Arrow Global Q1’24 Credit Update

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Credit Summary

• Arrow Global saw a seasonal decline in collections, but continued growth in Third-Party EBITDA.
• Cashflow generation modest, with free cashflow of £3.7m in Q1’24, pre interest cost.
• EBITDA trajectory is dependent on the shift to the asset management, 3^rd party capital light business model. Will likely see benefits in H2’25 and into 2026.
• Leverage is sticky at c4x, though management have committed to 3x target.
• Current YtM for £350m 11/26 6% bond is 12.9%. But payback unlikely anytime soon.

Operational Performance

Reflecting on Q1’24, Arrow experienced a decline in debt collection performance, though the third-party servicing business, now the group’s primary focus, showed continued growth. A shift in the business operating model has been the main driver for management. Backed by TDR, Arrow global is an asset manager focused on European non-performing loans and non-core assets.

• Collections from balance sheet portfolios dropped to £57m, down from £85m in the fourth quarter of 2023 and £59m in the third quarter of 2023.
• Collections were also down YoY from £81.5m.
• Arrow attributed this decline to the sale of 50% of its wholly owned UK portfolios in 2023 and the increasingly variable nature of collections due to the rising proportion of real estate and collateral-backed portfolio investments.

Segments

New investments in this business segment remained relatively low at £24m, leading to a decline in 120M estimated remaining collections ERCs to £1.27Bln vs £1.31Bln q/q.

Arrow Global’s third-party activities as integrated fund manager continue to grow in importance for the group, on the other hand, although FUM remained stable at £9.3Bln after the strong increase in 2023, up from £6.2Bln at year-end 2022.

Arrow acquired Amitra, a Spanish master servicer during the quarter, and with this signed a collaboration agreement with the Canada Pension Plan Investment Board as an entry into the Spanish market.

Separate fund raising continues as well, and the group said it was expecting a further fund closing imminently.

Continued Growth in Revenue and EBITDA from Fund Management Business

Revenue and EBITDA from the fund management business have continued to grow as the funds deploy their cash.

Segment revenue increased to £49m, compared to £42m year-over-year, though it was seasonally higher at £53m in the fourth quarter of 2023. Segment EBITDA rose by 63% to £13.8m for the quarter, up from £8.4m year-over-year.

Cashflow modest in Q1’24

Underlying this is a modest cashflow generation of £3.7m despite the net ERC decline, which should free up cash. But the way TDR model cashflow is from EBITDA, less portfolio investments and interest, which has led to another leakage of c£15m in cash.

Arrow has burnt through £43m in 2 years to leave a current balance of £101m. They also have a utilised RCF (£165m) of £285m maturing in 2026. Total liquidity of £223m is sufficient for the ongoing operations. Bear in mind they are burning through c£40m per year in cash.

Leverage

Net debt increased moderately to £1.34Bln from £1.32Bln QoQ, which Arrow says was due to working capital outflows related to staff bonuses.

The leverage ratio using cash EBITDA improved moderately to 4.1x vs 4.5x YoY, but was up from 3.8x in Q4’23 due to the weaker collection quarter.

Arrow has a commitment to reduce leverage to 3x over the medium term and to repay debt, but will need the growth in third party EBITDA to continue to achieve noticeable progress towards its target in time for the next debt refinancing.

Bonds

Arrow have one € bond, 11/27 €640m Floating rate, paying Euribor +462Bps. They also have a fixed rate 4.5% €400m 11/26 bond. And the sterling 11/26 bond £350m 6%. YtM is 12.9%. Though with current cost of interest looks unlikely to refinance soon. EBITDA is not on a trajectory to payback the bond either…

For other research on EHYO please read short review on Canary Wharf:- https://www.europeanhighyield.online/canary-wharf-credit-review-fy-2023/