It is never a good sign when a sleuth of angry bears bets against a stock. Distressed debt collector Arrow Global has several hedge fund grizzlies shorting its shares, including Lansdowne Partners and Marshall Wace. A total of 8% of its shares are out on loan, according to Markit, making it one of the London market’s most shorted stocks.
Among the weaknesses targeted by the bears is Arrow’s debt pile, with net debt levels 3.6 times adjusted earnings. Chief executive Lee Rochford has bowed to this pressure, committing to cut Arrow’s gearing by the end of the year to 3.5 times.
The debt collector faces other challenges, including high costs and its attempt to broaden its business model. Early last month, Arrow said it plans to strip out £20m of annual expenses from the end of next year. Part of this comes from “streamlining” and removing duplication in support teams across its two core divisions. Arrow has its own balance sheet for acquiring debt but has also pushed into managing assets and servicing debt for other companies, such as private equity groups that do not have debt collection teams.
Arrow started life in 2005 as a UK-focused buyer of unsecured debt, aiming to snap up distressed loans on the cheap that banks wanted to offload. It has spread into Europe: the UK now accounts for less than half its assets.
The firm would buy books of loans, often in partnership with private equity houses that wanted to slice off the best debt, giving rise to its asset management business. Arrow said last month that there is a “significant opportunity” for the group to grow in managing money for private equity and hedge funds, with European banks sitting on €800bn (£717bn) of non-performing loans. Analysts say asset management will yield lower profit margins but suck out less capital.
Other players have waded into debt collection, including Sweden’s Hoist and traditional rivals such as Cabot Financial. Still, Arrow posted robust results in the half to the end of June, with total income jumping 6.5% year-on-year to £177.7m, although underlying profit before tax nudged up by less than 1% to £36m.
Brexit is both a threat and an opportunity. Arrow’s own book of debt could come under pressure from borrowers hard-pressed to repay if the economy weakens. “You probably wouldn’t see absolute collections reduced, but delayed,” said Gary Greenwood of Shore Capital.
The shorting is ominous, but cost-stripping and asset management growth provide hope for Arrow. Hold.
