Arrow Global : HY 2021 Results Announcement

12 August 2021

Arrow Global Group plc interim results for the six months ended 30 June 2021

Strong second quarter performance; Execution of capital-light strategy on track, driving long-term growth

Highlights

• EBITDA before takeover costs of £61.3 million (H1 2020: loss of £100.0 million)
• Profit before tax and takeover costs of £22.9 million (H1 2020: loss of £135.9 million)
• Arrow shareholders voted in favour of the recommended all cash offer by TDR Capital at the court and general meetings on 21 May (93.8% of votes in favour); Completion, subject to regulatory approvals, expected by the end of Q3 2021; £22.4 million of takeover costs have been recognised leading to a statutory profit before tax of £0.5 million (H1 2020: loss of £135.9 million)
• Arrow Credit Opportunities 1 (ACO 1) fund deployment in line with expectations
• Asset Management & Servicing third-party contract wins continue

Fund and Investment Management (FIM) business - Attractive deployment opportunities

• Continued momentum in deployment of ACO 1 - 54% of fund deployed or committed (gross, before capital recycling and including both third-party and balance sheet co-investment); 64% deployed when co-investment is excluded
• Expect 70% deployment (excluding balance sheet co-investment) of ACO 1 in early 2022, enabling us to begin fundraising for our next fund, ACO 2
• Record deployment in Q2 2021; strong Q3 2021 investment pipeline
• H1 2021 third-party income of £10.8 million, up 92.9% (H1 2020: £5.6 million)
• Net deal IRR of 18% achieved in H1 2021 (FY 2020: 17%)
• Funds Under Management (FUM) of €4.8 billion at 30 June 2021 (31 December 2020: €4.3 billion)

Asset Management and Servicing (AMS) business - Resilient revenues and new contract wins

• Resilient third-party income growth, up 12.6% to £44.8 million (H1 2020: £39.8 million)
• 11 new contract wins during H1 2021 (FY 2020: 26), driving high-quality recurring revenues
• 71% of ACO 1 deployment serviced by AMS platforms (as at H1 2021, on a cumulative basis)

Balance Sheet (BS) business - Strong collections performance outperforming ERC

• H1 2021 collections of £179.6 million (H1 2020: £175.8 million), representing 119% of December 2020 forecast Estimated Remaining Collections (ERC)
• Portfolio purchases of £94.8 million (H1 2020: £42.9 million)
• No material changes to the outlook for macro-economic factors which informs the assumptions used in our ERC forecast

Capital and liquidity

• Robust balance sheet with liquidity headroom increasing to £190.0 million (FY 2020: £174.6 million) -
  driven by continued strong free cash flow generation of £90.7 million (H1 2020: £82.5 million), the successful €75 million bond tap in Q1 2021, partially offset by higher portfolio purchases
• Leverage of 4.7x (FY 2020: 5.1x), comfortably within covenant levels

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• Continue to expect leverage to be circa 4.0x by the end of 2021 and within target 3.0x-3.5x range by 2023

Outlook and targets

• Strongly positioned to take advantage of the investment and asset servicing opportunities that are arising from European-wide economic dislocation
• Recovery in performance during 2021 aligned to improving operating conditions and capital-light strategy
• Outlook described at FY20 remains appropriate; 2025 strategic targets remain on track

Commenting on today's results, Lee Rochford, Group chief executive officer, said:

"Arrow continues to build momentum, delivering a strong second quarter performance despite continued economic disruption in our European markets, and with most of our colleagues working from home. We remain focused on the execution of our capital-light strategy and are making excellent progress. The continued successful deployment of ACO 1 means we are on track to begin fundraising for our second fund as planned. I am also pleased that our AMS business continues to see strong demand for its services, with our reputation as a responsible servicer helping us continue to win new contracts. Arrow shareholders voted in favour of the recommended all cash offer by TDR Capital at the court and shareholder meetings on 21 May and we continue to work with TDR to progress regulatory filings to satisfy the remaining conditions to the acquisition, which is expected to complete by the end of the third quarter. As we look towards the future, Arrow's proven track record as a leading investor and servicer means we remain well positioned in the large and growing European market, as economic dislocation generates new opportunities at increasingly attractive returns."

Jonathan Bloomer, Group chairman, said:

"It has been a challenging 18-month period, and today's strong results reflect the resilience of our business and the strength of the integrated asset management platform we have built. I am immensely proud of the way Arrow has navigated the pandemic and on behalf of the board, I would like to thank all Arrow colleagues for their steadfast commitment to our customers and clients, and their continued engagement under difficult circumstances. I want to pay a particular tribute to Lee Rochford, our CEO, who has led the business through this period in an exemplary fashion thereby ensuring the strong performance. I would also like to thank our shareholders for their unwavering support since our IPO in 2013. The launch of our capital-light strategy towards the end of 2020 was a pivotal moment for the Group, only made possible by our transition into a scalable alternative asset manager and our successful track record. As Arrow embarks on its next chapter of growth, under the ownership of TDR Capital, I am confident that Arrow has bright prospects and will continue to build better financial futures for all of its stakeholders."

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• These results exclude advisor fees associated with the potential purchase of the business and one-off acceleration of share-based payments and retention arrangements for key personnel below executive directors. For the reconciliation between this and the condensed consolidated profit and loss, please see the reconciliation on page 47.
• ROE has been calculated by extrapolating the half yearly results. The full definition of 'annualised' can be seen within the ROE definition in the glossary on page 50.

Presentation for H1 2021 results

No conference call will be held for the H1 2021 results; however, a presentation detailing Arrow's first half performance is available on the Group's Investor Relations website.

Notes:

A glossary of terms can be found at the end of the document. More details explaining the business can be found in the Annual Report & Accounts 2020, which is available on the Company's website at www.arrowglobalir.net

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Forward looking statements

This document contains statements that constitute forward-looking statements relating to the business, financial performance and results of the Group and the industry in which the Group operates. These statements may be identified by words such as "expectation", "belief", "estimate", "plan", "target", or "forecast" and similar expressions or the negative thereof; or by forward-looking nature of discussions of strategy, plans or intentions; or by their context. All statements regarding the future are subject to inherent risks and uncertainties and various factors could cause actual future results, performance or events to differ materially from those described or implied in these statements. Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which the Group will operate in the future. Further, certain forward-looking statements are based upon assumptions of future events which may not prove to be accurate and neither the Company nor any other person accepts any responsibility for the accuracy of the opinions expressed in this document or the underlying assumptions. The forward- looking statements in this document speak only as at the date of this presentation and the Company assumes no obligation to update or provide any additional information in relation to such forward-looking statements.

Important note:

Both IFRS and cash metrics, alongside alternative performance measures are important in understanding the key drivers of the business and are part of target measures used in the calculation of senior management's variable remuneration. Full reconciliations between these positions have been presented in the 'additional information' section of this report. The commentary on the following pages refers to a combination of these measures to aid understanding of the business performance for the period.

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Strategic overview

For the six months to 30 June 2021

Overview

Strong financial results delivered in the first half

Arrow has delivered a strong set of results in the first six months of 2021. Total income of £166.3 million was significantly ahead of the prior period (H1 2020: £3.4 million) driven primarily by the H1 2020 non-cash impairment charge of £120.8 million in income relating to the write-down of the ERC balance sheet asset. Profit before tax and takeover costs of £22.9 million (H1 2020: loss of £135.9 million) reflected a strong second quarter with the standalone result nearly twice that achieved in the first quarter of 2021. Profit before tax after takeover costs was £0.5 million (H1 2020: loss of £135.9 million) with circa £17 million of the takeover costs being contingent on the successful completion of the deal.

Balance sheet cash collections of £179.6 million were 2.2% ahead of the prior period (H1 2020: £175.8 million), representing 119% of the 84-month ERC at 31 December 2020. Despite the outperformance, we believe that the assumptions underlying the ERC forecast remain appropriate given that we have yet to see the full impact of the pandemic on customer finances as the withdrawal of government support measures begin to take effect in our target markets. Our Fund & Investment Management business generated third-party management fee income of £10.8 million in the first half (H1 2020: £5.6 million) reflecting the strong level of capital deployment in the ACO 1 fund. The second quarter of 2021 saw the highest rate of fund deployment to date, and we are on track to begin fundraising for our second fund in early 2022. FUM were €4.8 billion at 30 June 2021 (31 December 2020: €4.3 billion), including the Investment Management subsidiaries of Norfin, Europa Investimenti and Sagitta. The increase in FUM was driven primarily by Norfin and Sagitta. The Asset Management & Servicing business continues to benefit from the servicing opportunities arising from the deployment of ACO 1. This, together with 37 new third-party contracts won in the last 18 months, increased gross income by 7.7% to £64.2 million (H1 2020: £59.6 million).

Free cash flow generation in the first half of 2021 was £90.7 million (H1 2020: £82.5 million). The strong free cash flow, together with the bond tap raising €75 million and partially offset by our portfolio investments, led to an increase in our liquidity headroom to £190.0 million (FY 2020: £174.6 million). Management actions delivered in 2020 to strengthen the balance sheet, following the onset of the COVID-19 pandemic, places the Group in a robust financial position with the flexibility to invest into the significant market opportunities that are arising from economic dislocation. Balance sheet leverage (secured net debt/adjusted EBITDA) reduced to 4.7x from 5.1x at the end of 2020 and is expected to continue reducing as the negative impact of H1 2020 COVID-19 lockdowns on collections fall out of the Group's trailing 12-month calculation. We are targeting leverage of circa 4.0x by the end of the year and to return to within our risk appetite (3.0x to 3.5x) by 2023.

Strategic execution on track

Having undertaken the pivot from a balance sheet investor to a fully integrated asset manager, largely investing capital on behalf of third-party investors, we have a clear strategy in place, with granular targets that reflect our ambitions. Since the start of the year, we have been resolutely focused on strategic execution as well as capitalising on the significant market opportunity.

It has been a busy six months for our Fund & Investment Management business as we invest to drive scale and industrialisation to support ACO 1 deployment and future divestment, as well as future fund launches.

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