Interim results

28 August 2014

Arrow Global Group PLC

Interim results for the six months to 30 June 2014

Arrow Global Group PLC (("the Company") and its subsidiaries (together "the Group")), one of Europe's leading purchasers and managers of debt, is pleased to announce its interim results for the six months to 30 June 2014 ("H1 2014").

Highlights

· Maiden interim dividend of 1.7p per share declared

· Core collections1 up 10.9% to £69.3 million (H1 2013: £62.5 million)

· Adjusted EBITDA up 10.6% to £48.0 million (H1 2013: £43.4 million); adjusted EBITDA ratio 69.3% (H1 2013: 69.5%)

· Profit attributable to shareholders up 40.0% to £10.5 million (H1 2013: £7.5 million)

· Underlying net income down 1.5% to £13.4 million (H1 2013: £13.6 million) - prior year comparative period included a portfolio write up of £4.7 million

· Acquired debt portfolios with face value of £1,053.1 million for an aggregate purchase price of £99.3 million, with a 120-month gross cash on cash multiple of 2.33x

· 120-month ERC2 up 27.2% to £827.3 million at 30 June 2014 (31 December 2013: £650.3 million)

· Underlying basic and diluted earning per share ("EPS") of £0.08

· LTM3 underlying return on equity ("ROE") of 23.9%

· Net debt £247.9m and Net Debt to LTM Adjusted EBITDA ratio of 2.6x

· Full FCA authorisation plan progressing well (FCA confirmed 'landing slot' Q3 2015). Three lines of defence model now firmly embedded - BDO in place as third line

Notes:

1. Core collections are collections on Arrow Global's purchased loan portfolios

2. Estimated remaining collections

3. Last Twelve Months ("LTM") is calculated by the addition of the consolidated financial data for the year ended 31 December 2013 and the consolidated interim financial data for H1 2014, and the subtraction of the consolidated interim financial data for H1 2013

A glossary of terms can be found on pages 26 to 28 which includes a reconciliation of adjusted EBITDA. The directors believe that the presentation of the adjusted EBITDA measure allows the users of the financial statements to gain a better understanding of the underlying performance of the business

Tom Drury, chief executive officer of Arrow Global commented:

 "Arrow Global had a strong first half of 2014, with core collections and adjusted EBITDA up 11% and the acquisition of good quality loan portfolios with a face value of £1,053 million for £99.3m. £62.4m of these purchases were in Portugal, reflecting our expanding origination capability and the increasing propensity for creditors to sell.

"Two of the Portuguese portfolios were initially expected to be acquired in Q3 2014, but we have completed them earlier than anticipated and at a larger size. As a result, and as already announced, we now expect our full year purchases to be ahead of our previous expectations, laying a strong foundation for earnings growth in future years.

"We maintain our focus on targeted European expansion and I am delighted that we have secured the necessary license to operate in Holland - including completion of a €1 million pilot portfolio investment.

"With the regulatory environment set to tighten further, debt purchase markets are entering a period of increasing consolidation which we expect will see the emergence of a core group of industry leaders. We continue to assess a number of opportunities in European geographies with favourable market dynamics and we also have good visibility of a strong pipeline in the UK. "Against this backdrop of continued growth, and in accordance with the Group's dividend policy, today we announce our maiden interim dividend of 1.7p per share. This is a significant milestone and reflects our highly cash generative business model which provides the capacity to pay dividends whilst still allowing us to invest in attractive loan portfolios.

"We remain committed to finding attractive loan portfolios in both UK and European markets and continue to pursue a strategy to diversify our investments by both asset class and geography. Underpinned by a strong start to the year, we remain on track to deliver overall results in line with our expectations for the full year."

For further information:

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.

Business and financial review of the period to 30 June 2014

With the announcement of our first dividend post IPO, Arrow Global's H1 2014 results mark its continued evolution as a publicly listed company. Our board and senior management team continues to focus on targeted and profitable growth of our loan portfolio as well as the successful implementation of consortium ventures and other collections activity.

Key results

* June 2013 and 31 December 2013 balances include £0.5 million of student loan investments held as loan notes

Portfolio acquisitions and overview

For the period ended 30 June 2014, we acquired debt portfolios with a face value of £1,053.1 million for a purchase price of £99.3 million. Of these portfolios, £112.6 million comprises paying accounts, representing 33.9% of the purchase price. This mitigates our downside risk on these portfolios, whilst we use our data assets to seek to penetrate the £940.5 million of non-paying accounts.

These acquisitions, net of amortisation, have increased the balance sheet value of our purchased loan portfolios to £352.8 million at 30 June 2014 (31 December 2013: £273.9 million). As at 30 June 2014, the total face value of assets under management was £10.6 billion, including purchased portfolios of £8.3 billion across 5.4 million customer accounts.

Our data-driven approach is a key strategic differentiator and drives purchasing and collections activities, giving us a greater level of insight and accuracy in our modelling and operations. Our Proprietary Collections Bureau has increased to 17.5 million records, representing 7 million unique customers and we matched approximately 26% of our newly acquired Portuguese accounts to Arrow Global's existing back book.

Collections

Core collections increased to £69.3 million (H1 2013: £62.5 million), reflecting the increase in our portfolio assets base. Collections continue to perform in line with expectations and, at 30 June 2014, were cumulatively 102% of our original underwriting forecast. For the period ended 30 June 2014, 75% of cash collections came from regular small payments, with an average monthly payment of £23, reflecting our focus on working with customers to create long term sustainable repayment plans.

Collection costs

We continue to use our data capabilities and benefits from our outsourced model to maintain collection cost efficiency. During the period there was an improvement in the collection cost ratio, to 22.6% (H1 2013: 22.9%).

Adjusted EBITDA

Adjusted EBITDA is our proxy for free cash flow. For the period ended 30 June 2014 adjusted EBITDA increased by £4.6 million (10.6%) to £48.0 million (H1 2013: £43.4 million). This was mainly driven by an increase in core collections net of collection costs. The adjusted EBITDA ratio was 69.3% (H1 2013: 69.5%). The Group had cash generated from operations of £45.8 million for the period ended 30 June 2014.

Underlying net income 

Underlying net income decreased 1.5% to 13.4 million for the period ending 30 June 2014 (H1 2013: £13.6 million). This reflected the timing of an historical portfolio revaluation and earlier than anticipated portfolio purchases in 2014.

Portfolio overview

Our 120-month ERC - our expected collections from our back book - has increased by £177.0 million from 31 December 2013 to £827.3 million. The ERC is underpinned by paying accounts that have a face value of £1.1 billion, which represents 1.3 times 120-month ERC cover. As at 30 June 2014, we estimate the amount we would need to invest over the next year to maintain our current ERC level is circa £51 million.

Funding, net debt and net assets

In the period to 30 June 2014 we purchased portfolios with a face value of £1,053.1 million for £99.3 million, with £66.2 million funding in Q2 of 2014. We partially funded the £66.2 million purchase of portfolios through a draw down of the revolving credit facility of £26.9 million in June 2014 - leaving undrawn amounts of £28.1 million.

Net debt at 30 June 2014 was £247.9 million, being 2.6 times LTM adjusted EBITDA and a net debt/84-month ERC loan to value ratio of 35.3%, which is significantly below our financial covenants of 75%. These ratios have increased due to timing of the funding of portfolios in June 2014.

Net assets increased by £11.4 million during the period, largely reflecting the retained profit for the period.

Shareholder returns

Underlying basic and diluted EPS for the period ended 30 June 2014 was 8p (31 December 2013: 16p), and underlying ROE was 12.8% (LTM underlying ROE 23.9%) (31 December 2013: 26.5%).

The maiden interim dividend of 1.7 pence per share declared today is the Company's first dividend since the IPO. The Board will continue to pursue a progressive dividend policy targeting a payout ratio of between 25 and 35 per cent of annual underlying net income as set out in the IPO prospectus. However, rather than the annual dividend being split between the interim and final dividend in the proportion 1/3 to 2/3 as previously anticipated, in the future, the interim dividend (from H1 2015 onwards) will be declared at 50% of the prior year's final dividend with the subsequent final dividend being proposed based on the underlying net income for the year and in accordance with the payout ratio above.

Recent Developments

As discussed in our latest annual report, the Group undertook a tender of the external audit contract and successfully appointed KPMG LLP in July 2014. The Group also appointed BDO in April 2014 to provide its internal audit services, as it continues to invest in strong governance procedures.

As previously discussed, the Group has been involved with ongoing discussions with HMRC with respect to the business activities in Guernsey prior to 2013 when the Group was restructured. HMRC has concluded its review and disagreed with our technical analysis. HMRC have raised an assessment for VAT but confirmed no penalties will be levied as they have confirmed that the Group acted reasonably. Given the time, costs and uncertainties associated with appealing the HMRC decision at a tax tribunal and the fact that this is a historical issue, with no impact on future profitability, the board has decided to settle the assessment. Including advisors costs for the current period, this has resulted in a non-recurring charge of £2.4 million.

Outlook

The regulatory environment is set to continue to tighten, resulting in debt purchase markets entering a period of increasing consolidation. We expect this will lead to the emergence of a core group of industry leaders. We continue to assess a number of opportunities in European geographies with favourable market dynamics and we also have good visibility of a strong pipeline in the UK.

Unsecured consumer credit is continuing to grow following a period of stagnation during the recession and the propensity of banks to sell is expected to increase in response to accounting and regulatory changes. We remain committed to pursuing a strategy to diversify our investments by both asset class and geography.

As already announced, our demonstrated ability to access portfolios from multiple sources, coupled with larger than anticipated purchases in the first half of the year, means that we expect full year portfolio purchases to be ahead of our previous expectations, laying a strong foundation for earnings growth in future years.

Underpinned by a strong start to the year, we remain on track to deliver overall results in line with our expectations for the full year.

Directors' responsibilities statement in respect of the interim results

We confirm that to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

· the interim management report includes a fair review of the information required by:

a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

28 August 2014

Principal risks and uncertainties

We have an enterprise-wide risk framework in place, which sits alongside the strategic business plan and is designed to support the identification, assessment, management and control of material risks that threaten the achievement of our business objectives. Risks are categorised as: strategic risk, conduct risk, operational risk and financial risk.

Independent review report to Arrow Global Group PLC

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 which comprises the consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated statement of cash flows and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA"). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with the International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with the International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.

Richard Gabbertas

for and on behalf of KPMG LLP

Chartered Accountants

St James Square

Manchester

M2 6DS

28 August 2014

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period ended 30 June 2014

CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2014

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD ENDED 30 JUNE 2014

Any exchange differences are recycled to the statement of comprehensive income.

Own share reserve

The own share reserve comprises the cost of the Company's ordinary shares held by the Group. At 30 June 2014 the Group held 249,304 ordinary shares of 1p each, held in an employee benefit trust. This represents 0.1% of the Company share capital at 30 June 2014.

Translation reserve

The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.

Merger reserve

The merger reserve represents the reserve generated upon consolidation of the Group following the acquisition of Arrow Global One Limited.

* Other reserves total £277,960,000 deficit (31 December 2013: £277,848,000 deficit, 30 June 2013: £277,329,000 deficit)

Consolidated Statement of Cash Flows for the Period Ended 30 June 2014

Notes

1. Statutory Information

Arrow Global Group PLC (the "Company") is a company domiciled in the United Kingdom. The condensed consolidated financial statements of the Company as at and for the six months ended 30 June 2014 comprise the Company and its subsidiaries (the "Group").

This condensed set of consolidated interim financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. They do not include all of the information required for a full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 December 2013.

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the interim financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated annual report for the year ended 31 December 2013.

The consolidated financial statements of the Group as at and for the year ended 31 December 2013 are available upon request from the Company's registered office at Belvedere, 12 Booth Street, Manchester, M2 4AW or online at www.arrowglobalir.net.

The comparative figures for the financial year ended 31 December 2013 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the registrar of companies. The report of the auditor was

(i) unqualified

(ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and

(iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.The interim financial statements of the Group have been prepared under the historical cost convention other than the fair value of derivative contracts and the amortised cost value of portfolio assets. The accounting policies are the same as those given in the annual report and accounts for the period ended 31 December 2013.

The statements were approved by the board of directors on 28 August 2014 and have been reviewed by KPMG LLP.

After making appropriate enquires, the directors have a reasonable expectation that the Company and the Group will be able to continue in operational existence for the foreseeable future, owing to the fact that forecasts show sufficient resources are available throughout the period under review. Thus, they continue to adopt the going concern basis of accounting in preparing the interim results.

2. Finance income

3. Finance costs

4. Earnings per share

5. Dividend

The maiden interim dividend of 1.7 pence per share declared today is the Company's first dividend since the IPO. The Board will continue to pursue a progressive dividend policy targeting a payout ratio of between 25 and 35 per cent of annual underlying net income as set out in the IPO prospectus. However, rather than the annual dividend being split between the interim and final dividend in the proportion 1/3 to 2/3 as previously anticipated, in the future, the interim dividend (from H1 2015 onwards) will be declared at 50% of the prior year's final dividend with the subsequent final dividend being proposed based on the underlying net income for the year and in accordance with the payout ratio above.

The maiden interim dividend of 1.7p per share (2013: nil) is payable on 9 October 2014 to shareholders who are on the register as at 12 September 2014. The maiden dividend, which amounts to £2,965,000 (30 June 2013: £nil), has not been recognised as a liability in these interim financial statements.

6. Tax

The applicable corporation tax rate for the period to 30 June 2014 was 21.5% (30 June 2013: 23.25%). The Group's effective consolidated tax rate for the six months ended 30 June 2014 was 22.9% (30 June 2013: 33.3%). The effective tax rate in the period to 30 June 2013 was unusually high due to non deductible non recurring expenses and overseas tax differences no longer applicable this year. The current period effective rate tax is reflective of the applicable corporate tax rate for the year and reconciling items.

Non-recurring tax

We have identified non-recurring items in the period to 30 June 2014 amounting to £3,573,000 (30 June 2013: £7,230,000) of which £444,000 is not deductible for tax purposes.

7. Non-recurring items

Non-recurring items are items that, by virtue of their size and incidence, are not considered to be representative of the underlying performance of the Group.

Non-recurring items amounted to £3.6 million, mainly due to a provision for resolution of a historical tax issue of £2.4 million and share option charges in relation to the IPO of £0.9 million.

In the period ended 30 June 2013, the non-recurring items included in other operating expenses represented goodwill impaired in connection with the acquisition of Arrow Global Accounts Management Limited, costs associated with the senior secured notes issuance and restructuring costs.

8. Financial assets

Purchased loan portfolios

The Group recognises income from purchased loan portfolios in accordance with IAS 39. At 30 June 2014, the carrying amount of the purchased loan portfolio asset was £352,766,000 (31 December 2013: £273,932,000).

The movements in purchased loan portfolio assets were as follows:

* inclusive of capitalised portfolio expenditure of £1,802,000 (31 December 2013: £1,759,000)

9. Trade and other payables

The directors consider that the carrying amounts approximate to their fair value on the basis that the balances are short term in nature.

10. Related party transactions

The Company is the ultimate parent entity of the Group. Intercompany transactions with wholly owned subsidiaries have been excluded from this note, as per the exemption offered in IAS 24.

Related party balances as at each period end were as follows:

Summary of transactions

During the period GKV Limited, owned by director Gillian Key-Vice charged the Group £1,546 in relation to consultancy services provided on Group projects.

11. Borrowings

Senior secured notes

On 29 January 2013, the Group issued £220 million of 7.875% senior secured notes due 2020 (the "senior secured notes"). Net proceeds of £211.2 million included issuance costs that were capitalised within the financial instrument. The proceeds from this issuance were used to repay the bank loans, shareholder loans, and the non-controlling interest loan in full resulting in recognition of a £3,036,000 amortisation of previously capitalised transaction costs. In addition, there was a cancellation fee of £880,000 for early settlement of the revolving credit facility in place at that time.

The senior secured notes can be redeemed in full or in part on or after 1 March 2016 at the Group's option. Prior to 1 March 2016 the Group may redeem, at its option, some or all of the senior secured notes at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus an applicable "make-whole" premium. The notes are secured by substantially all of the assets of the Group. Interest is paid bi-annually.

Revolving credit facility

On 29 January 2013, the Group entered into a revolving credit facility (the "revolving credit facility") with The Royal Bank of Scotland plc ("RBS"), as security agent for a consortium of participating financial institutions. The revolving credit facility terminates on 28 January 2018 and bears interest at a rate per annum equal to LIBOR or EURIBOR (as applicable) plus certain mandatory costs and a margin of 4.25% per annum, subject to a margin ratchet based on the loan-to-value ("LTV") ratio at each quarter end. The new revolving credit facility was increased to £55 million on 22 October 2013. During the period the revolving credit facility was drawn down by £26,946,000 and this remains the position at the 30 June 2014.

The Group is also required to pay a commitment fee on available but not utilised or not cancelled commitments under the new revolving credit facility at a rate of 40% of the applicable margin per annum on the undrawn portion of each lender's commitment. The new revolving credit facility is secured by the same assets as the senior secured notes. Interest is paid based on agreement when the facility is drawn down, payable every one, three or six months.

12. Segmental reporting

The Group represents a single reportable segment. Collections information is available for the UK and Portuguese operations. Such information does not constitute sufficient information upon which to base resource allocation decisions. This is the only information analysed between the UK and Portugal received on a regular basis by the chief operating decision maker ("CODM") and consequently one segment was identified. The CODM is considered to be the board of directors collectively.

13. Financial instruments

Fair values

The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other valuation techniques.

For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

Valuation models

The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements.

· Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments

· Level 2: inputs other than quoted market prices within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data

· Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.

Valuation techniques include net present value and discounted cash flow models, using prices from observable current market transactions and dealer quotes for similar instruments and unobservable inputs such as historic performance data and the PCB output. The purchased loan portfolios fair value is calculated using discounted net 84-month forecast cash flows. The fair values of derivative instruments are calculated using quoted prices. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts. Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates.

Borrowings are considered to be reported at fair value as these were arm's length transactions at prevailing market rates. The Group has not identified a significant change in the availability of such market rates. Assets and liabilities measured at fair value on a non-recurring basis include goodwill, property, plant and equipment, and other intangible assets. Such assets are reviewed for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset or asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3). There were no significant impairments recorded during the period ended 30 June 2014.

Derivative financial instruments are initially recognised, and subsequently measured, at fair value.

Financial instruments measured at fair value - fair value hierarchy

The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position.

Of the above derivative contracts, the net fair value asset of £402,000 (December 2013: asset of £507,000) has been determined as a Level 2 measurement. There have been no transfers in or out of Level 2.

Financial instruments not measured at fair value - fair value hierarchy

There have been no transfers in or out of Level 3.

The balance sheet value of the Group's purchased loan portfolios is derived from discounted cash flows generated by an 84-month ERC model. The inputs into the ERC model are historic portfolio collection performance data. This ERC is updated with the Core Collections experience to date on a monthly basis.

Estimates of cash flows that determine the effective interest rate are established for each purchased portfolio over 12 months old and are based on the Group's collection history with respect to portfolios comprising similar attributes and characteristics such as date of purchase, original credit grantor, type of receivable, customer payment histories, customer location, and the time since the original charge off.

Management consider that the valuing of the purchased loan portfolios at amortised cost is comparable to the fair value.

The Group has an established control framework with respect to the measurement of purchased loan portfolio values. This includes regular monitoring of portfolio performance, overseen by the portfolio review committee, which considers actual versus forecast results at an individual portfolio level, re-forecasts cash flows on a quarterly basis, reviews actual against forecast IRR, signs off the latest ERC forecast, assesses the carrying value of the portfolio assets and reviews revenue recognition.

A reconciliation of the opening to closing balances for the period of the purchased loan portfolios can be seen in note 8.

Glossary

 "Adjusted EBITDA" means profit for the period attributable to equity shareholders before interest, tax, depreciation, amortisation, portfolio write up, foreign exchange gains or losses and Non-recurring items and share-based payments. The adjusted EBITDA reconciliations for the period ended 30 June 2014 are shown below:

 "Adjusted EBITDA ratio" represents the ratio of Adjusted EBITDA to core collections.

 "Collection activity costs" represents the direct costs of external collections related to the Group's purchased loan portfolios, such as commissions paid to third party outsourced providers, credit bureau data costs and legal costs associated with collections.

"Core collections" or "core cash collections" mean collections on the Group's existing portfolios.

 "Cost-to-collect ratio" is the ratio of collection activity costs to core collections.

"Creditors" means financial institutions or other initial credit providers to consumers, certain of which entities choose to sell paying accounts or non-paying accounts receivables related thereto to

debt purchasers (such as the Group).

 "Customers" means consumers whose unsecured loan obligation is owed to Arrow Global as a result of a portfolio purchase made by the Group.