Q2 2022 ArrowMark Financial Corp Earnings Call

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Welcome to the arerrowark financial cops. Q2, 2020 -two investor call. As a reminder, fiscall is being recorded.

Now I would like to turn the call over to June . morocco Investor Relations of aromark financial corp.

Before we begin this conference call, I'd like to remind everyone that certain statements made during the call may be considered forward-looking statements, which are based on current management expectations that involve substantial risks and uncertainties. Actual results may differ materially from the results stated in or implied by, these forward-looking statements. aerom Mark financial has based the forward-looking statements included in this presentation on information available to us today. As of June thirtieth 2022, unless otherwise noted, the company undertakes no duty to update any forward-looking statements made herein in today's call, the management of aommark financial will be providing prepared remarks. Investors will have the opportunity to address our questions directly to management by calling Investor Relations at two one two four six 8, five four four one or emailing J morocco at aerrow Mark partners com. Now I will turn the call over to San J bolay, Chief Executive Officer of aommark financial.

Thank you, Julie. Good afternoon and welcome to armark's financials. Investor call for second quarter of 2020 -two.

Along with Julie Sha with me today are Dana stacks President and pass ferrel our CFO .

In the next few minutes I will briefly comment on the market maramin.

Including factors affecting the credit markets.

Then I'll provide arok's financial quarterly results and portfolio view.

Dana will provide details on the origination pipeline and Pat will provide you with greater detail on our financial results.

Before I begin, I want to recognize the appointment of danasstags as President of areramark'sfinancial corp.

Effective June nth 20: 20 two.

Data has over 27 years of experience leadaving organizations.

He has been new to Ark partners for five years.

Helping lead the private debt and equity investment strategy at the firm.

Dana is focused on the origination, beljence and management of the investment portfolio.

And I'm pleased to have Dana as an Officer of the company.

Now on to the markets.

During the second quarter, the equity and credit markets continued to experience volatility.

With the SMB 500 down 16% for the second quarter.

And down nearly 20% in the first six months of 2020 -two.

Likewise, the bond markets also declined, with a Bloomberg barclay's U's aggregate bond index.

A proxy for investment rate bonds was down nearly 5% for the quarter and down 10% in the first six months of 2020 -two.

hidened fears of a recession.

Driven by high inflation.

Tightening Central Bank monongterary policy.

Supply chain disruptions and geopolitical risks from the war Ukraine contributed to the volatility and equity and credit markets.

Last week.

The Federal Reserve announced that a raised the fast funds rate by sey-five basis points.

The second time the Fed made a 75 basis points hike in the past two months.

Many believe the Fed is not finished hiking rates.

Additional increases are expected in the second half of the year in order to pain inflation in accordance with a 2% inflation target.

We expect that monetary policy will continue to weigh heavily on the markets for the remainder of the year.

With the long-term view in mind, I want to put the macrooffactors affecting the markets into perspective when it comes to armark's national and our underlying investments.

airmark nationalalss portfolio is natup of securities primily issued by money, certain banks and U's community banks.

We believe that our investment portfolio is well positioned.

Despite these macroactors affecting our current economy.

Moreover.

We believe we have a defensive approach based on travel preservation, income generation and maximizing total risk-adjusted returns.

Our beliefs are based on the following.

First our investments are structured in a way that mitigates risk.

As previously mentioned, our regulatory capital relief investments are primarily issued by moneycertain banks.

Classify as jesseps.

That are well outital life.

We also deploy capital and community banks where we invest in term loans.

Trust preferred and preferred securities. All priority of ranking securities issued by these banks.

We believe that money center banks and community banks have been conservative in taking reserves ahead of a possible economic downturn.

they'are also poised to benefit from increases in lending rates.

As well as growth in their loan book.

Given strong Chairman capital ratios and conservative balance sheets for our portfolio banks.

We expect the banking sector to be resilient.

In general, during any economic downturn.

Second our portfolio regulatory capital and communite bank investments are diversified across money center banks and community banks.

Third before the mitigated risk through our portfolio management process, as our investment team has in frequent contact with our issuers.

Our investment team.

We regularly stress test the portfolio against various economic scenarios.

Industry sector credit outlooks and or geographic risk.

Finally the scale and experience that the aok partners' platform provides.

To our adviser offers exceptional benefits, including diverse in-house subject matter expertise and research.

The team contributes to improving the company efficiencies, which helped to optimize aramo financial's operating results.

Our season team has experienced managing inlesseston portfolios through multiple economic cycles and market conditions.

This depth of experience is exactly why we remain intently focused on credit quality when underwriting the portfolio.

Now I'd like to say a few words on interest rates and the positive impact on our earnings.

We believe a rise in rates should be beneficial through our portfolio, due to the flding rate structure of a majority of our investments.

Today approximately 78% of the company's total investment are in floating rate assets, which provides and inflation hedggeed to the portfolio.

As I mentioned last quarter, we believe that every 25 basis points increase in base rates may translate to as much as an additional half Penn to ren B? Y per share per quarter in net income. All things being equal.

Impact to net income from an increase in rate is dependent on a number of variables.

These include the mix of floating rate assets and a timing of the reset of the base rates and the average amount of borrowings under our credit facility, for example.

Now on to arermark financials' results for the second quarter.

We are pleased to report that net investment income for the second quarter of 2022 was approximately $3 million, or 43 cents per share, up 2% from the prior quarter.

Of note once again.

We have all earned our stated dividend of 39 cents per share per quarter.

For the first six months of 2022, net investment income was up approximately 15% as compared to the same period in 2021.

Our net asset value at the end of the quarter was $20 to 94 cents per share, down 50 cents per share or negative 2% from the prior quarter end.

For the most part of.

This was due to the volatility of the credit markets.

Our NAV has performed well, which compares favorably to the equity and credit markets performance during the quarter.

We believe this demonstrates the low volatility characteristics of our investments and their strong underlying credit profile.

Now let me turn to the portfolio view.

During the second quarter, the company measted a total of $23.8 million in four regulatory capital and transactions.

The securities were purchased in the primary market and together have an effective weighted average scop on of 11% and.

I want to point out that the yields on these regulatory capital securities will continue to benefit from the rise in interest rates due to the floating rate structure.

The $230.8 million of investments was offset by $14.8 million from the full sale of PS.

The full call of first marquis and other partial pays.

The estimated annualized yield of the portfolio investments as of June thirtieth was 10%.

Up 58 basis points over the last quarter end.

Partially driven by the sales of low top 5% yielding assets.

And the purchase of much higher yielding regulatory capital assets.

I want to highlight that this is the first time the portfolio yields has been above 10% since the second quarter of 2020 and.

At quarter end, total assets of portfolio were reported had approximately $201.6 million, and then invset portfolio was reported at one hundred and ninety-six, point four.

Now I want to introduce Dana ef, President of the company who discuss the origination pipeline.

Thank you, sanj. In Q2, industry-wide regulatory capital origination was robust, with an estimated three to three and a half billion of issuance. Bring the year-to date 2020 -two issuance to approximately four to $5 billion.

The new issue market for red cap is expected to meet or exceed 2021 issuance levels.

Continued growth of the red cap market supports our efforts to deploy capital into this asset class.

In the community banking space in Q2 subordinated loans issued by community banks were yielding 5% higher versus 3% to 4% for most of 2021 and.

The recent rise in subordinated loan interest rates have been primarily driven by recent increases in the five and 10 -year treasury yearield.

Despite favorable price changes, we still find more attractive opportunities on a risk-adjusted return basis and regulatory capital securities. However, we continue to monitor the community ban' suboborardina loan and preferred equity new issue and secondary market. It is our intention to opportunistically invest in those assets when attractive opportunities are available. Now I will turn it back to project.

Thank you, Dana. We firmly believe that during these volatile times, the company is well positioned to deliver superior financial results.

Benefiting from the strategic mix of Re cap and community bank investments.

airmark financial is the only public company that offers the opportunity to participate in regulatory capital investments.

With this strategy and with the stock at an 9% yield, we believe that Ark financial continues to offer exceptional value to investors.

Now I want to turn the call over to pas ferll, Chief Financial Officer of the company.

Thank you, sonanjay. As a hueach quarter, I will present the financial results by going through the components of the company's quarterly results in detail.

The net outset value in June thirtieth was $20 and nety-four cents per share, down 50 cents from the prior quarter. The decline in NAV in part reflects the volatility of the credit markeket.

Entity is comprised to four components: net measment income, realized capital gains and losses to change in value of the portfolio's investments and lastly, distributions paid during the period. Let's review these components.

Gross income for the quarter was approximately five million, or 71 cents per share.

Total expenses for the quarter were two million, or 28 cents per share, resulting in that misment income for the quarter of three million, or 43 cents per share.

As is the case every quarter. The timing of calls and paydowns impacts the income generation of the company.

Realized capital gains and losses in the quarter is the second component affecting the change in any bate. The net realized capital gains from investment activities were approximately two point five million or 36 cents per share.

The third component- changes in unrealized depreciation or depreciation of the portfolio- relates to how the value of the entire investment portfolio has changed from the previous quarter end to the current quarter end.

For the quarter, the change in net unrealized depreciation on investments and foreign current future transaction was approximately six point four million per 90 cents per share.

I want to point out that gains of losses from foreign currency hedging activities do not impact our net income.

The fourth component affecting the change in net asset value is distribution.

A regular cash distribution for the quarter was 39 cents per share. The distribution of 39 cents per share was paid on June twenty-ninth.

In summary, we began the quarter with a net asset value of $21 and 40 percents per share. During the quarter, we generated net income of three million, net realized capital gains at approximately two point five million and the unrealized value of portfolio on foreign currency transactions decreased by six point four mon.

The su of these components, reduced by a distribution of 39 cents per share, resulted in a net asset value of $20 and 94 cents per share on June thirtieth, which was down 50 cents from the prior quarter.

We believe this NAV is a true representation of the valri of the company.

Although we don't believe we get credit for in the public markets. The majority of the portfolio is independently marked, meaning we do not put valuations on the majority of investments in our own portfolio, which is a point of differentiation compared to other publicly traded closed-end funds and BDC.

In the second quarter, approximately 75% of the portfolio of pric remarks reflect the minimum of two quotations for broker-dealers or pricing services.

These quotations represent an independent third-party assessment of the current valide of the portfolio.

At quarter end, the company had total assets 201.6 million, consisting of total investments of 197.1 million and cash interest and dividend receivable and prepaid assets totaling approximately four point five million.

At quarter end, our dividend yield was approximately 8%. As of today, diend yield is approximately 9%, and.

Now let me update you on our credit facility.

As disclosed in our eight -k filing on June . Third, we amended and extended our credit agreement with Texas Capital Bank, our lender and capital partner since two thousand and fourteen and.

The interest rate for the facility is now based on the secured overnight financing rate, known as SA, and is currently priced at silur plus 3%, and.

In addition, we upsi the facility to seven million from 62 million, with the option to increase to Ninety million.

We also extend the maturity in another three years, with an option to extend to a fourth year. We are pleased with the new terms, which will ensure strong and stable access to debt capital over the next 40 years.

As of June thirtieth 2022, the company had 51.5 million drawn from the facility, where 26% total assets.

As a registered investment company subject to the investment company Act, may only Barrow up to 33% of our total assets.

Now I want to turn the call back over to sonanj.

Thank you, PAT. I'd like to thank everyone on the call for listening in today. We appreciate your continued support. I mean hope you enjoy the remainder of the summer.

Stay safe. And nine.

This concludes today's call. Thank you for attending.

The host has ended this call goodbye.