Arrow Global (ARW) investors were given some relief after the distressed debt purchasing specialist issued improved leverage targets for next year, as it places greater focus on less capital-intensive asset management work.
Management plans to double income from third-party asset management and servicing business over the next five years to half of the group total. During the first nine months of the year, that income was up a quarter to £63.3m – representing a quarter of the overall total – with assets under management growing more than a fifth to £51.5bn. Given that type of business requires less capital than investing in loan portfolios, management has lowered the net debt target to between 3.0 and 3.5 times adjusted cash profits within the next five years.
Shares in the group closed 13 per cent up on the day of the announcement, in contrast to a sharp de-rating over the past 12 months. Market concerns have centred on the group’s exposure to bad European bank loans – which are bought at a deep discount to book value – and how collections would fare in the event of a further economic downturn.
For now, core debt collections are holding up, rising 18 per cent to £289m and prompting a 29 per cent uplift in adjusted cash profits. However, Peel Hunt analyst Anthony Da Costa remains concerned about the level of visibility of long-term cash flows. “Arrow hasn’t been through a cycle with such a large portfolio of investments,” he says.
