Arrow Global Share Discussion Threads

[hpowell1] 02/12/2019 13:30

It appears the business operates on a 7-year ERC model which is refreshed annually. This leads to bullish initial internal asset valuations followed by haircuts to the ERC year-on-year after the initial valuation. Business forecasts that are used to estimate the ERC are most likely overlooked by senior management who artificially boost these forecasts in order to make the portfolio's appear more valuable on paper. This is an unsustainable way of working as in the short-term it helps increase the value of the company and drive investment but in the long-term the chickens will come home to roost as portfolio's performance does not realise the artificially boosted forecasts.

I would be sceptical of internally produced financials such as the annual and half-year reports. 2 comparisons made in this chat are good descriptions for the company's position: 1) They are on a treadmill getting faster and faster that they can't get off 2) no USP. The company considers itself a 'master-servicer'. It is a model that is easily replicated by other businesses. The company appears to simply place tranches of debtors to and from other DCA’s and servicers. There seems to be a lack of specialisation or added-value within their system. The company is trying to pivot to an Asset management/ fund business as it relies on more and more funds to be pumped in to maintain its unsustainable back-book. The business should focus on existing asset performance before trying to purchase more and more debt at an unsustainable rate. Although this would obviously expose the underlying portfolio performance which they are keen to hide.

[makinbuks] 15/11/2019 13:25

The concerns voiced here are acknowledged issues. That's why the company itself is looking to reduce the debt level and build the asset management business.

I don't see why buying more debt is essential, indeed to me it just exacerbates the concerns. Alternatively, if they were to stop completely and run off the portfolio the outstanding debt would fall in line with collections. What is critical therefore is whether the level of collections on the existing book is sustainable. Will it continue at 104% of expected levels or will it plummet?

Obviously in such a highly geared model a relatively small increase in non collectables will have a severe impact on equity holders

[gbeagle] 14/11/2019 15:47

The simple fact is ARW is no more a sophisticated collection machine than many privately held entities. It does no more and with lack of agility, sometimes less than others. It has no USP and is reliant upon its ability to raise funds, which in turn is very much dependent upon the cash collected. The cash will not rise significantly in the absence of purchase activity and will inevitably derease in its absence, a lot faster than you dare think. Its debtor (they are not customers) base is not increasing its wealth, more likely becoming increasingly impecunious, which means no meaningful increase in collections. So where's the increased performance without taking on more debt?

Interesting to see what happens long term, because the current record consumer debt will be up for sale in a couple of years 😊

[martindjzz] 14/11/2019 14:42

It is now more than 2 years since I sold out but I keep watching as I thought it a possible repurchase. One of several things that puts me off is ARW’s claim that its always collects more debt than it originally forecast, the latest figure being 104pct. I worry that this and other figures are being manipulated.

[gbeagle] 14/11/2019 14:21

The asset management platform is not induatry leading and is a by product of the core business. Other providers are way ahead, having concentrated their efforts in the sector.

The cash collections will be sensitive to political change and particularly in the UK, the protections provided to delinquent consumers. Hence, the increase in non-UK portfolios.

If the collections drop and keep doing so (as will be the case if they atop purchasing), its 'lights out'. You should remember, not all the delinquent accounts purchased are non-paying. So each purchase provides extra cashflow immediately. There was a time when this coagility where class leaders with an element of agility, but that has long since dissapeared. Its treading water and will eventually drown.

Its a short for sure.

[makinbuks] 14/11/2019 13:40

So its a treadmill they can't get off? You can't deliver profitable growth by buying more and more year on year because eventually you run out of debt to buy. Sensibly therefore they identify the asset management business as more sustainable and reliable. The problem is its size relative to the debt portfolio

[gbeagle] 13/11/2019 19:35

The fact is, the cash revenues will only remain at current levels if they continue to purchase. Failure to purchase and receive the bump in collections, would soon reveal the under performing portfolios. Failure to purchase would soon hit cash revenue. Its all about the collections, because the underlaying asset (the delinquent consumer debt, primarily) lose value by the month.

[topvest] 12/11/2019 20:15

Looks OK, but I think the market would like some slowing of portfolio additions that have been running at > £200m again.
Encouraging points below:

"The primary focus of the Group continues to be to build out our fund management capabilities and good progress has been made following the formation of AGG Capital Management Limited announced in the Group's interim results. Our clear objective is to build a fund management business which will drive substantial growth in AMS revenues and, when combined with the cost efficiency programme, will see the Group evolve to become a more capital light, high margin business with less leverage."

The asset management side of the business is what I'm interested in and I would like to see them split the business into two.

"The Group's highly cash generative characteristics mean we continue to have the flexibility to allocate capital between investment for growth, dividends and deleveraging. We therefore remain confident that we can continue to grow the business, reward shareholders and finish the year within our new targeted lower leverage range of 3.0x-3.5x."

Sounds OK, but there seems a reluctance to reduce portfolio investments. If they did this temporarily then it would have a massive impact.

[davr0s] 12/11/2019 19:08

Yeah I thought the results were good lol. But I trade so try to not let my opinions affect my trading. Still holding and miles away from my stop. Sometimes results can be a 1d reaction so it's the next few days that may determine where this is going

[uhound] 12/11/2019 18:09

No thoughts from holders here on the results today?

[wiseacre] 20/8/2019 11:51

Yes and they've taken a bath!

[topvest] 14/8/2019 08:54

Fifth Street Station LLC managed by Oaktree Capital (Howard Marks) have increased their holding to 9%. They have been increasing since the early summer. Interesting indeed!

[topvest] 13/8/2019 20:55

Getting kicked again today. Disclosed shorts back up to 7.95%.

[topvest] 09/8/2019 20:45

Hmm, not really comparable to Burford - litigation finance involves a big cash outlay with the prospect of a return at some point / not. Arrow Global generates enormous operating cash flow every month (c£250m per annum). Agreed, that the income statement and portfolio valuations are judgemental but that's the nature of the beast. I invested in Arrow Global for the asset management side of the business and that has enormous potential. I agree that its relatively high risk and we would all like the debt reduced a tad more quickly. They will hit their range in H2 by the sounds of things though, and all funding is in place for 5 years, so will stick with it. Hopefully, they will split off the asset management side once it has got going, but possibly 3 years away.

[shauney2] 09/8/2019 16:19

Well thats me taken out.Considering i had my original stop under 2 quid its been a good trade with a divi on top.Good luck.

[deanmatlazin] 09/8/2019 14:04

Another blood bath like Staffline. Going to re-test £2. See where it goes from there..

[wiseacre] 09/8/2019 09:29

The following comment comes from analyst at Peel Hunt:

"there are similarities from an accounting perspective between what Muddy Waters had to say on Burford yesterday and Arrow Global. The P&L is dominated by mark-to-market/model adjustments that require long term judgements to be made in relation to the performance of the underlying assets and many of those adjustments are entirely at management’s discretion. Some of the basis upon which performance is reported is unusual and potentially misleading including the calculation used for net IRR and collections to forecast (the 104% is based on original underwriting assumptions not the mark-to-market/model assumptions). Stripping the mark-to-market/model adjustments out of the P&L highlights that the business is loss making, net debt exceeds the value of the investment portfolio at cost and, the business has no tangible net worth. If something goes wrong there is no margin of safety for equity investors and the debt (net debt/total equity 6.3x) providers will end up owning the business in its entirety or alternatively it will go bust. Nor are management exercising discipline; while on one hand it is acknowledged that we are entering a later stage of the credit cycle on the other they continue to increase new portfolio purchases resulting in leverage remaining high. It would seems sensible for management to slow the rate of new purchases, actively deleverage the balance sheet and make greater use of other people money in the asset management business until the cycle turns but sadly this is a team that is obsessed with growth and owns little of the equity personally. For these reasons it remains a high conviction short for me".

It is rare for such a damning verdict to come from a sell-side analyst.

[wiseacre] 08/8/2019 21:04

What a load of tosh. Note the increase in net debt from £1.08 billion to £1.15 billion.
Unsustainable IMHO.

[topvest] 08/8/2019 19:50

Yes, much better than the weak interims a year ago, that started the downward move in the share price. They seem to be progressing well.

[ttny2004] 08/8/2019 07:49

Strong set of accounts

[topvest] 06/8/2019 16:13

This is doing very well in a very weak market. Shooters are getting burnt.

[wiseacre] 06/8/2019 11:30

Am very relaxed about my position despite the short squeeze and run up ahead of results.
Looking to add too my short position after the figures which IMHO will be the usual ramptastic nonsense.

[topvest] 02/8/2019 17:22

Yes, looking positive.

[makinbuks] 02/8/2019 15:27

More shorts squeezed out, 8.1% now