ARROW GLOBAL GROUP PLC
Fitch Ratings has affirmed
These rating actions are being taken in conjunction with a debt purchaser and servicer sector review conducted by Fitch, covering eight publicly rated entities in
Arrow is the parent company of
Key Rating Drivers
LONG-TERM IDR
The rating affirmation reflects Arrow's continuing high leverage as well as its credible market positions in five markets (
Improving but High Leverage: Arrow's Long-Term IDR is constrained by the company's high cash flow leverage with a gross debt/adjusted EBITDA ration as calculated by Fitch of around 4.8x at end-1Q22 (based on trailing 12 months adjusted EBITDA) versus around 5.6x at end-2021.
Fitch expects resilient collections and improving revenue in the fund-management and servicing segments to improve leverage in line with management's stated target of net leverage of around 3x in the medium term (end-1Q22: 4.2x). Similar to many European peers', Arrow's tangible equity position is negative following material inorganic growth. This is reflected in Fitch's capitalisation and leverage assessment.
Growth in Capital-Light Revenue: Arrow's franchise (measured by both estimated remaining collections (ERC) and adjusted EBITDA) is moderately smaller than franchises of higher-rated peers and concentrated on a fairly small number of markets, notably the
Unlike many peers, Arrow largely targets smaller and often off-market transactions, which are incrementally less price sensitive than more standard auction-led transactions.
Reduced Balance-Sheet Usage: Unlike most of its peers, Arrow is transitioning from a conventional debt purchaser to primarily a manager of funds investing in NPL portfolios as well as servicer of these assets. Own balance-sheet usage will largely be limited to co-investments in funds (at around 25% of total fund size in ACO 1 and around 10% in the follow-on funds). As a result, management expects purchases for Arrow's own balance sheet (largely in the form of co-investments) at around
While Arrow can point to a long record of acceptable collection performance, management's plans for follow-on funds and hence funds under management (FuM) growth are, in our view, ambitious (FuM of more than
Governance Unchanged Following Delisting: In line with most listed peers, Arrow operates a three-lines-of-defence model supported by various board committees. All new investments are approved by the company's investment committee, and ERC and portfolio investments are valued both internally and with an external auditor's attendance.
Following its delisting and new ownership, Arrow's governance structure remains broadly in place, supporting our favourable view of the company's risk and corporate governance. With some exceptions, Arrow's senior management team has generally fairly short tenors with the company, but extensive professional experience in the relevant sectors. Its CEO was replaced in 2H21 with Arrow's founder and chief investment officer but Fitch believes that Arrow's strategy under its new CEO will remain broadly unchanged.
Long-Dated Funding Profile; Adequate Coverage: Arrow's EBITDA coverage ratio is acceptable and the company benefits from a long-dated funding profile (no bond maturities until 2026) and sound contingent liquidity through a long-dated undrawn
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
LONG-TERM IDR
Material delays in rolling out its capital-light strategy, in particular if impairing Arrow's deleveraging potential or indicative of general collection underperformance, would put pressure on Arrow's ratings
Inability to meet its 2023 target of net leverage (net debt/adjusted EBITDA) of 3.0x-3.5x, could also put pressure on Arrow's ratings
Material collection underperformance, in particular if leading to further meaningful portfolio impairments, could be rating-negative. A material increase in Arrow's risk appetite or weakening of its risk or corporate governance would also put pressure on Arrow's ratings
Factors that could, individually or collectively, lead to positive rating action/upgrade:
LONG-TERM IDR
As Arrow's Long-Term IDR is currently constrained by the company's leverage, any positive rating action would require a material and sustained improvement in its gross leverage ratio to well within Fitch's 'bb' benchmark range (gross debt/adjusted EBITDA of between 2.5x to 3.5x)
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
SENIOR SECURED DEBT
As Arrow's senior secured notes are the company's main outstanding debt class, Fitch has equalised the notes' ratings with the Long-Term IDR, indicating average recoveries for the notes.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
SENIOR SECURED DEBT
A downgrade of the Long-Term IDR would likely be mirrored in a downgrade of the notes. In addition, worsening recovery expectations, for instance, through a larger layer of structurally senior debt, could lead Fitch to notch down the notes' rating from the Long-Term IDR
An upgrade of the Long-Term IDR would likely be mirrored in an upgrade of the notes. In addition, improved recovery expectations, for instance, through a larger layer of junior debt, could lead Fitch to notch up the notes' rating from Arrow's Long-Term IDR
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Arrow has an ESG Relevance Score of '4' for financial transparency due to the significance of internal modelling to portfolio valuations and associated metrics such as ERC. However, this is a feature of the debt purchasing sector as a whole, and not specific to Arrow. This has a moderately negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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