Filling the void left by high street banks when they curtailed lending to small and medium-sized businesses (SMEs) has attracted a number of small players including 1pm (OPM), Ultimate Finance (UFG), City of London Group (CIN) and Manx Financial Group (MFX). And big banks are unlikely to make a return anytime soon, because there is still an estimated £2.9bn which will have to be shaved off European banks’ balance sheets if they are to meet Basel 111 regulatory requirements. Furthermore, major banks have been leaking expertise at the same time, with experienced individuals migrating to the new wave of lenders.
Now, these changes have prompted a number of bigger operations to seek entry to the London markets, one of which is Arrow Global, currently owned by the RBS Special Opportunities Fund. Arrow plans to join the main market in London, raising £50m and achieving a free float of around 50 per cent. The proceeds will be used to make further portfolio acquisitions of consumer debt, consolidating its position as one of the UK’s largest and fastest growing consumer debt purchasers.
The core business involves acquiring and managing defaulted or distressed consumer debt portfolios from financial institutions. It currently has 3.4m customers and defaulted consumer loans with a face value of more than £8bn. In the year to June, it invested £121m in loan purchases with a face value of £1.6bn, and generated collections of £109.1m, resulting in free cash flow of £72.7m. It may sound like a gruesome business, but Arrow works with customers to help repair their credit scores by working out an affordable repayment plan over a longer period than the original lender would agree to, and it doesn’t charge interest or penalties on defaulted accounts.
As well as unloading bad debt, banks have also largely pulled up the drawbridge on SME lending despite the government's attempts to encourage this through the Funding for Lending Scheme. But there are other services that small companies need such as invoice discounting, where companies use issued invoices as collateral for a cash advance - less a fee - thus helping to maintain cash flow. The latest entrant to this market is Tungsten, which plans to raise as much as £160m from investors. This will be used to acquire OB10, an electronic invoice processing company which last year processed more than £100bn of invoice transactions by value. If successful, OB10 will be combined with the soon to be acquired UK arm of First International Bank of Israel which, subject to regulatory approval, will provide Tungsten with a UK banking licence.
