Shares in specialist investment firm Arrow Global (ARW) jumped 10% to 88p after it revealed it had reinforced its balance sheet against a severe downturn in collections and its asset management business had remained cash-flow positive during the first half of the year.
Arrow is a major investor and asset manager in the non-performing and non-core assets sector, buying and managing loans and real estate portfolios from and at the same time on behalf of banks, institutions and specialist lenders.
This helps banks and financial institutions reduce their balance sheets and generate cash, while Arrow takes on the risk of earning a return on the assets.
The business was cash positive in the first half with available cash headroom of £166.7 million, up 9% on a year ago, thanks to strong cash flow generation and lower capital intensity from co-investment. Arrow’s share of portfolio purchases was just £42.9 million in the period compared with £165.6 million a year ago.
The firm also secured £91.1 million of asset-backed lending and restructured the covenants on its bank lending in line with its revised (lower) estimated remaining collections. It has no debt coming due until 2024 so it has plenty of financial leeway to invest should it want to.
Collections hit a low point in April but recovered throughout the second quarter as the property market reopened and the court system returned to ‘normal’. However, the firm decided to take a non-cash impairment charge of £133.6 million to allow for lower levels of collections than expected at the start of the year.
In taking this impairment the firm has forecast a severe contraction in employment and asset prices as governments reduce their economic stimulus packages later this year. Its base case scenario is actually less negative and would see the net present value (NPV) of its investments rise by £43 million compared with its worst-case scenario.
Jefferies’ analyst Julian Roberts remains upbeat despite the large provision and has maintained his 420p price target. ‘A high impairment figure dominates the P&L, but the balance sheet is secure, even in the severe downside scenario, and collections are recovering. Considerable uncertainty remains, but Arrow is likely to emerge into a bigger market with more opportunities for the AMS business’.
