to potential claims or liabilities being incurred by the Group.
Conduct and regulatory compliance
Given the high level of scrutiny regarding financial institutions’ treatment of customers and business conduct from regulatory bodies, the
media and politicians, there is a possibility that certain aspects of the current or historic business, including, amongst other things, collections
practices and general treatment of customers, may be determined by the FCA and other regulatory bodies or the courts as, in their opinion,
not being conducted in accordance with applicable laws or regulations, or fair and reasonable treatment.
Contractual disputes
In carrying out its ongoing business, the Group enters into numerous contracts in any given year with a various third-party entities. There is
always a risk that a contractual dispute may arise in the future, which may lead to a claim against the Group in respect of any damages or losses
incurred by the third-party.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
138
Notes to the financial statements continued
19. Share capital and reserves
Share capital and share premium
Issued, fully paid and authorised
176,858,244 (2018: 176,263,343) ordinary shares of 1p each
Offset by own shares
2019
£000
1,769
(6 )
1,763
2018
£000
1,763
(10)
1,753
Total consideration for the shares was £349,180,000 (2018: £349,180,000), giving rise to a share premium of £347,436,000 (2018: £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 an equal right to receive dividends and repayments of capital
paid by the Company. There are no restrictions on the repayment of capital.
The shareholders have the right to receive notice of, and to attend and vote at all general meetings of the Company.
Own shares
Own shares consist of treasury shares and shares held within an employee benefit trust. The Company has an employee benefit trust for the
granting of shares to applicable employees.
Own shares are recognised at cost as a deduction from equity shareholders’ funds. Subsequent consideration received for the sale of such
shares is also recognised in equity, with any difference between the sale proceeds and the original cost being taken to retained earnings.
No gain or loss is recognised in the financial statements on transactions in treasury shares.
Issued, fully paid and authorised
1,030,766 (2018: 257,377) opening own shares of 1p each
Changes in the period
628,874 (2018: 1,030,766) closing shares of 1p each
2019
£000
10
(4 )
6
2018
£000
3
7
10
Nature and purpose of reserves
Hedging reserve
The hedging reserve comprises the net cumulative fair value adjustments on the derivative contracts used in the Group’s hedging activities
which are deemed to be effective.
Own share reserve
The own share reserve comprises the cost of the Company’s ordinary shares held by the Group. At 31 December 2019, the Company held
628,874 ordinary shares of 1p each (2018: 1,030,766 ordinary shares of 1p each) held in an employee benefit trust. This represents 0.4% of the
Company’s share capital as at 31 December 2019.
Translation reserve
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.
Merger reserve
The 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.
20. Dividends
The following dividends were recognised as distributions to owners during the year ended 31 December 2019:
Interim dividend 2019: 4.4p per ordinary share (2018: 4.0p)
Final dividend 2018: 8.7p per ordinary share (2017: 8.1p)
2019
£000
7,751
15,311
23,062
2018
£000
7,002
14,156
21,158
The 2019 interim dividend was declared at 50% of the 2018 final dividend. A final dividend for 2019 has been proposed of 8.7p, bringing the total
dividend for the year to 13.1p being 40% of underlying profit after tax. The proposed final dividend is subject to approval at the annual general
meeting and has, therefore, not been included as a liability in these financial statements.
The ex-dividend date for the final dividend is 11 June 2020, with a record date of 12 June 2020 and a payment date of 17 July 2020. Shareholders
will have the opportunity to elect to reinvest their cash dividend and purchase existing shares in the Company through a dividend reinvestment
plan with an election date of 26 June 2020. The dividend has not been recognised as a liability and there are no tax consequences.
Arrow Global Annual Report and Accounts 2019
139
21. Leases
The Group has leases for offices and production vehicles. With the exception of short-term leases and leases of low-value underlying assets,
each lease is reflected on the balance sheet as a right-of-use asset and a lease liability. The Group classifies its right-of-use assets in a
consistent manner to its property, plant and equipment (see note 15).
Leases of vehicles are usually limited to a lease term of two to four years. Leases of property generally have a lease term ranging from five years
to ten years. Lease payments are generally fixed, however there are a limited number of property leases where rentals are linked to annual
changes in an index (either RPI or CPI).
Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the
right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a substantive
termination fee. Some leases contain an option to purchase the underlying leased asset outright at the end of the lease, or to extend the lease
for a further term. The Group is prohibited from selling or pledging the underlying leased assets as security. For leases over office buildings the
Group must keep those properties in a good state of repair and return the properties in their original condition at the end of the lease. Further,
the Group must insure items of property, plant and equipment and incur maintenance fees on such items in accordance with the lease
contracts.
Right-of-use assets
Right-of-use assets relate to leased office premises and vehicles that are presented within property, plant and equipment (see note 15).
Adoption of IFRS 16 as at 1 January 2019
Adoption of IFRS 16 as at 1 January 2019 depreciation
Depreciation charge for the year
Additions
Disposals
Exchange differences
Balance at 31 December 2019
Office
premises
£000
23,401
(1,409)
(4,060)
962
(674)
13
18,233
Maturity analysis – contractual undiscounted cash flows
See note 25 for maturity analysis of lease liabilities as at 31 December 2019.
At 31 December 2018, the future minimum lease payments under non-cancellable operating leases were payable as follows:
Less than one year
Between one and five years
More than five years
Vehicles
£000
2,985
(1,790)
(650)
–
–
2
547
2018
£000
3,517
15,032
9,440
27,989
The primary difference between the total future minimum lease payment as at 31 December 2018 and the opening right of use assets recognised
on adoption to IFRS 16 relates to the phasing of the IAS 17 charge, including recognition of rent-free periods over the lease term, as opposed to
the straight line depreciation of an opening right of use balance, which was determined by discounting the future lease payments at the
incremental cost of borrowing relating to a particular lease. This resulted in a timing difference on the recognition of the lease expense between
IAS 17 and IFRS 16.
Amounts recognised in profit or loss
During 2019 the following leases-related expenses were recognised under IFRS 16 in the profit or loss:
Interest on lease liabilities
Depreciation charge for the year on right of use assets
Expenses relating to short-term leases
During 2018 the following leases were recognised under IAS 17 in the profit or loss:
Lease expense
Amounts recognised in statement of cash flows
During 2019 the following lease payments were recognised in the statement of cash flows:
Total cash outflow for leases
2019
£000
1,395
4,710
76
2018
£000
5,354
2019
£000
5,061
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
140
Notes to the financial statements continued
22. Related party transactions
Group
Related party balances as at each year end were as follows:
As at 31 December 2019 and 2018:
Trade
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.
Summary of transactions
Key management, defined as permanent members of the board plus all non-executive directors, were awarded the following compensation
for the financial year:
Remuneration
Salaries and performance-related bonus
Pension-related benefits
Share based payments
The number of key management during the year was 6 (2018: 7).
Company
Related party balances as at each year end were as follows:
As at 31 December 2019
Due from subsidiary undertakings
Due to subsidiary undertakings
As at 31 December 2018
Due from subsidiary undertakings
Due to subsidiary undertakings
2019
£000
1,628
110
(306)
1,432
2018
£000
2,057
128
426
2,611
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)
–
(151)
(151)
212,495
–
212,495
40
–
40
212,535
(1,518)
211,017
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
The material receivable balance due from subsidiary undertakings from Arrow Global One Limited relates primarily to final dividends declared
by Arrow Global One Limited in 2018. In the current period, the movement in this balance relate primarily to the partial settlement in cash of
this receivable. 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.
As a loan repayable on demand, expected credit losses were estimated on the assumption that repayment of the loan is demanded at the
reporting date. It was assessed that loan was not in default as (i) the repayment had not been demanded, and (ii) the subsidiary was considered
to be performing.
The maximum period over which expected impairment losses were measured was the period needed to transfer the cash once demanded.
As at 31 December 2019, Arrow Global One Limited could repay the outstanding balance of the receivable within six months, with the majority
of the payment being received immediately. Therefore, the expected credit loss was limited to the effect of discounting the amount due on
the balance over this period. As the expected repayment schedule is short, discounting at the receivable’s effective interest rate did not result
in a material expected credit loss.
During the year there were no other related party transactions other than discussed above.
Arrow Global Annual Report and Accounts 2019
23. Investments in subsidiaries and associate
Details of the Company’s subsidiaries at 31 December 2019 are as follows:
Name
Agenda Management Services Limited
AGG Capital Management (Holdco) Limited (ACM(H)L)
AGL Fleetwood Limited
AGL Fleetwood Topco Limited (AFTL)
Arrow Global (Holdings) Limited (AG(H)L)
Arrow Global Accounts Management Limited
Arrow Global Adviser Limited
Arrow Global Europe Limited
Arrow Global Finance Plc
Arrow Global Guernsey Limited
Arrow Global Investments Holdings Limited (AGIHL)
Arrow Global Legh Limited
Arrow Global Limited (AGL)
Arrow Global Luna Limited
Arrow Global Management Limited
Arrow Global Massey Limited
Arrow Global One Limited (AGOL)
Arrow Global Portugal Investments Limited
Arrow Global Portugal Limited
Arrow Global Receivables Management Limited
Arrow SMA LP Limited
Bergen Capital Management Limited
Capquest Asset Management Limited
Capquest Debt Recovery Limited (CDRL)
Capquest Debt Recovery Services Limited
Capquest Group Limited (CGL)
Place of incorporation
(or registration) and operation
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
Registered
office
Note 1
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Proportion
of ordinary
shares
ownership
(%)
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Current
status
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Dormant
Trading
Dormant
Trading
Trading
Dormant
Dormant
Trading
Trading
Trading
Trading
Trading
Trading
Dormant
Trading
Dormant
Trading
141
Parent
company
DFS
AGGP
AFTL
AGIHL
AGIHL
AGL
AGIHL
AGIHL
AGIHL
AG(H)L
AGGHL
AG(H)L
AG(H)L
AG(H)L
AG(H)L
AG(H)L
AGGP
AGL
AG(H)L
AG(H)L
AGIHL
MAL
CGL
CGL
CGL
QNL
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 142
Notes to the financial statements continued
23. Investments in subsidiaries and associate continued
Name
Capquest Investments 2 Limited
Capquest Investments Limited
Capquest Limited
Capquest Mortgage Servicing Limited
Capquest UK Limited
Care Debt Management Limited
Data Verification Services Limited
Drydens Limited (DFS)
Erudio Customer Management Limited
Mars Acquisition Limited (MAL)
Mars Capital Finance Limited
Mars Capital Management Limited
Quest Bidco Limited (QBL)
Quest Newco Limited (QNL)
Quest Topco Limited (QTL)
Western Acquisition Holdings Limited
Mars Capital Management Ireland DAC
Mars Capital Finance Ireland DAC
Arrow Global Debt Limited (AGDL)
Arrow Global Guernsey Limited
Arrow Global Guernsey Holdings Limited (AGGHL)
Arrow Global Guernsey Management Limited
AGG Capital Management Limited (ACML)
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 S.R.L. (EITS)
Fieramosca Dieci S.R.L.
Sagitta SGR Spa
Europa Investimenti Aziende S.R.L. (EIAS)
Europa Investimenti Gestione Attivi S.R.L.
Lanzone Due S.R.L.
Lanzone Cinque S.R.L.
Europa Investimenti Corporate Finance S.R.L.
Lanzone Diciannove S.R.L.
Lanzone Quattordici S.R.L.
Lanzone Dodici S.R.L.
Lanzone Ventidue S.R.L.
Lanzone Quindici S.R.L.
Lanzone Ventuno S.R.L.
Whitestar S.R.L (WS)
New Call S.R.L.
Place of incorporation
(or registration) and operation
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
UK – England and Wales
Republic of Ireland
Republic of Ireland
Guernsey
Guernsey
Guernsey
Guernsey
Jersey
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Registered
office
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 1
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 2
Note 3
Note 3
Note 4
Note 4
Note 4
Note 4
Note 5
Note 6
Note 6
Note 6
Note 6
Note 6
Note 7
Note 7
Note 7
Note 7
Note 7
Note 7
Note 7
Note 7
Note 7
Note 7
Note 7
Note 7
Note 7
Note 7
Note 8
Note 9
Note 9
Proportion
of ordinary
shares
ownership
(%)
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
50
100
100
100
100
100
100
100
100
100
50
100
100
71.80
100
100
95.64
100
100
100
100
100
100
51
100
100
100
100
100
100
Current
status
Dormant
Trading
Dormant
Trading
Dormant
Dormant
Dormant
Trading
Dormant
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Dormant
Dormant
Trading
Dormant
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Parent
company
CGL
CGL
CGL
CGL
CGL
CGL
CGL
AGL
AG(H)L
AGIHL
MAL
MAL
QTL
QBL
AGIHL
AGL
MAL
MAL
AGGHL
AGIHL
AGOL
AGDL
ACM(H)L
AGIHL
AGIHIS
ZSS
AGIHL
AGIS
AGIS
EIS
EIS
EIS
EIS
EIS
EIS
EIS
EIS
EIS
EIS
EIS
EIS
EIS
EIS
AGIS
WS
Arrow Global Annual Report and Accounts 2019
23. Investments in subsidiaries and associate continued
Name
Giardini di Sacro Monte Eco-Immobiliare S.r.l.
Etna SPV S.R.L
Forest SPV S.R.L
Haywave SPV S.R.L
Leonardo Investment Opportunities
SPV Project 156 S.R.L
SPV Project 158 S.R.L
SPV Project 1608
SPV Project 1713 S.R.L
Vulcan SPV S.R.L
Zeus Finance S.R.L
PARR SH. P.K.
Strzala Sp. z o.o.
Capquest Debt Recovery S.A (pty) Limited
AGHL Portugal Investments Holdings, S.A. (AGHLPIH)
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
Sucesso Delicado, S.A.
Transitorysphere – Unipessoal LDA
Benefitpossibility – Unipessoal LDA
Every Possibilities – Unipessoal LDA (EPUL)
Esfera Civilizada SA
Amstelveste Vastgoed B.V.
Arrow Global Investments Holdings Benelux B.V. (AGIHB)
Focum Groep B.V. (FG)
Focum Solutions B.V.
Fiditon Holding B.V. (FH)
Focum Commerce B.V.
Focum Finance B.V.
Incassobureau Fiditon B.V.
Universum Inkasso B.V. (UI)
Vesting Finance Detachering B.V.
Vesting Finance Holding B.V. (VFH)
Vesting Finance Incasso B.V.
Vesting Finance Servicing B.V. (VFS)
Arrow Global Benelux (Holdings) B.V. (AGBH)
Spark Hypotheken B.V.
KU88 B.V.
Arrow Global Luxembourg (Holdings) S.á.r.l. (AGLH)
Bow Advisers S.á r.l
Bow (SMA)Advisers S.á r.l
Bow (Co-invest)Advisers S.á r.l
Focum Belgium (BVBA)
Place of incorporation
(or registration) and operation
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Italy
Albania
Poland
South Africa
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
the Netherlands
Luxembourg
Luxembourg
Luxembourg
Luxembourg
Belgium
Registered
office
Note 6
Note 6
Note 6
Note 6
Note 11
Note 12
Note 11
Note 11
Note 11
Note 11
Note 10
Note 13
Note 14
Note 15
Note 16
Note 17
Note 16
Note 16
Note 16
Note 18
Note 18
Note 18
Note 16
Note 16
Note 16
Note 16
Note 16
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 19
Note 20
Note 21
Note 21
Note 21
Note 22
Proportion
of ordinary
shares
Current
ownership
status
(%)
Trading
100
Trading
0
Trading
0
Trading
0
Trading
0
Trading
0
Trading
0
Trading
0
Trading
0
Trading
0
Trading
0
Trading
20
Dormant
100
Dormant
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
100
Trading
100 Non-Trading
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
Trading
100
143
Parent
company
AGIS
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
WS
AG(H)L/AGL
CDRL
AGIHL
AGHLPIH
AGHLPIH
AGHLPIH
AGHLPIH
AGHLPIH
NISA
NISA
AGHLPIH
AGHLPIH
AGHLPIH
AGHLPIH
EPUL
AGIHB/VFS
AGIHL
AGIHB
FG
AGIHB
FG
FG
FH
AGIHB
VFH
AGIHB
VFH
AGIHB
AGIHB
AGLH
AGLH
AGBH
ACML
ACML
ACML
AGIHB/FG
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 144
Notes to the financial statements continued
23. Investments in subsidiaries and associate continued
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 entity. The Group at times, must exercise judgement as to whether the combination of control and exposure to variability of
returns arising from an entity means it is acting primarily as an agent, or as a principal for its own interests and should therefore consolidate
the entity into the results of the Group. There have been no instances in the period where significant judgement was applied to reach a
conclusion over whether or not an entity should be consolidated or not. The Group did not consolidate any entity which individually had
material non-controlling interest balances, and as such, no further disclosure on non-controlling interests have been provided in this note.
Financial support given to structured entities
During the year, the Group issued no guarantees (2018: nil) to holders of notes issued by structured entities that the Group consolidates.
Notes
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Note 18
Note 19
Note 20
Note 21
Note 22
Registered addresses
4th Floor, Fairfax House, Merrion Street, Leeds, LS2 8BX
Belvedere, 12 Booth Street, Manchester M2 4AW
Grand Canal House, 1 Grand Canal Street Upper, Dublin 4 D04 Y7R5
First Floor, Albert House, South Esplanade, St Peter Port, Guernsey
27 Esplanade, St Helier, Jersey, JE1 1SG
Via V. Betteloni 2, 20131 Milan
Via Lanzone 31, 20123 Milan
Via Niccolo Tommaseo 68, 35131 – Padova
Via Pieve Torina, 44–46/a, 00156 Rome
Foro Bonaparte 70, 20121 Milan
Via A.Pestalozza 12/14, 20131 Milan
Via G.Fara 26, 20124 Milan
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
Edifício D. Sebastião, Rua Quinta do Quintã, nº 6, Quinta da Fonte, 2770 203 Paço de Arcos, Portugal
Edifício Q54 D. José, Rua Quinta do Quintã, nº1,Piso 0, Fracção B, Quinta da Fonte, Oeiras, Portugal
Avenida da República, nº 35, 4º, 1050–186, Lisboa–Portugal
Asch van Wijckstraat 55F, 3811 LP Amersfoort, the Netherlands
15 Boulevard Friedrich Wilhelm Raiffeisen, L–2411 Luxembourg
6D, route de Treves, L-2633 Senningerberg, Grand Duchy of Luxembourg
Nijverheidsstraat 70, 2160 Wommelgem
Company: investment in subsidiaries
At 31 December 2018 and 31 December 2019
The investments in subsidiaries are all stated at cost less accumulated impairment.
Arrow Global
One Limited
£000
307,500
Total
£000
307,500
Arrow Global Annual Report and Accounts 2019
24. Portfolio investments
Split of portfolio investments by period:
Expected falling due after one year
Expected falling due within one year
Total
Purchased portfolio investments
The Group recognises income from portfolios investments in accordance with IFRS 9 from 1 January 2018.
The movements in portfolio investments were as follows:
As at 31 December 2019
145
2019
£000
916,123
247,501
1,163,624
2018
£000
841,890
245,140
1,087,030
As at the year brought forward
Portfolios purchased during the year
Transfer between categories
Collections in the year
Income from portfolio investments at amortised cost
Fair value gain on portfolio investments at FVTPL
Income from portfolio investments – real estate inventories
Net impairment gain
Exchange and other movements
Portfolio restructure
As at the year end
Financial instruments
Amortised cost
£000
869,056
248,470
11,483
(390,734)
199,094
–
–
12,720
(4,729)
(13,161)
932,199
FVTPL
£000
217,974
30,052
(55,262)
(48,034)
–
32,397
–
–
(7,328)
–
169,799
Real estate
inventories
£000
–
25,165
43,779
(3,543)
–
–
561
(6)
(4,330)
–
61,626
Total
£000
1,087,030
303,687
–
(442,311)
199,094
32,397
561
12,714
(16,387)
(13,161)
1,163,624
Transfer between categories represents positions where the Group has originally held one type of instrument relating to a portfolio, and
subsequently increased or changed its interest in the portfolio, leading to the requirement to consolidate the underlying structure onto the
Group’s balance sheet. This leads to a change in the classification of the portfolio investment held. The ‘portfolio restructure’ represents the
restructure of a leveraged structured deal to move to a de-levered position, and hence change the nature of the holding whilst extinguishing
related liabilities. Note that for real estate inventories, which are not financial instruments, the collections figure above is analogous to total
sales of inventories, and the net of collections and income from portfolio investments – real estate inventories, is analogous to cost of sales of
inventories. Sales of inventories are accounted for as revenue under IFRS 15, as they are not financial instruments, but are presented alongside
the other portfolio investments for ease of reference.
As at 31 December 2018
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 portfolio investments at FVTPL
Net impairment gain
Exchange and other movements
As at the year end
Financial instruments
Amortised cost
£000
920,578
(93,734)
826,844
169,514
3,339
(387,699)
188,862
–
50,727
17,469
869,056
FVTPL
£000
30,889
76,734
107,623
93,836
8,514
(23,889)
5,070
24,745
–
2,075
217,974
Real estate
inventories
£000
–
–
–
–
–
–
–
–
–
–
–
Total
£000
951,467
(17,000)
934,467
263,350
11,853
(411,588)
193,932
24,745
50,727
19,544
1,087,030
The impact of IFRS 9 shown above is pre-tax. The post-tax impact is £14,000,000. The closing IFRS 9 position has not been shown in the table
above, as post-implementation the impact of IFRS 9 is subsumed within the net impairment gain, and within income from portfolio
investments at amortised cost.
The estimated future cash flows generated by portfolio investments are the key estimates/judgements in these financial statements. Flexing
the expected future gross cash flows by -1/+1% would impact the closing carrying value of the portfolio investments as at 31 December 2019
by £11,020,000 (31 December 2018: £10,870,000). Note that this sensitivity applies only to ‘Amortised Cost’ and ‘FVTPL’ portfolio investments,
as this is not a critical estimate for Real Estate portfolio assets.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
146
Notes to the financial statements continued
25. Risks arising from financial instruments
Risk management
Credit risk
The Group’s principal activity is the acquisition and management of non-performing and non-core consumer and commercial unsecured,
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 ERCs 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 of debt types, also factoring in
sale recoveries from collateral held on the secured portfolios. Further details of the forecasting process are given in note 4.ii.
A pricing credit committee is in place which includes at least two members of the executive committee 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.
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.
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.
Credit quality analysis
The Group’s purchased portfolio investments have been classified as purchased or originated as credit impaired (POCI) as they include
financial instruments that were credit-impaired at initial recognition, irrespective of whether they are still credit-impaired at the reporting
date. Expected credit losses (ECL) against POCI exposures are always calculated on a lifetime basis (cumulative changes in ECL since initial
recognition), and are reflected in the credit-adjusted effective interest rate at initial recognition. As a result, no loss allowance is recognised
at inception. Subsequently, any changes in lifetime ECL after initial recognition are recognised in profit or loss. The 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, interest rates 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 judgement 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’.
Arrow Global Annual Report and Accounts 2019
147
25. Risks arising from financial instruments continued
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.
The following table sets out information about the credit quality of financial assets measured at amortised cost. Unless specifically indicated
the amounts in the table represent gross carrying amounts.
Portfolio investments – amortised cost
Loss allowance
Carrying amount
The following table sets out a geographical analysis of all portfolio investments:
All portfolio balances
UK and Ireland
Netherlands
Portugal
Italy
Total
Stage 1- 3
£000
–
–
–
POCI
£000
932,199
N/A
932,199
Total
£000
932,199
N/A
932,199
2018
£000
869,056
N/A
869,056
2019
£000
452,584
157,350
295,695
257,995
1,163,624
2018
£000
468,786
168,025
304,893
145,326
1,087,030
The following table sets out further credit analysis for portfolio investments measured at amortised cost:
Amortised cost portfolio balances
UK and Ireland
Netherlands
Portugal
Italy
Total
Secured
£000
55,348
1,989
87,506
95,244
240,087
Unsecured
£000
352,028
64,820
162,388
112,876
692,112
Total
£000
407,376
66,809
249,894
208,120
932,199
2018
£000
403,138
75,421
300,694
89,803
869,056
Portfolio balances are based on the customer’s country of domicile.
The Group’s maximum exposure to credit risk on portfolio investments is considered equal to the current carrying balance of such portfolio
investments.
Information on collateral held against amortised cost secured loans
The following table stratifies credit exposures from secured portfolio investments held at amortised cost by ranges of loan-to-value (LTV)
ratio. LTV is calculated as the ratio of the gross amount of the loan – or the amount committed for loan commitments – to the value of the
collateral. The valuation of the collateral excludes any adjustments for obtaining and selling the collateral. The value of the collateral is based
on the most recent appraisals. LTV stratification is deemed a more relevant measure of the value of collateral held against secured loans than
gross collateral values held, which may include an amount which is not due to the Group upon realisation. Comparative information for 2018
was not available in a comparable format.
LTV Ratio
Less than 50%
51-70%
71-90%
91-100%
More than 100%
Total
2019
£000
89,119
21,796
16,986
12,263
99,923
240,087
Other types of credit enhancements
In addition to the collateral included in the tables above, the Group holds other types of collateral and credit enhancements, such as second
charges and floating charges for which specific values are not generally available
Assets obtained by taking possession of collateral
There have been no instances of financial or non-financial assets obtained by the Group during the year by taking possession of collateral held
as security against portfolio investments.
The Group’s policy is to pursue timely realisation of the collateral in an orderly manner. The Group does not generally use the non-cash
collateral for its own operation.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
148
Notes to the financial statements continued
25. Risks arising from financial instruments continued
Significant increase in credit risk
There are no significant increases or decreases in credit risk since origination as all portfolio investments have been deemed to be purchased
or originated credit impaired on initial recognition.
Cash and cash equivalents
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 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
2019
£000
88,765
2018
£000
92,001
The table represents a worst-case scenario of the counterparty risk that the Group is exposed to. The 31 December 2019 balance is spread
across a number of counterparties with the top five accounting for 57% of the total (2018: 72%). The maximum exposure to one counterparty
is £16 million (2018: £47 million).
The cash and cash equivalents are held with banks and financial institution counterparties whose external credit ratings, by either S&P Global
Ratings or Moody’s Investor Service, are as follows:
AA
A
Below A
Total cash and cash equivalents
2019
%
23
34
43
100
2018
%
–
59
41
100
Incorporation of forward looking information
Note 4 includes a description of how the future cash flows are estimated for the Group’s portfolio investments. Additionally, the Group
incorporates forward looking information in the measurement of portfolio investments held at amortised cost. The Group formulates six
economic scenarios: a base case, which is the central scenario, developed based on consensus forecasts, and five less likely scenarios – two
upside, one stagnation and two downside scenarios.
These scenarios are calculated by an external and independent macroeconomic forecasting company, and are reviewed internally before
being used in the Group’s models. To derive these scenarios, multiple sources of information are considered, including economic data and
forecasts published by governmental bodies and monetary authorities in the countries where the Group operates, supranational organisations
such as the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund, and selected private-
sector and academic forecasts.
The Group has identified and documented key drivers of credit risk for its portfolio investments and, using an analysis of historical data, has
estimated relationships between macro-economic variables and credit risk and credit losses. The key drivers for credit risk for portfolio
investments are: CPI growth, price indices, unemployment rates and interest rates. For exposures to specific regions, the key drivers also
include relevant real estate prices.
The Group estimates each key driver for credit risk over the active forecast period of four years. This is followed by a period of mean reversion
of three years. A limitation of the approach which has been taken by the Group in estimating the impact of multiple economic scenarios is that
the correlations between macro-economic variables and credit risk have been calculated using UK macro-economic data and UK historic
portfolio performance but applied to the wider population of amortised cost portfolios held across Europe. The exception to this is in Portugal
for secured assets, where specific correlations between Portuguese HPI and credit risk have been calculated and used. Despite such limitations,
the Group believes that this approach provides a materially correct estimate of the impact of future economic scenarios across the Group.
Arrow Global Annual Report and Accounts 2019
149
25. Risks arising from financial instruments continued
The economic scenarios used as at 31 December 2019 included the following key indicators for the UK (unemployment rates, interest rates,
CPI growth, HPI growth) and Portugal (house prices) for the years ending 31 December 2019 to 2023.
UK
Unemployment rates
Interest rates
CPI growth
HPI growth
Portugal
House prices
Scenario
Base
Upside
Mild upside
Stagnation
Downside
Severe downside
Base
Upside
Mild upside
Stagnation
Downside
Severe downside
Base
Upside
Mild upside
Stagnation
Downside
Severe downside
Base
Upside
Mild upside
Stagnation
Downside
Severe downside
Base
Upside
Mild upside
Stagnation
Downside
Severe downside
Probability
50%
10%
10%
10%
10%
10%
50%
10%
10%
10%
10%
10%
50%
10%
10%
10%
10%
10%
50%
10%
10%
10%
10%
10%
50%
10%
10%
10%
10%
10%
2019
3.8%
3.8%
3.8%
3.8%
3.8%
3.8%
0.8%
0.8%
0.8%
0.8%
0.8%
0.8%
1.8%
1.8%
1.8%
1.8%
1.8%
1.8%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
2019
9.6%
9.6%
9.6%
9.6%
9.6%
9.6%
2020
3.8%
3.3%
3.7%
4.5%
4.5%
4.6%
0.7%
1.4%
1.1%
0.5%
0.3%
0.2%
1.6%
2.4%
2.1%
1.1%
0.9%
0.6%
2.0%
10.6%
7.0%
(4.3%)
(7.1%)
(11.6%)
2020
2.8%
13.8%
9.8%
(1.7%)
(4.1%)
(8.2%)
2021
3.7%
2.4%
3.3%
5.2%
5.3%
5.6%
1.0%
2.1%
1.6%
0.4%
0.3%
0.1%
1.5%
3.1%
2.4%
0.5%
0.1%
(0.5%)
2.5%
8.1%
5.6%
(3.8%)
(6.5%)
(11.6%)
2021
2.2%
7.7%
5.8%
(0.4%)
(2.0%)
(4.7%)
2022
3.7%
2.0%
3.3%
5.8%
6.0%
6.3%
1.2%
2.5%
2.0%
0.8%
0.5%
0.1%
1.8%
2.9%
2.5%
1.3%
1.1%
0.8%
3.1%
11.1%
8.4%
(1.3%)
(4.0%)
(9.4%)
2022
2.3%
6.6%
5.1%
0.1%
(1.3%)
(3.8%)
2023
3.6%
1.9%
3.2%
5.8%
6.0%
6.4%
1.5%
3.0%
2.3%
1.0%
0.8%
0.3%
1.9%
1.9%
1.8%
1.8%
1.8%
1.9%
3.4%
3.0%
3.1%
3.8%
4.0%
4.4%
2023
2.4%
2.0%
2.1%
2.5%
2.7%
2.9%
Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed
based on analysing historical data over the past 10 years. Where correlations have not been calculated for a specific country in which the Group
operates, the closest comparable correlation from another country is used.
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 Asset and Liability committee, which is chaired by the Group chief financial officer, and is 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 risks are 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 2019 (2018: £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.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
150
Notes to the financial statements continued
25. Risks arising from financial instruments continued
Liquidity risk continued
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 and cash and cash equivalents to meet contractual maturities on borrowing facilities plus an operational headroom. In addition,
the Group aims to ensure that leverage is within the target range of 3.0 to 3.5 times, there is an appropriate refinancing profile with phased
maturity dates and it has diversified funding sources with no over-reliance on a single or small group of lenders or type of funding. At
31 December 2019, the Group’s senior secured notes, revolving credit facility and asset backed security transaction had an average period
to maturity of 4.8 years (2018: 5.8 years). Total cash and undrawn facilities as at 31 December 2019 were £153 million (2018: £131 million).
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 regular cash receipts and portfolio purchases (except forward flows) are discretionary, which helps to mitigate
liquidity risk.
The key measure used by the Group for managing liquidity risk is liquidity headroom, which includes cash and cash equivalents and the
headroom under the two committed facilities, being the revolving credit facility and the asset backed security facility. Details of the liquidity
headroom as at the reporting date and during the reporting period were as follows.
At 31 December
Average for the period
Maximum for the period
Minimum for the period
2019
£000
152,874
138,061
198,888
109,257
2018
£000
131,000
184,000
273,000
130,000
Maturity analysis
The table below sets out the remaining contractual maturities of the Group’s financial liabilities and financial assets and includes both interest
and principal cash flows, payable over the contractual life of the non-derivative financial liabilities.
Group
As at 31 December 2019
Financial liability by type:
Trade and other payables
Lease liabilities
€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%)
Revolving credit facility1
Asset-backed securitisation
Other borrowings
Bank overdrafts
Total financial liabilities
Financial asset by type:
Cash and cash equivalents
Portfolio investments (excluding REOs)
Total financial assets
Less than
1 month
£000
21,037
23
842
–
–
498
276
–
1,386
24,062
88,765
31,420
120,185
Within
1 year
£000
123,922
5,194
9,103
9,242
16,445
5,385
2,979
2,695
–
174,965
1-2 years
£000
3-5 years
£000
31,206
4,347
9,918
9,217
16,400
5,867
15,071
41
–
92,067
23,413
9,267
29,780
27,676
363,763
246,409
78,393
936
–
779,637
More than
5 years
£000
1,018
5,029
341,840
253,126
–
–
–
–
–
601,013
Total
£000
200,596
23,860
391,483
299,261
396,608
258,159
96,719
3,672
1,386
1,671,744
–
339,856
339,856
–
324,294
324,294
–
691,327
691,327
–
324,406
324,406
88,765
1,711,303
1,800,068
1. Reflects all drawings at 31 December 2019 being held to the facility maturity date of 4 January 2024.
Arrow Global Annual Report and Accounts 2019
151
25. Risks arising from financial instruments continued
Group
As at 31 December 2018
Financial liability by type:
Trade and other payables
Lease liabilities
€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%)
Other borrowings
Bank overdrafts
Revolving credit facility1
Total financial liabilities
Financial asset by type:
Cash and cash equivalents
Portfolio investments (excluding REOs)
Total financial assets
Less than
1 month
£000
Within
1 year
£000
1-2 years
£000
3-5 years
£000
More than
5 years
£000
Total
£000
–
–
890
–
–
–
2,696
743
4,329
92,001
16,834
108,835
145,181
–
9,676
9,800
16,400
8,978
–
8,703
198,738
–
199,371
199,371
26,255
–
11,964
10,803
16,400
2,978
–
10,195
78,595
12,426
–
43,643
37,912
49,200
–
–
268,317
411,498
13,795
–
379,833
287,804
331,616
–
–
–
1,013,048
197,657
–
446,006
346,319
413,616
11,956
2,696
287,958
1,706,208
–
198,339
198,339
–
285,807
285,807
–
934,434
934,434
92,001
1,634,785
1,726,786
1. Reflects all drawings at 31 December 2018 being held to the facility maturity date of 2 January 2023.
The above tables includes a maturity analysis for financial assets that it holds as part of managing liquidity risk – e.g. financial assets that are
expected to generate cash inflows to meet cash outflows on financial liabilities – to enable the user to evaluate the nature and extent of the
Group’s and the Company’s liquidity risk
As part of the management of liquidity risk arising from financial liabilities, the Group holds liquid assets comprising cash and cash equivalents
which can be readily used to meet liquidity requirements. In addition, the Group maintains agreed lines of credit with other banks.
The non-derivative financial liabilities and financial assets are calculated based upon the undiscounted cash flows, which include estimated
interest payments. 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.
Company
As at 31 December 2019
Financial liability by type:
Trade and other payables
Total financial liabilities
Financial asset by type:
Cash and cash equivalents
Total financial assets
Company
As at 31 December 2018
Financial liability by type:
Trade and other payables
Total financial liabilities
Financial asset by type:
Cash and cash equivalents
Total financial assets
Less than
1 month
£000
489
489
18
18
Less than
1 month
£000
–
–
8
8
Within
1 year
£000
1,518
1,518
–
–
Within
1 year
£000
2,251
2,251
–
–
1-2 years
£000
3-5 years
£000
More than
5 years
£000
–
–
–
–
–
–
–
–
–
–
–
–
1-2 years
£000
3-5 years
£000
More than
5 years
£000
–
–
–
–
–
–
–
–
–
–
–
–
Total
£000
2,007
2,007
18
18
Total
£000
2,251
2,251
8
8
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 into certain forward flow agreements to which it has committed to pay an estimated
£24,600,000 (2018: £6,257,000) over the next five years.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
152
Notes to the financial statements continued
25. 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
2019
2018
Outflow
£000
84
135
217
79
–
515
Inflow
£000
–
–
–
–
–
–
Outflow
£000
63,392
48,254
57
4
–
111,707
Inflow
£000
63,512
48,224
5
3
–
111,744
The above table shows the gross contractual undiscounted cash flows receivable and payable on the derivative financial instruments.
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 derivative financial instruments are held across a number of counterparties; the largest net cash flow exposure to a single counterparty
at 31 December 2019 is £0.2 million (2018: £0.3 million).
Financial assets pledged as collateral
On 30 April 2019, the Group entered into a £100 million non-recourse committed asset backed securitisation facility with an advance rate of
55% of 84-month ERC.
On the same date, the Group sold £137 million of ERC into AGL Fleetwood Limited, a wholly owned Arrow Global Group subsidiary, and borrowed
an initial amount of £75 million non-recourse funding at Libor plus 3.1%, under the facility. The assets of AGL Fleetwood Limited are pledged as
security against the non-recourse funding.
On 31 July 2019, the Group sold a further £44 million of ERC into AGL Fleetwood Limited and subsequently borrowed an additional £25 million
non-recourse funding on the same terms under the facility. The facility has a five year term comprising an initial two year revolving period
followed by a three year amortising period with an option to extend the revolving period by one year, subject to lender consent.
As at 31 December 2019, the Group had pledged £94.2 million (2018: £nil) of portfolio investments as security in connection with the
non-recourse committed asset backed securitisation.
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 and are considered further below. Note that the Group does not
hold any trading portfolios for the purposes of these disclosures.
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
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
Arrow Global Annual Report and Accounts 2019
2019
£000
2018
£000
320,000
320,000
320,000
320,000
(88,765)
912,855
(340,237)
483,853
(92,001)
861,153
(453,811 )
315,341
2019
£000
470
(1,369)
2018
£000
1,134
(849)
153
25. Risks arising from financial instruments continued
This sensitivity analysis is based on the following assumptions:
• 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 highly likely 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. This risk is managed by the Group matching Euro asset purchases with Euro
funding wherever possible, to achieve an element of natural hedging.
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)
2019
£000
2018
£000
21,380
21,380
10,097
10,097
2019
£000
9,800
9,800
2018
£000
6,837
6,837
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)
2019
£000
2018
£000
(17,493)
(17,493)
(8,621)
(8,621)
2019
£000
2018
£000
(8,018)
(8,018)
(5,594)
(5,594)
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 2019
Financial statementsFinancial statements
154
Notes to the financial statements continued
25. Risks arising from financial instruments continued
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 but seeks to maintain leverage (calculated as Secured Net Debt over Adjusted EBITDA) of between
3.0 and 3.5 times.
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 cash, cash equivalents debt and equity.
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 2019 was:
Ordinary share capital and premium
Other reserves excluding opening IFRS 9, IFRS 15 and IFRS 16 adjustments
Impact of adopting IFRS 9
Impact of adopting IFRS 15
Impact of adopting IFRS 16
Total equity and reserves
2019
£000
349,205
(150,866 )
–
–
(947)
197,392
2018
£000
349,199
(143,343)
(14,000)
(199)
–
191,657
26. Financial assets and liabilities
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. The Group does not apply ‘offsetting’ to
any of its financial assets and liabilities.
2019
Portfolio investments
Cash and cash equivalents
Other receivables classified as financial assets
Total financial assets
2019
Senior secured notes
Revolving credit facility
Asset-backed loans
Bank overdrafts
Other borrowings
Derivative liability
Trade and other payables classified as financial liabilities
Total financial liabilities
Mandatorily at
FVTPL
£000
169,799
–
–
169,799
Mandatorily at
FVTPL
£000
–
–
–
–
–
509
12,549
13,058
FVOCI
£000
–
–
–
–
FVOCI
£000
–
–
–
–
–
–
–
–
Amortised cost
£000
932,199
88,765
69,198
1,090,162
Amortised cost
£000
897,875
230,963
84,077
1,386
3,672
–
151,586
1,369,559
Total carrying
amount
£000
1,101,998
88,765
69,198
1,259,961
Total carrying
amount
£000
897,875
230,963
84,077
1,386
3,672
509
164,135
1,382,617
Total fair value
£000
1,101,275
88,765
69,198
1,259,238
Total fair value
£000
904,853
230,963
84,077
1,386
3,672
509
164,135
1,389,595
Arrow Global Annual Report and Accounts 2019
155
26. Financial assets and liabilities continued
Portfolio investments
Cash and cash equivalents
Trade and other receivables classified as financial assets
Total financial assets
2018
Senior secured notes
Revolving credit facility
Bank overdrafts
Other borrowings
Derivative liability
Trade and other payables classified as financial liabilities
Financial liabilities
Mandatorily at
FVTPL
£000
217,974
–
–
217,974
Mandatorily at
FVTPL
£000
–
–
–
–
502
38,455
38,957
FVOCI
£000
–
–
–
–
FVOCI
£000
–
–
–
–
–
–
–
Amortised cost
£000
869,056
92,001
88,779
1,049,836
Amortised cost
£000
941,109
245,587
2,696
11,635
–
105,085
1,306,112
Total carrying
amount
£000
1,087,030
92,001
88,779
1,267,810
Total carrying
amount
£000
941,109
245,587
2,696
11,635
502
143,540
1,345,069
Total fair value
£000
1,100,001
92,001
88,779
1,280,781
Total fair value
£000
864,835
245,587
2,696
11,635
502
143,540
1,268,795
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 instruments that trade infrequently and have little price transparency, fair value is less objective, and required judgement 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 the differences between the instruments.
Application to the Group’s financial assets and liabilities
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. The primary unobservable input to which this valuation is sensitive to is the current market rates for portfolios. A 1% rise/fall in this rate
would lead to an uplift/reduction in fair value of £20,251,000/(£19,438,000).
The fair value of cash and cash equivalents and the revolving credit facility are deemed to be equal to their carrying amount, and is considered
a level 1 fair value.
The carrying value of other receivables and payables classified as financial assets/liabilities is deemed to be a good approximation of their fair
value, due to their short maturity and low credit risk. These would be considered as a level 3 fair values.
The carrying value of asset-backed loans is deemed to be a good approximation of their fair value. Given the significant collateral underpinning
the asset-backed loans, it is deemed appropriate to not adjust the carrying value for expected credit losses when deriving the fair value of the
loans. Additionally, the market rate is not deemed to have materially changed since the issuance of the asset-backed loans. The fair value
would be categorised as a level 3 value.
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.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
156
Notes to the financial statements continued
26. Financial assets and liabilities continued
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
Liabilities:
Contingent consideration
2019
£000
–
509
509
2018
£000
(294)
796
502
169,799
169,799
217,974
217,974
(12,549)
157,250
(38,455)
179,519
There have been no transfers between level 2 or level 3. However, in the year it has been determined that contingent consideration liabilities
qualify as level 3 financial liabilities held at FVTPL. As such, they are now included within this disclosure.
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 2019.
Total gains on portfolio investments recognised at FVTPL have been presented in the income statement as ‘Fair value gains on portfolio
investments at FVTPL’. The fair value of portfolio investments recognised as FVTPL has been calculated by using a discounted cash flow model.
The significant unobservable inputs used in the calculation of portfolio investments categorised as Level 3 In the fair value hierarchy are
estimated future cash flows (ERCs), derived from management forecasts and the discount rate appropriate to the investment and the
anticipated rate of return.
The total 84 month ERC value for the Group’s portfolio investments held at FVTPL is £255,844,000, with an average discount rate of 12.4%. An
increase/decrease in ERC of 1% would lead to an increase/decrease in the carrying value of portfolio investments held at FVTPL of £1,698,000/
(£1,698,000). An increase/decrease in the discount rate of 1% would lead to an increase/decrease in the carrying value of portfolio investments
held at FVTPL of (£5,325,000)/£5,637,000.
The total ERC value for the Group’s portfolio investments held at amortised cost is ££1,428,163,000, with an average discount rate of 22.9%. An
increase/decrease in ERC of 1% would lead to an increase/decrease in the carrying value of portfolio investments held at amortised costs of
£9,322,000/(£9,322,000). An increase/decrease in the discount rate of 1% would lead to an increase/decrease in the carrying value of portfolio
investments held at amortised of (£14,114,000)/£14,613,000. A full reconciliation between the opening and closing portfolio investments held
at FVTPL has been provided in note 24. For a fuller description of how the future cash flows are estimated, please refer to note 4.
Reconciliation of Level 3 fair values – contingent consideration
Contingent consideration – Level 3
As at the year brought forward
Additional liabilities entered into in the period
Fair value adjustments
Consideration repaid in the year
Foreign exchange gain
2019
£000
38,455
4,300
(21,119)
(8,678)
(409)
12,549
2018
£000
18,502
20,130
(167)
–
(10)
38,455
Contingent consideration has arisen as a result of business combinations in the prior periods. In the current period, the contingent
consideration was remeasured, partly due to the renegotiation of the terms of the deferred consideration in the period. Of the closing
balance, €10 million relates to the acquisition of Norfin and has a minimum/maximum pay-out of €5 million/€10 million. The remainder relates
to the acquisition of Drydens, with a minimum/maximum pay-out of £nil/£5 million.
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.
Arrow Global Annual Report and Accounts 2019
157
26. Financial assets and liabilities continued
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 2019 is £nil (2018: £35,300,000). As at 31 December 2018, these comprise foreign currency contracts to sell Sterling and purchase
Euros for a total notional of £35,300,000 and had maturity dates to March 2019. These contracts were designated and were effective as cash
flow hedges under IFRS 9 and, accordingly, the fair value thereof was deferred in equity and the fair value recycled to the statement of profit
or loss and other comprehensive income during 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. During the year,
£8,000 (2018: £1,202,000) 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 and an amount of £100,000 has been charged to equity for
the Group in the period in respect of cash flow hedges (2018: £291,000).
Level 3
Assets:
Portfolio investments – amortised cost
Total assets
2019
£000
2018
£000
932,199
932,199
869,056
869,056
There have been no transfers in or out of level 3. However, in the year it has been determined that deferred consideration liabilities qualify as
level 3 financial liabilities held at amortised cost. As such, they are now included within this disclosure. 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 internal model. For a
fuller description of how the future cash flows are estimated, please refer to note 4. Following acquisition, the fair value will move directionally
in line with carrying amount but may deviate as market conditions change.
The Group has an established control framework covering the measurement of portfolio investment carrying 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 24.
The Company did not hold any other financial instruments not measured at fair value for which a fair value needs to be calculated (2018: none).
Derivatives designated as cash flow hedges
Instrument type
Interest rate derivatives
Foreign exchange contracts
Total derivatives designated as cashflow hedges
2019
Assets
£000
–
–
–
Liabilities
£000
509
–
509
2018
Assets
£000
–
294
294
Liabilities
£000
796
–
796
Interest rate hedging
The Group has Euro interest rate swaps, which hedge floating 3 month Euribor with a zero percent floor to a fixed rate and have been
designated as cash flow hedges, in place for a Sterling equivalent notional amount of £340,237,000 (2018: £453,811,000). In 2018 and 2019,
these interest rate swaps covered current borrowings, being the floating rate senior secured Euro notes. An amount of £286,000 has been
credited to equity for the Group in the period in respect of cash flow hedges (2018: £291,000 charge). All hedge relationships have been
effective in the year and are expected to maintain effectiveness.
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 and no charge has
been made to the statement of profit or loss and other comprehensive income in the year (2018: no charge). No re-classifications into or out
of the hedging reserve were made in relation to interest rate swaps.
The Company did not hold any interest rate swaps at 31 December 2019 (31 December 2018: £nil). No charge has been made to the
Company’s equity.
The calculation methodology of Euribor changed during 2019. In July 2019, the Belgian Financial Services and Markets Authority granted
authorisation with respect to Euribor under the European Union Benchmarks Regulation. This allows market participants to continue to use
Euribor after 1 January 2020 for both existing and new contracts. The Group expects that Euribor will continue to exist as a benchmark rate for
the foreseeable future. The Group does not anticipate changing the hedged risk to a different benchmark. For these reasons, the Group does
not consider its cash flow hedges of the Euribor benchmark interest rate to be directly affected by the interest rate benchmark reform at
31 December 2019. No hedge relationships have any exposure to LIBOR.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
158
Notes to the financial statements continued
26. Financial assets and liabilities continued
At 31 December 2019, the Group held the following instruments to hedge exposures to changes in interest rates.
Interest rate risk
Interest rate swaps
Nominal amount (£000)
Average fixed interest rate
Reconciliation of components of equity
Reconciliation of components of equity
Balance at 1 January 2019
Cash flow hedges
Effective portion of changes in fair value:
Interest rate risk
EUR foreign currency risk
Related tax
Net amount reclassified to profit or loss:
EUR foreign currency risk
Related tax
Foreign currency translation differences for foreign operations
Balance at 31 December 2019
Less than 1 year
1-5 years
187,130
0.19%
153,107
0.05%
Hedging
reserve
£000
(584)
Translation
reserve
£000
9,214
287
(100)
(33)
8
(1)
–
(423)
–
–
–
–
–
(7,077)
2,137
27. Unconsolidated structured entities
Unconsolidated structured entities are all structured entities that the Group has an interest in, but does not control. The Group uses structured
entities in the normal course of business to facilitate acquisitions of portfolios in accordance with local law, to allow co-investment with other
parties, or to implement the financing required to acquire portfolios.
In addition to exposures to unconsolidated structured entities, the Group also undertakes Asset Management and Servicing activities for
certain structured entities in which the Group has no other interests. Such activities are charged at a market rates, on terms normal for the
industry, and are considered to be a typical customer/supplier relationship per the meaning of this term set out in ‘IFRS 12 – Disclosure of
Interests in Other Entities’.
Nature and risks associated with Group interests in unconsolidated structured entities:
Geography of operations
Underlying asset type
Loan receivables
Real estate
Number of entities as at 31 December 2019
Portfolio investments
FVTPL
Amortised cost
Total assets as at 31 December 2019
Total liabilities as at 31 December 2019
UK and Ireland
1
–
1
UK and Ireland
4,203
–
4,203
–
Portugal
6
1
7
Portugal
18,864
2,976
21,840
–
Italy
5
–
5
Netherlands
4
2
6
Italy
12,070
6,080
18,150
–
Netherlands
89,451
2,008
91,459
–
The maximum exposure to loss is the carrying value of the instruments summarised above, due to the nature of the Group’s holdings at the
fact that no additional support has been provided or committed to the vehicles.
Unconsolidated structured entities in which the Group holds an interest are typically financed by a form of junior profit participation note, and
in some instances also have senior secured or senior unsecured liabilities to which the junior positions are subordinated.
2018 Comparative:
Geography of operations
Underlying asset type
Loan receivables
Real estate
Number of entities as at 31 December 2019
Arrow Global Annual Report and Accounts 2019
UK and Ireland
1
–
1
Portugal
4
–
4
Italy
5
–
5
Netherlands
4
2
6
159
27. Unconsolidated structured entities continued
Portfolio investments
FVTPL
Amortised cost
Total assets as at 31 December 2019
Total liabilities as at 31 December 2019
UK and Ireland
3,504
–
3,504
–
Portugal
3,899
25,170
29,069
–
Italy
12,202
7,472
19,674
–
Netherlands
88,021
4,492
92,513
–
28. Share-based payments – Group and Company
Share incentive plan (SIP)
In 2019 (and previously April 2018, 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 in 2017, with restrictions attached to these shares ceasing to have effect from the
vesting date.
Long-term incentive plan (LTIP)
On 20 June 2019, nil-cost share options were granted to eligible employees based on a maximum of 200% of base salary. The LTIP awards vest
at the end of three years subject to the achievement of performance conditions. On the same dates, tax-qualifying options were granted as
part of the LTIP awards (‘CSOP options’) to eligible UK employees.
On 27 June 2018, 31 March 2017, 8 April 2016 and 19 May 2016, 30 June 2015 and 15 June 2015, 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. 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. Awards granted on or after 27 June 2018 awards do not include the right to receive a dividend equivalent.
2019 LTIP award criteria
For each eligible employee, 50% of the LTIP awards are subject to the following ROE criteria:
Performance condition
Less than 24% Average ROE over three performance years
24% average ROE over the three performance years (threshold performance)
30% average ROE over the three performance years (maximum performance)
Between 24% and 30% average ROE over the three performance years
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 the following total shareholder return criteria, being share price growth plus
the value of dividend. The Group is compared against the FTSE 350 Index.
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
For each eligible employee, 25% of the LTIP awards are subject to the following FCF performance conditions:
Performance condition
Between 24% and 30% average ROE over the three performance years
£715 million cumulative FCF over the three performance years (threshold performance)
£757 million cumulative FCF over the three performance years (maximum performance)
Between £715 million and £757 million cumulative FCF over the three performance years
Percentage vesting
0%
25%
100%
Between the threshold performance and maximum
performance on a straight line basis
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 160
Notes to the financial statements continued
28. Share-based payments – Group and Company continued
LTIP Awards 2015, 2016, 2017 and 2018 criteria
For each eligible employee, 50% of the LTIP awards are subject to the following underlying basic EPS growth criteria:
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
LTIP Awards 2015, 2016, 2017 and 2018 continued
For each eligible employee, 25% of the LTIP awards are subject to the following total shareholder return criteria, being share price growth plus
the value of dividend. The Group is compared against the FTSE 350 Index.
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
For each eligible employee, 25% of the LTIP awards are subject to the following ROE criteria:
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
For each eligible employee, 25% of the LTIP awards are subject to the following ROE criteria:
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
Restricted share awards
Restricted share awards were made on 10 May 2019 and 10 May 2018. These awards vest on 10 May 2021 and 10 May 2020 respectively, subject
to continuity of employment. Awards made on 31 March 2017, 19 May 2016 and 15 June 2015 vested on 31 March 2019, 19 May 2018 and 11 May
2017 respectively.
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 26 March 2019, 27 March 2018, 31 March 2017, 8 April 2016 and 9 April 2015.
See page 89 for details of the bonus delivered in the form of deferred shares for the financial year 2019.
The deferred shares granted on 9 April 2015 and 8 April 2016 vested on 9 April 2018 and 8 April 2019 respectively.
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, in connection with Paul Cooper’s resignation the awards which were due to vest in 2020 and 2021 lapsed.
Arrow Global Annual Report and Accounts 2019
161
28. Share-based payments – Group and Company continued
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 – 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 – DSBP
Equity settled award – buy out
Equity settled award – buy out
Equity settled award – LTIP
Equity settled award – restricted
Equity settled award – SIP
Equity settled award – DSBP
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
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
2,107,612
359,934
103,981
132,737
3 years
3 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
3 years
2 years
3 years rolling
3 years
31 October 2016
30 December 2017
May-June 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
22 June 2022
10 May 2021
May-June 2022
26 March 2022
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
162
Notes to the financial statements continued
28. Share-based payments – Group and Company continued
The following table shows the weighted average exercise prices (WAEP)/fair values (FV) 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
2019
2018
WAEP/FV
2.88
2.24
2.68
2.86
2.66
2.63
2.62
Number of
options
5,177,072
2,704,265
(1,265,351)
(975,199)
(206,981)
5,433,806
677,859
WAEP/FV
£2.90
£2.73
£2.88
£2.59
–
£2.88
£2.53
Number of
options
4,076,095
2,350,193
(436,320)
(812,896)
–
5,177,072
718,631
The weighted average price of shares exercised in the year was £2.12 (2018: £2.54). The share options outstanding at 31 December 2019 have a
weighted average contractual life of 1.4 years (2018: 1.3 years) and an exercise price in the range of £1.84 to £2.57. The weighted average fair value
of options granted during the year was £2.15 (2018: £2.61). The majority of options granted to date are nil-cost options (2018: 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 (%)
20 June
2019
3
£2.31
43.1%
0.5%
10 May
2019
2
£1.94
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
Please see the directors remuneration report for further information about directors’ share options.
10 May
2019
3
£2.17
n/a
n/a
2019
£000
1,558
1,437
26 March
2019
3
£2.04
n/a
n/a
2018
£000
3,267
3,267
Arrow Global Annual Report and Accounts 2019
29. Borrowings and facilities
Senior secured notes net of transaction fees of £12,780,000 (2018: £14,769,000)
Revolving credit facility net of transaction fees of £3,720,000 (2018: £3,466,000)
ABS Loan net of transaction fees of £1,658,000 (2018: £nil)
Bank overdrafts
Other borrowings – Non-recourse facility
Total borrowings:
Amount due for settlement within 12 months
Amount due for settlement after 12 months
163
2019
£000
897,875
230,963
84,077
1,386
3,672
1,217,973
2018
£000
926,340
242,121
–
2,696
11,635
1,182,792
257,500
960,473
259,045
923,747
Senior secured notes
On 7 March 2018, Arrow Global Finance Plc issued €285 million floating rate senior secured notes due 2026 (the ‘2026 Notes’) at a coupon of
3.75% over three-month EURIBOR and also issued a £100 million tap of its existing £220 million 5.125% fixed rate notes due 2024. As part of the
transaction Arrow Global Finance Plc also redeemed its €230 million 4.75% over three-month EURIBOR floating rate senior secured notes.
The proceeds were used to fund the purchase price for the acquisition of Parr Credit, partially repay drawings under the revolving credit facility
and to fund transaction costs and the redemption of the 2023 notes.
In 2018, bond refinancing costs comprised £18,658,000 incurred on the early redemption of the €230 million notes due 2023, of which
£13,623,000 was a cash cost related to the call premium. The remaining £5,035,000 was due to a non-cash write-off of related transactions
fees, relating to the 2023 notes.
The Euro senior notes and Sterling senior notes are secured by substantially all of the assets of the Group.
Revolving credit facility
On 4 January 2018 the commitments under the revolving credit facility were increased from £215 million to £255 million. The maturity of the
facility was extended to 2 January 2023 and the margin reduced to 2.5%.
On 1 November 2018, the commitments under the revolving credit facility were increased from £255 million to £285 million.
On 26 February 2019, the revolving credit facility was extended to 2024, with no change in margin.
Asset backed securitisation
On 30 April 2019, the Group entered into a £100 million non-recourse committed asset backed securitisation facility with an advance rate of
55% of 84-month ERC. On the same date, the Group sold £137 million of ERC into AGL Fleetwood Limited, a wholly owned Arrow Global Group
subsidiary, and borrowed an initial amount of £75 million non-recourse funding at Libor plus 3.1% under the facility.
On 31 July 2019, the Group sold a further £44 million of ERC into AGL Fleetwood Limited and subsequently borrowed an additional £25 million
non-recourse funding on the same terms under the facility. The facility has a five year term comprising an initial two year revolving period
followed by a three year amortising period with an option to extend by one year, subject to lender consent.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
164
Notes to the financial statements continued
29. Borrowings and facilities continued
Reconciliation of movements of liabilities to cash flows arising from financing activities:
Balance at 31 December 2018
Changes from financing cash flows
Net repayments on loans
Proceeds from issued notes (net of fees)
Redemption of issued notes
Repayment of interest on issued notes
Payments on finance leases
Banking facility interest and other fees paid
Total changes from financing cash flows
Liability-related
Interest expense on issued notes
Amortisation of capitalised transaction fees
Banking facility interest and other fees
Interest rate swap and hedge costs
Other interest including on finance leases
Total interest and similar charges
Recognition on initial application of IFRS 16
The effect of changes in foreign exchange rates
Other borrowings restructure
Capitalised transaction fees
Acquisition of subsidiary – other borrowings
acquired
Impact of consolidation of subsidiary in the
period – other borrowings
Revaluation of contingent consideration
Net deferred consideration commitments
Other changes
Total liability-related changes
Balance at 31 December 2019
Senior
secured
notes
£000
926,340
Asset
backed-loans
£000
–
Revolving
credit
facility
£000
242,121
Lease
liabilities
£000
–
Deferred and
contingent
consideration
£000
71,953
Other
borrowings
£000
14,833
–
–
–
(33,553)
–
–
(33,553)
36,071
2,161
–
–
–
38,232
–
(32,971)
–
–
–
100,000
(14,396)
(2,317)
–
–
83,287
2,274
235
–
–
–
2,509
–
–
–
(1,719)
(2,017)
–
–
–
–
(6,705)
(8,722)
–
876
6,976
–
–
7,852
–
(8,414)
–
(1,127)
–
–
–
–
(5,061)
–
(5,061)
–
–
–
–
1,395
1,395
27,300
(130)
–
–
–
–
–
–
–
–
–
–
–
–
–
2,307
2,307
–
(1,806)
–
–
(5,482)
–
–
–
–
(1,747)
(7,229)
–
–
(61)
515
1,749
2,203
–
(318)
(13,161)
–
Total liabilities
relating to
cash flow
from
financing
activity
£000
1,255,247
(7,499)
100,000
(14,396)
(35,870)
(5,061)
(8,452)
28,722
38,345
3,272
6,915
515
5,451
54,498
27,300
(43,639)
(13,161)
(2,846)
–
–
–
–
–
6,122
6,122
–
–
–
(173)
(33,144)
897,875
–
–
–
–
(1,719)
84,077
–
–
–
(747)
(10,288)
230,963
–
–
–
–
27,170
23,504
–
(21,119)
41,981
–
19,056
93,316
3,623
–
–
(506)
(4,240)
5,567
3,623
(21,119)
41,981
(1,426)
(3,165)
1,335,302
The tables above and below have been represented to show additional detail, and to more easily allow reconciliation of the information to the
cash flow statement, income statement and the opening and closing balance sheet.
Other borrowings
Other borrowings
Bank overdrafts
Derivative liability
2019
£000
3,672
1,386
509
5,567
2018
£000
11,635
2,696
502
14,833
Arrow Global Annual Report and Accounts 2019
165
30. Acquisition of subsidiary undertaking
Current year acquisitions
a. Drydens Limited (Drydens)
On 8 April 2019, the Group acquired 100% of the share capital of Drydens. Drydens is a provider of legal services, the acquisition of which will
broaden the Group’s UK range of servicing capabilities and skills across consumer and commercial litigation, probate and insolvency. The total
undiscounted consideration for the acquisition is £11,115,000 including deferred and contingent consideration.
Contingent consideration is payable at various times within two years from completion of the transaction upon the satisfaction of three
mutually exclusive conditions which are based upon the business achieving certain targets around future volumes and the successful migration
of Group accounts. The targets for contingent consideration are not linked to the post-acquisition employment status of the sellers, and is not
considered to be a post-employment benefit arrangement with the former owners.
Of the £4,262,000 contingent consideration the gross undiscounted amounts are made up as follows:
• Up to £2,000,000 is contingent upon the successful migration of Arrow accounts. The payment range could be anywhere between £nil and
£2,000,000 with the final amount to be agreed upon in April 2020;
• Up to £2,000,000 is contingent upon the performance of Arrow placed accounts against the jointly agreed business plan. The payment
range could be anywhere between £nil and £2,000,000 with the final amount to be agreed upon in April 2021; and
• £1,000,000 is contingent upon winning Proceeds of Crime Act servicing deal from the UK Government before 8 April 2020. If the deal is not
won the payment is forfeited.
Effect of the acquisition
The fair values of the identifiable assets acquired and liabilities assumed are as set out in the table below. Acquisition related costs are
expensed in the profit or loss in the reporting period:
Property, plant and equipment
Intangible assets
Deferred tax asset
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Deferred tax liability
Current tax liability
Provisions
Lease liability
Loan liability
Total identifiable net liabilities
Goodwill on acquisition
Consideration:
Cash
Deferred consideration
Contingent consideration
Cash impact of acquisition in the period:
Cash consideration
Cash and cash equivalents acquired
Total
£000
954
688
146
15
1,983
(723)
(131)
(277)
(59)
(760)
(6,122)
(4,286)
14,519
10,233
2,865
3,106
4,262
10,233
2,865
(15)
2,850
An intangible asset of £688,000 has been recognised at acquisition, being the fair value after appropriate discounting, of expected cash flows
arising from existing customer relationships. The gross contractual outstanding amounts of ‘trade and other receivables’ was materially equal
to their carrying amount, with no material balances not expected to be collected upon.
Goodwill of £14,519,000 was created as a result of this acquisition. The primary reason for the acquisition was to broaden the Group’s range of
servicing capabilities in the UK.
In the period from acquisition to 31 December 2019, Drydens contributed income of £3,650,000 and profit after tax contribution of £1,165,000
to the consolidated results for the period. If the acquisition had occurred on 1 January 2019, Group total income would have been higher by an
estimated £1,167,000 and profit after tax would have been lower by an estimated £24,000.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
166
Notes to the financial statements continued
30. Acquisition of subsidiary undertaking continued
Prior 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 liablilities
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
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
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. The gross contractual
outstanding amounts of ‘trade and other receivables’ was materially equal to their carrying amount, with no material balances not expected to
be collected upon.
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.
Arrow Global Annual Report and Accounts 2019
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:
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
167
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. The gross
contractual outstanding amounts of ‘trade and other receivables’ was materially equal to their carrying amount, with no material balances not
expected to be collected upon.
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 funds under management (FUM) growth and margins achieved
in the business by the end of 2020. If such targets are met, a share of the FUM over the performance threshold will be paid as contingent
consideration in the first half of 2021.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
168
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
Intangible assets
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 (£31,335,000) 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.
The gross contractual outstanding amounts of ‘trade and other receivables’ was materially equal to their carrying amount, with no material
balances not expected to be collected upon.
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 2019
169
30. Acquisition of subsidiary undertaking continued
The gross contractual outstanding amounts of ‘trade and other receivables’ was materially equal to their carrying amount, with no material
balances not expected to be collected upon. 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.
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. Certain adjustments in respect of the fair value of the opening balance sheets acquired and the discounted fair value of
consideration paid on EI and Norfin have been made in the period (see note 13). If any additional changes are required within this
measurement period, these will be reflected in the 2020 half year results of the Group.
31. Notes to the statement of cash flows
Profit after tax
Adjusted for:
Collections in the year
Income from portfolio investments
Fair value gain on portfolios
Net impairment gain
Deferred consideration release
Depreciation and amortisation
Loss/(profit) on write off and disposal of property, plant and equipment
Loss on write off and disposal of intangible assets
Net interest payable
Lease liability interest
Foreign exchange gains/(losses)
Equity settled share-based payment expenses
Tax expense
Operating cash flows before movement in working capital
Decrease/(increase) in other receivables
Decrease/(increase) in amounts due to/from subsidiary undertakings
Increase in trade and other payables
Cash generated by operations
Income taxes and overseas taxation paid
Net cash flow from operating activities before purchases of portfolio investments
Purchase of portfolio investments
Net cash generated by/(used in) operating activities
Group
Group
Company
Company
2019
£000
37,287
2018
£000
29,969
442,311
(199,655)
(32,397)
(12,714)
(21,119)
18,435
1,419
5,766
53,103
1,395
1,018
1,437
14,033
310,319
15,800
–
12,120
338,239
(14,036)
324,203
(303,687)
20,516
411,588
(193,932)
(24,745)
(50,727)
–
14,235
(731)
508
66,792
–
(2)
3,267
10,022
266,244
(28,132)
–
15,645
253,757
(9,428)
244,329
(263,350)
(19,021)
2019
£000
11,897
–
–
–
–
–
–
–
–
–
–
–
–
–
11,897
26
10,858
291
23,072
–
23,072
–
23,072
2018
£000
154,298
–
–
–
–
–
–
–
–
–
–
–
–
–
154,298
(91)
(130,029)
198
24,376
(720)
23,656
–
23,656
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
170
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, as determined by management, that by virtue of their size, nature or incidence (i.e. outside the normal
operating activities of the Group) are not considered to be representative of the ongoing performance of the Group and these items are
excluded from underlying profit after tax. Judgement has been applied in determining which items are considered as ‘adjusting’ for the
purpose of this metric.
Income
Operating expenses
Collection activity costs
Other operating expenses
Total operating expenses
Operating profit
Finance income
Finance costs
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
31 December 2019
Adjustments
£000
–
Reported
£000
339,518
(109,798)
(123,902)
(233,700)
105,818
61
(54,559)
51,320
(14,033)
37,287
(2,064)
35,223
–
26,789
26,789
26,789
–
–
26,789
(4,056)
22,733
–
22,733
Underlying
£000
339,518
(109,798)
(97,113)
(206,911)
132,607
61
(54,559)
78,109
(18,089)
60,020
(2,064)
57,956
0.33
23.2%
31 December 2018
Adjustments
£000
–
Reported
£000
361,796
Underlying
£000
361,796
(119,041)
(135,972)
(255,013)
106,783
76
(66,868)
39,991
(10,022)
29,969
–
29,969
1,080
22,676
23,756
23,756
–
18,658
42,414
(8,275)
34,139
–
34,139
(117,961)
(113,296)
(231,257)
130,539
76
(48,210)
82,405
(18,297)
64,108
–
64,108
0.37
22.2%
2019 adjusting items
Of the £26,789,000 adjusting items total in 2019, £15,220,000 relates to the Group’s strategic simplification programmes, £10,112,000 relates to
the expansion of the Group’s Fund Management business, and £1,457,000 relates to costs incurred to facilitate the acquisition of Drydens Limited.
The Group’s simplification programmes are considered to be adjusting items, as they comprise a series of actions which have incurred costs in
the current period, which are not expected to recur in future periods. As such, they are not considered as part of the underlying performance
of the Group. Of the £15,220,000 of spend related to the Group’s strategic simplification programmes:
• £6,398,000 relates to the accelerated write-off and decommissioning of IT-related intangible assets;
• £3,459,000 relates to the costs of exiting employees from certain functions across the Group, including staff restructuring;
• £2,641,000 relates to the costs of exiting particular sites and small business lines across the Group;
• £1,567,000 relates to employee costs (including allocations of existing employees’ costs) of executing and delivering the programme; and
• £1,155,000 relates to third-party advisory costs and other costs of delivering the programme.
The costs incurred in the expansion of the Group’s Fund Management business are considered to be adjusting items, as a lot of this activity is
being undertaken for the first time in the period, but is not expected to recur in future periods. As such, this expenditure is not considered
representative of the underlying performance of the Group. Of the £10,112,000 of spend related to the expansion of the Group’s Fund
Management business:
• £6,897,000 relates to third-party advisory fees and sundry materials costs; and
• £3,215,000 relates to employee costs (including allocations of existing employees’ costs) of working on this project.
Arrow Global Annual Report and Accounts 2019
171
Additional information (unaudited) continued
2018 adjusting items
Collection activity cost adjusting items relate to ‘One Arrow’ costs incurred during 2018.
Of the £42,414,000 adjusting items total in 2018, £18,658,000 related to bond refinancing costs, £14,717,000 were acquisition related costs,
and £9,039,000 related to ‘One Arrow’ costs.
Of the £18,658,000 related to bond refinancing costs:
• £13,623,000 costs related to the call premium; and
• £5,035,000 due to a non-cash write-off of related transaction fees, in connection with the 2023 Notes.
Of the £14,717,000 acquisition related costs:
• £3,068,000 related to acquisitions in the current year; and
• £11,649,000 related to contingent consideration payments on previous periods’ acquisitions.
The remaining £9,039,000 related to ‘One Arrow’, which was a Group-wide programme which began in 2017 and came to an end in 2018, and
included the development of a revised governance structure, office consolidations and IT/change investment across the Group. Given the
aggregate size and nature of this Group-wide transformation programme, these costs have been presented as profit adjusting items as they
are considered to warrant separate presentation. The Group expects this will drive longer term benefits into future periods.
IFRS to cash result reconciliations
We provide two reconciliations between reported IFRS profit and cash measures. The first looks at the movement in our portfolio investments
compared to the movements in the ERC – the gross cash value of the portfolio before it is discounted to present value for inclusion in the
reported results. The second reconciles the reported profit for the year to the cash result. For completeness we also separate out other
adjusting items. A number of the terms referred to in this section are defined in the glossary.
As part of the Group’s Investment Business, we acquire portfolios and turn these into regular, predictable and long-term cash flows. This
predominantly involves high volumes of low value collections from customers, and therefore we use analytical models to estimate cash flows
we expect at an individual account level. The output of these account level forecasts is aggregated to a portfolio and then into the Group’s total ERC.
When we purchase portfolio investments, we recognise them in the statement of financial position at the purchase price in accordance with
IFRS. In terms of the equivalent cash measure, we add the portfolio ERC to the Group ERC at the point of purchase. We quote both 84-month
and 120-month ERC forecasts as key performance measures for the business.
Collections from portfolios can extend beyond 15 years; however, we only include 84 months of cash flow in assessing the majority of our
portfolio investments. As we progress through the months of each year, we roll forward the ERC forecast, meaning we always have 84 months
of expected cash flow from our portfolios recognised on the statement of financial position.
Due to the nature of our business, actual collections on portfolio investments will not perform exactly as initially forecast and, each half year, we review
performance against collections experience and update the ERC forecast where appropriate. This updated cash flow forecast, discounted at the
applicable rate is the year-end carrying value of the portfolio investments. This movement of the portfolio investments is reflected as revenue in the
income statement. The size of the portfolio asset, associated ERC and cash collections in the year are therefore all key drivers to the result we report.
As we collect on our portfolios, the statement of financial position value, ERC and income we receive decreases over time. Based upon our
target returns that we expect to invest at, we are able to calculate a replacement rate, or maintenance capex, being the amount we need to
invest to hold the Group’s total portfolio value constant. During a year, if we invest higher than the replacement rate at target returns,
the income from debt purchase grows. The replacement rate is a key driver to the cash result the business generates.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 172
Additional information (unaudited) continued
Additional information (unaudited) continued
Movement in portfolio investments under IFRS reconciled to cash ERC
Total portfolio investments
Brought forward
Portfolios acquired during the year1
Collections in the year2
Income from portfolio investments at amortised cost3
Fair value gain on portfolio investments at FVTPL4
Net impairment gain5
Net income from real estate inventories
Portfolio restructure
Exchange and other movements
Effect of discounting7
Carried forward 31 December 2019
Portfolio investments – amortised cost
Brought forward
Portfolios acquired during the year1
Collections in the year2
Income from portfolio investments at amortised cost3
Net impairment gain5
Transfer between categories
Portfolio restructure
Exchange and other movements
Effect of discounting7
Carried forward 31 December 2019
IFRS
£000
1,087,030
303,687
(442,311)
199,094
32,397
12,714
561
(13,161)
(16,387)
1,163,624
IFRS
£000
869,056
248,470
(390,734)
199,094
12,720
11,483
(13,161)
(4,729)
932,199
ERC
120-month
£000
1,972,130
513,766
(442,311)
–
–
–
–
–
–
(8,164)
2,035,421
ERC
120-month
£000
1,606,329
391,905
(390,734)
–
–
12,570
–
–
(11,622)
1,608,448
ERC
84-month
£000
1,634,786
479,783
(442,311)
–
–
–
–
–
–
145,682
1,817,940
(654,316)
1,163,624
ERC
84-month
£000
1,391,786
359,124
(390,734)
–
–
12,570
–
–
53,770
1,426,516
(494,317)
932,199
ERC brought forward
ERC acquired during the year
Collections in the year
ERC roll forward and reforecast 6
ERC carried forward
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 1 in the reconciliation of profit after tax to the cash result on page 173 for more detail on total
income.
4. Fair value gain on portfolio investments at FVTPL represents net increases to carrying values, discounted to calculate the market interest rate of portfolio investments held at FVTPL
as a result of reassessments to their estimated future cash flows.
5. Net impairment gain represents net increases to carrying values, discounted at the credit-adjusted EIR rate, of portfolio investments held at amortised cost as a result of
reassessments to their estimated future cash flows.
6. The ERC roll forward and reforecast reflects management’s updated estimation of future collections. It takes account of updated information on specific portfolios, the latest
exchange rate and rolls forward the 84-month and 120-month forecast collection period.
7. Under IFRS, the carrying value of portfolio investments primarily includes 84-months of discounted cash flows, however we expect to see cash flows beyond this period and report
a 120-month ERC also, as is customary for the industry.
Arrow Global Annual Report and Accounts 2019
Additional information (unaudited) continued
Reconciliation of profit after tax to the cash result
Income from portfolio investments
Fair value gains portfolio investments at FVTPL
Net impairment gains
Income from asset management and servicing
Other income
Total income1
Total operating expenses
Operating profit
Net finance costs
Profit before tax
Taxation charge on ordinary activities
Profit after tax
Reported
profit
£000
199,655
32,397
12,714
94,360
392
339,518
(233,700)
105,818
(54,498)
51,320
(14,033)
37,287
Adjusting
items4
£000
–
–
–
–
Underlying
profit after tax
£000
199,655
32,397
12,714
94,360
–
–
26,789
26,789
–
26,789
(4,056)
22,733
392
339,518
(206,911)
132,607
(54,498)
78,109
(18,089)
60,020
Other
items
£000
242,656
(32,397)
(12,714)
–
–
197,545
(102)2
197,443
12,9363
210,379
4,053
214,432
173
Cash
result
£000
442,311
–
–
94,360
392
537,063
(207,013)
330,050
(41,562)
288,488
(14,036)
274,452
(13,099)
261,353
(176,064)
85,289
Collections in the period
Income from asset
management and servicing
Cash operating expenses
Adjusted EBITDA5
Capital expenditure
Free Cash Flow7
Replacement rate6
Cash result4
1. Total income is largely derived from income from portfolio investments as explained in 3 above, plus income from asset management and servicing being commission on collections
for third-parties and fee income received. The non-cash items add back loan portfolio amortisation to get to core collections. Amortisation reflects a reduction in the statement of
financial position carrying value of the portfolio investments arising from collections, which are not allocated to income. Amortisation plus income from portfolio investments
equates to core collections.
2. Includes non-cash items including depreciation and amortisation, share-based payment charges and FX.
3. Non-cash amortisation of fees and interest.
4. The cash result is viewed on an underlying basis which excludes certain items. See underlying profit after tax table on page 170. 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 on page 170.
5. Adjusted EBITDA is a key driver to the cash result. This measure allows us to monitor the operating performance of the Group. See additional information provided on page 174 for
detailed reconciliations of adjusted EBITDA.
6. Replacement rate is the rate of portfolio investments purchases, at our target portfolio returns, required during the next 12 months to maintain the 84-month ERC as at 31 December 2019.
7. Free cash flow is the adjusted EBITDA after the effect of capital expenditure and working capital movements.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements
174
Notes to the financial statements continued
Reconciliation of net cash flow to adjusted EBITDA
Net cash flow used in operating activities
Purchases of portfolio investments
Income taxes paid
Working capital adjustments
Amortisation of acquisition and bank facility fee
Proceeds from sale of property
Write off and disposal of intangible asset and property plant and equipment
Acquisition costs
‘One Arrow’ costs
Adjusting items
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 losses/(gains)
Amortisation of acquisition and bank facility fees
Proceeds from sale of property
Deferred consideration release
Disposal of intangible asset
Share-based payments
Acquisition costs
‘One Arrow’ costs
Adjusting items
Adjusted EBITDA
Reconciliation of operating profit to adjusted EBITDA
Profit after tax for the year
Underlying finance income and costs
Taxation charge on ordinary activities
Adjusting finance costs
Operating profit
Portfolio amortisation
Depreciation and amortisation
Foreign exchange losses/(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
Deferred consideration release
Acquisition costs
‘One Arrow’ costs
Adjusting items
Adjusted EBITDA
Arrow Global Annual Report and Accounts 2019
31 December
2019
£000
20,516
303,687
14,036
(27,920)
127
–
(7,185)
–
–
26,789
330,050
31 December
2018
£000
(19,021)
263,350
9,428
12,487
273
3,759
–
14,717
9,039
–
294,032
244,766
197,545
442,311
94,752
(233,700)
18,435
1,018
127
–
(21,119)
–
1,437
–
–
26,789
330,050
37,287
54,498
14,033
–
105,818
197,545
18,435
1,018
–
127
–
1,437
–
(21,119)
–
–
26,789
330,050
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
Glossary
175
Glossary of Key Performance Indicators (KPIs)
A description of the Group’s KPIs relating to clients, financial position and performance is set out in the ‘additional information’ section.
The Group’s KPIs are used throughout this document to help explain the performance of the business. This glossary sets out why each of these
KPIs are important to the Group.
84-month ERC
The 84-month ERC means the Group’s estimated remaining collections on portfolio investments (of all classifications) over the next
84-months, representing the expected future core collections on portfolio investments during this period. The expected future collections are
calculated at the end of each month, based on the Group’s proprietary ERC forecasting model, as amended from time to time. The 84-month
ERC is particularly important for the Group as it shows the forecast cash inflows over the same period that is used to calculate the future cash
flows of the Group’s portfolio investments.
120-month ERC
The 120-month ERC means the Group’s estimated remaining collections on portfolio investments (of all classifications) over the next
120-months, representing the expected future core collections on portfolio investments during this period. The expected future collections
are calculated at the end of each month, based on the Group’s proprietary ERC forecasting model, as amended from time to time. The
120-month ERC is an important metric for the Group as in some cases the collection profile of a particular portfolio can extend beyond
84-months, and as such, the 120-month ERC gives a more holistic view of potential remaining collections from the Group’s portfolio
investments.
Leverage ratio
The Group’s leverage ratio is calculated by dividing the secured net debt outstanding at the end of the period by the LTM (12 months’ rolling
average) Adjusted EBITDA. The leverage ratio presented in the Annual report and Accounts is calculated on the same basis as the financial
covenant stipulated within the Group’s revolving credit facility provided by a syndicate of banks. As at 31 December 2019, the actual leverage
was 3.4 times against the bank covenant of 4.4 times and a management target of between 3.0 to 3.5 times.
Funds under management (FUM)
The funds under management figure for the Group represents the current gross discretionary capital that the Group is responsible for
managing in some capacity, including any of its own capital which it has committed to invest alongside third parties. FUM is an important
metric used to understand the scale of the Group’s Fund Management business and how this compares to others in the market.
Net IRR
The net Internal Rate of Return (Net IRR) is calculated by taking the cumulative expected returns from a portfolio investment (or group of
portfolio investments) and discounting these at a rate that makes the net present value of such returns equal to the price paid for the
investments(s). This is an important metric for the business as it is a measure of the returns which are being generated by investing the Group’s
own capital into new purchases in the period.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 176
Glossary continued
Glossary of alternative performance measures
APM
Adjusted EBITDA
Adjusting items
Cash result
Core collections/
collections
Definition
The Adjusted EBITDA figure represents the
Group’s earnings before interest, tax,
depreciation and amortisation, adjusted for any
non-cash income or expense items. Any impact
on EBITDA of ‘adjusting items’ (see below for
definition) is also removed for the purposes of
calculating adjusted EBITDA.
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.
The 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.
Core collections or collections represent cash
collections on the Group’s existing portfolio
investments including ordinary course portfolio
sales and put-backs.
Leverage
Leverage is calculated as secured net debt over
Adjusted EBITDA.
Underlying profit
before/after tax
Underlying return
on equity
Underlying profit before/after tax means profit
for the period after tax adjusted for the pre-tax/
post-tax effect of certain adjusting items, as
defined above, as well as adjustments to
remove profits due to non-controlling
interests.
Underlying return on equity represents the
ratio of underlying profit after tax, to average
shareholder equity over a 12-month period.
Underlying basic EPS Underlying basic EPS represents earnings per
share based on underlying profit after tax,
excluding any dilution of shares.
Why is the measure used?
Adjusted EBITDA is an approximate measure of
the underlying cash EBITDA of the Group. In
addition, the leverage ratio of the Group is
calculated as the ratio of secured net debt to
Adjusted EBITDA. This makes the Adjusted
EBITDA figure a key component of this metric,
which also features in the Group’s banking
covenant measures.
Adjusting items are used to calculate various
‘underlying’ metrics, to provide information
about the performance of the Group without
the impact of such items included.
Reconciliation to the
financial statements
Page 174
Page 170
The cash result provides a measure of how
much cash the Group generates across the
reporting period which it can utilise on a
discretionary basis, whilst maintaining the size
of its current investment portfolio.
Page 173
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 calculate the Group’s
leverage position.
The leverage metric provides an indication of
the level of indebtedness of the Group, relative
to its underlying cash earnings.
The Group presents underlying profit before/
after tax because it excludes the effect of items
which are not considered representative of the
Group’s ongoing performance, on the Group’s
profit or loss for a period.
Page 173
Pages 174 and 178
Page 170
Underlying return on equity provides a measure
of the underlying returns generated by the
Group on the average shareholder capital
deployed in the period.
Underlying basic EPS provides a metric of
underlying profit after tax on a per-share basis,
which is a consideration in the valuation of
individual shares, amongst other items.
Page 170
Page 170
Arrow Global Annual Report and Accounts 2019
177
Glossary of terms
‘AMS’ Income from Asset Management and Servicing (AMS) contracts. The Group recognises revenue when it satisfies a performance
obligation related to a service it has undertaken to provide to a customer.
‘APM’ means alternative performance measure.
‘Average net assets’ is calculated as the average quarterly net assets from 2018 to 2019 as shown in the quarterly and half yearly statements.
In comparative periods this was calculated as the average annual net assets.
‘CGU’ means cash-generating unit.
‘Collection activity costs’ represent the direct costs of collections related to the Group’s portfolio investments, such as salaries, commissions
paid to third-party outsourced providers, credit bureau data costs and legal costs associated with collections.
‘Cost income ratio’ see ‘total cost-to-income ratio’.
‘Cost-to-collect ratio’ is collection activity costs over total income.
‘Creditors’ means financial institutions or other initial credit providers to consumers, certain of which entities choose to sell paying accounts
or non-paying accounts receivables related to debt purchasers (such as the Group).
‘CSA’ means Credit Services Association.
‘Customers’ means consumers whose unsecured loan obligation is owed to the Group as a result of a portfolio purchase made by the Group.
‘Defaulted debt’ means a debt where a customer has breached the repayment terms governing that debt such that it is unlikely to be paid.
Under the Consumer Credit Act 1974 there are specific legal obligations which require a customer to be sent the relevant statutory default
notice(s) after which the customer’s agreement may ultimately be terminated. Other types of debts may also be defined as defaulted in the
event that they remain unpaid for a period of 90 days or more, if there is not an acceptable arrangement in place to bring the account back
up to date, in which case the creditor or lender may reasonably believe that the relationship has broken down. Under the Data Protection Act
1990 it is a requirement that any organisation seeking to register a default with a credit reference agency must also send a notice of intention
to file a default, this notice is very similar in nature to that required under the Consumer Credit Act both of which give the debtor 28 days to
bring the account back up to date before action is taken.
‘Diluted EPS’ means the earnings per share whereby the number of shares is adjusted for the effects of potential dilutive ordinary shares,
options and LTIPs.
‘DSBP’ means the Arrow deferred share bonus plan.
‘EBITDA’ means earnings before interest, taxation, depreciation and amortisation.
‘EBT’ means employee benefit trust.
‘ECL’ means expected credit losses.
‘EIR’ means effective interest rate (which is based on the loan portfolio’s gross internal rate of return) calculated using the loan portfolio
purchase price and forecast gross ERC at the date of purchase. On acquisition, there is a short period that is required to determine the EIR, due
to the complexity of the portfolios acquired.
‘EPS’ means earnings per share.
‘ERC roll forward’ relates to additional cash flows from rolling the asset life on all portfolios to seven years from the date of ERC, including
the impact of any foreign exchange movement and the impact of reforecast in the period.
‘FCA’ means the Financial Conduct Authority.
‘Free cash flow’ or ‘FCF’ means Adjusted EBITDA after the effect of capital expenditure and working capital movements.
‘FVTPL’ means Financial instruments designated at fair value with all gains or losses being recognised in the profit or loss.
‘FUM’ means funds under management.
‘GFC’ means global financial crisis.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements 178
Glossary continued
‘Gross money multiple’ means core collections to date plus the 84-month gross ERC or 120-month gross ERC, as applicable, all divided
by the purchase price for each portfolio, excluding REO purchases and purchase price adjustments relating to asset management fees.
‘IB’ means the Investment Business.
‘IFRS’ means EU adopted international financial reporting standards.
‘Income from AMS’ includes commission income, debt collection, due diligence, real estate management, advisory fees and intra-group
income for these services.
‘IPO’ means initial public offering.
‘Loan to value’ or ‘LTV ratio’ represents the ratio of 84-month ERC to net debt.
‘LTIP’ means the Arrow long-term incentive plan.
‘NCI’ means non-controlling interest.
‘Net debt’ means the sum of the outstanding principal amount of the senior secured notes, interest thereon, amounts outstanding under
the revolving credit facility and deferred consideration payable in relation to the acquisition of portfolio investments, less cash and cash
equivalents. Net debt is presented because it indicates the level of debt after taking out of the Group’s assets that can be used to pay down
outstanding borrowings, and because it is a component of the maintenance covenants in the revolving credit facility. The breakdown of net
debt for the year ended 31 December 2019 is as follows:
Cash and cash equivalents
Senior secured notes (pre-transaction fees net off)
Revolving credit facility (pre-transaction fees net off)
Asset-backed loans (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.
2019
£000
(88,765)
902,656
234,683
85,604
1,134,178
62,944
30,372
7,999
1,386
3,672
1,240,551
2018
£000
(92,001)
935,567
245,587
–
1,089,153
12,031
59,922
5,542
2,696
11,635
1,180,979
‘Off market’ means those loan portfolios that were not acquired through a process involving a competitive bid or an auction like process.
‘Paying account’ means an account that has shown at least one payment over the last three months or at least two payments over the last
six months.
‘Pay-out ratio’ represents the total amount of dividends paid out divided by the underlying profit after tax.
‘Portfolio amortisation’ represents total collections plus income from portfolio investments.
Arrow Global Annual Report and Accounts 2019
179
‘POCI’ means purchased or originated credit impaired.
‘Portfolio investments’ are on the Group’s statement of financial position and represent all debt portfolios that the Group owns at the relevant
point in time. A portfolio comprises a group of customer accounts purchased in a single transaction.
‘RCF’ means revolving credit facility.
‘Replacement rate’ means the level of purchases needed during the subsequent year to maintain the current level of ERC.
‘ROE’ means the return on equity as calculated by taking profit after tax divided by the average equity attributable to shareholders. Average
equity attributable is calculated as the average quarterly equity from 2018 to 2019 as shown in the quarterly and half yearly statements.
In the comparative period this is calculated as the average annual equity attributable.
‘Secured net debt’ see table in ‘net debt’ definition.
‘SIP’ means the Arrow all-employee share incentive plan.
‘SMART’ means aligning the leadership teams across the Group around our Mission, Vision and Strategy.
‘SME’ means small and medium-sized enterprises.
‘SPPI’ means solely payments of principal and interest.
‘TCF’ means the treating customers fairly FCA initiative.
‘Total cost-to-income ratio’ is total operating expenses over total income.
‘Translation reserve’ comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.
‘TSR’ means total shareholder return.
Arrow Global Annual Report and Accounts 2019
Financial statementsFinancial statements Annual general meeting
The forthcoming annual general meeting of the Company will
take place at The Cavendish London, 81 Jermyn Street, St James’s,
London, SW1Y 6JF on Tuesday, 2 June 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 and 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
and accounts, results, other announcements and presentations,
together with the latest share price information on the Company’s
investor relations website (www.arrowglobal.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.
180
Shareholder information
Registered and head office
Belvedere
12 Booth Street
Manchester
M2 4AW
United Kingdom
Telephone: +44 161 242 1724
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 2020
• Announcement of 2019 full-year results 12 March 2020
• Announcement of the 3 months to 31 March 2020 results
14 May 2020
• Annual general meeting 2 June 2020
• Ex-dividend date for 2019 final dividend 11 June 2020
• Record date for 2019 final dividend 12 June 2020
• Close of DRIP elections 26 June 2020
• Payment date of 2019 final dividend 17 July 2020
• Announcement of 2020 half-yearly results 11 August 2020
• Announcement of the 9 months to 30 September 2020 results
12 November 2020
• Full-year end 31 December 2020
Arrow Global Annual Report and Accounts 2019
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®
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Arrow Global Group plc
Belvedere
12 Booth Street
Manchester
M2 4AW
www.arrowglobalir.net
Company No. 08649661
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