Diversifying Arrow's European growth

Arrow Global is awaiting approval from the Bank of Italy for its acquisition of debt servicing business Zenith. At the time of its full-year results in March, management said it expected to receive this during the first half of the year. At the end of 2016, Italy had €360bn (£307bn) of non-performing loans including €76bn completed and ongoing deals, according to the Bank of Italy - an equivalent transaction rate greater than the UK, Ireland, Spain and the Netherlands combined (see chart).

Outstanding loans within the markets Arrow Global will operate in this year - including Italy - stand at almost €63bn, according to Deloitte. This compares with Arrow Global's purchased loan portfolio of £804m (€945m) at the end of 2016, an indication of the opportunities on the table for Arrow. Last year organic loan purchases were £223m, up a quarter on 2015. Together with assets gained as part of its acquisition of Belgian debt servicer Vesting, that took the face value of loans bought last year to £2.2bn at a purchase price of £258m. This represented a record year for Arrow Global.

The group has also increased its exposure to real estate loans by acquiring the debt serving operations of Dutch bank RNHB Hypotheekbank alongside CarVal Investors. Its loan book comprises 9,300 high-quality real estate loans, with a prudent loan-to-value ratio of 66 per cent and face value of around €1.7bn. This added to its existing real estate loan exposure in Portugal.

The group has also diversified its income stream by moving further into more capital-light "asset management", which is regarded as a higher-quality source of income. By the end of 2016 this accounted for a fifth of group revenue, expected to grow to a quarter during 2017. This was thanks to the acquisition of Vesting.

The group's ability to collect distressed debts is key to its success and its ability to keep returns high as competition grows. The nature of the business is also a very cyclical. To increase its ability to collect the most money possible, Arrow Global uses an in-house data system to track down customers and pursue repayments, before setting up a repayment plan. Collection records indicate this system has been successful. Core debt collections increased by almost a third last year to £286m, aided by the gradual growth in the portfolio. Portugal was the biggest contributor to this portfolio growth, as its troubled banks continue to deleverage. There is potential for this rising rate of collections to continue. The group has been acquiring loans in excess of its required replacement rate, which meant that its 84-month estimated remaining collections - an important measure of its pipeline - increased by 30 per cent.