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spk01: Welcome to the Arrowmark Financial Corp Q2 2022 Investor Call. As a reminder, this call is being recorded. Now, I would like to turn the call over to Julie Morocco, Investor Relations of Arrowmark Financial Corp.
spk00: 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. Arrowmark Financial has based the forward-looking statements included in this presentation on information available to us today as of June 30, 2022, unless otherwise noted. The company undertakes no duty to update any forward-looking statements made herein. In today's call, the management of Arrowmark Financial will be providing prepared remarks Investors will have the opportunity to address their questions directly to management by calling Investor Relations at 212-468-5441 or emailing jmorocco at AramarkPartners.com. Now, I will turn the call over to Sanjay Bosley, Chief Executive Officer of Aramark Financial.
spk02: Thank you, Julie. Good afternoon, and welcome to Aramark Financial's investor call for second quarter 2022. Along with Julie, here with me today are Dana Staggs, President, and Pat Farrell, our CFO. In the next few minutes, I will briefly comment on the market environment, including factors affecting the credit markets. Then I'll provide Aramark financial quarterly results and portfolio review. 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 Dana Staggs as President of Aramark Financial Corp, effective June 9, 2022. Dana has over 27 years of experience leading organizations. He has been with Aramark Partners for five years, helping lead the private debt and equity investment strategy at the firm. Dana is focused on the origination, diligence, and management of the investment portfolio, and I'm pleased to have Dana as an officer of the company. Now onto the markets. During the second quarter, the equity and credit markets continue to experience volatility with the S&P 500 down 15% for the second quarter and down nearly 20% in the first six months of 2022. Likewise, the bond markets also declined With the Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for investment-grade bonds was down nearly 5% for the quarter and down 10% in the first six months of 2022. Tightened fears of a recession driven by high inflation, tightening central bank monetary policy, supply chain disruptions, and geopolitical risks from the war on Ukraine contributed to the volatility in the equity and credit markets. Last week, the Federal Reserve announced that it raised the Fed funds rate by 75 basis points, the second time the Fed made a 75 basis points hike in the past two months. Many believe the Fed has not finished hiking rates. Additional increases are expected in the second half of the year in order to retain 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 macro factors affecting the markets into perspective when it comes to Aramark Financial and our underlying investments. Aramark Financial's portfolio is made up of securities primarily issued by money-centered banks and U.S. community banks. We believe that our investment portfolio is well positioned despite these macro factors affecting our current economy. Moreover, we believe we have a defensive approach based on capital 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 Money Center banks classified as GSIBs that are well capitalized. We also deploy capital in community banks where we invest in term loans, trust preferred and preferred securities, all priority 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're also poised to benefit from increases in lending rates, as well as growth in their loan book. Given strong tier one 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 community bank investments are diversified across money center banks and community banks. Third, we further mitigate risk through our portfolio management process as our investment team is in frequent contact with our issuers. Our investment team regularly stress tests the portfolio against various economic scenarios, industry sector credit outlooks, and or geographic risk. Finally, the scale and experience that the Aramark Partners platform provides to our advisor offers exceptional benefits, including diverse in-house subject matter expertise and research. The team contributes to improving the company's efficiencies, which help to optimize Aramark Financial's operating results. Our seasoned team has experience managing investment 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 to our portfolio due to the floating rate structure of a majority of our investments. Today, approximately 78% of the company's total investments are in floating rate assets, which provides an inflation hedge 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 penny to one penny per share per quarter in net income, all things being equal. The impact to net income from an increase in rates is dependent on a number of variables. These include the mix of floating rate assets and the timing of the reset of the base rates and the average amount of borrowings under our credit facility, for example. Now, onto Aramark Financial's 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 2.5% from the prior quarter. Of note, once again, we have over-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 $20.94 per share down 50 cents per share or negative 2.3% from the prior quarter end. For the most part, 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 review. During the second quarter, the company invested a total of $23.8 million in four regulatory capital transactions. The securities were purchased in the primary market and together have an effective weighted average coupon of 10.6%. 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 $23.8 million of investments was offset by $14.8 million from the full sale of PFF, the full call of first marquee, and other partial paydowns. The estimated annualized yield of the portfolio investments as of June 30th was 10.11%, 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 yield has been above 10% since the second quarter of 2020. At quarter end, total assets of portfolio were reported at approximately $201.6 million and the invested portfolio was reported at 196.4 million. Now, I want to introduce Dana Sachs, president of the company, who will discuss the origination pipeline.
spk01: Thank you, Sanjay. In Q2, industry-wide regulatory capital origination was robust with an estimated 3 to 3.5 billion of issuance, bringing the year-to-date 2022 issuance to approximately $4 to $5 billion. The new issue market for REDCap is expected to meet or exceed 2021 issuance levels. Continued growth of the REDCap 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% and higher versus 3 to 4% for most of 2021. The recent rise in subordinated loan interest rates have been primarily driven by recent increases in the 5- and 10-year Treasury yields. Despite favorable price changes, we still find more attractive opportunities on a risk-adjusted return basis in regulatory capital securities. However, we continue to monitor the community bank's subordinated loan and preferred equity new issue and secondary markets. It is our intention to opportunistically invest in those assets when attractive opportunities are available. Now I will turn it back to Sanjay.
spk02: 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 REDCap and community bank investments. Aramark 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 8.6% yield, we believe that Aramark Financial continues to offer exceptional value to investors. Now, I want to turn the call over to Pat Ferrell, Chief Financial Officer of the company. Thank you, Sanjay. As I do each quarter, I will present the financial results by going through the components of the company's quarterly results in detail. The net asset value on June 30th was $20.94 per share. down 50 cents from the prior quarter. The decline in NAV, in part, reflects the volatility of the credit market. NAV is comprised of four components, net investment income, realized capital gains and losses, the 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 5 million or 71 cents per share. Total expenses for the quarter were $2 million or $0.28 per share, resulting in net investment income for the quarter of $3 million or $0.43 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 NAB. The net realized capital gains from investment activities were approximately $2.5 million or $0.36 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 currency transactions was approximately 6.4 million, or 90 cents per share. I want to point out that gains and 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 29th. In summary, we began the quarter with a net asset value of $21.44 per share. During the quarter, we generated net income of 3 million, net realized capital gains of approximately 2.5 million, and the unrealized value of the portfolio in foreign currency transactions increased by $6.4 million. The sum of these components, reduced by a distribution of $0.39 per share, resulted in a net asset value of $20.94 per share on June 30th, which was down $0.50 from the prior quarter. We believe this NAV is a true representation of the value of the company. Although we don't believe we get credit for it 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 VDCs. In the second quarter, approximately 75% of the portfolio prices or marks reflect a minimum of two quotations from broker-dealers or pricing services. These quotations represent an independent third-party assessment of the current value 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 dividends receivable in prepaid assets, totaling approximately 4.5 million. At quarter end, our dividend yield was approximately 8.1%. As of today, the dividend yield is approximately 8.6%. Now, let me update you on our credit facility. As disclosed in our 8K filing on June 3rd, we amended and extended our credit agreement with Texas Capital Bank, our lender and capital partner, since 2014. The interest rate for the facility is now based on the secured overnight financing rate, known as SOFR, and is currently priced at SOFR plus 2.61%. In addition, we upsized the facility to $70 million from $62 million, with the option to increase to $90 million. We also extended the maturity another three years with an option to extend to a fourth year. We're pleased with the new terms, which will ensure strong and stable access to debt capital over the next four years. As of June 30th, 2022, the company had 51.5 million drawn from the facility for 26% total assets.
spk01: As a registered investment company subject to the Investment Company Act, we only borrow up to 33.3% of our total assets.
spk02: Now I want to turn the call back over to Sanjay. Thank you, Pat. I'd like to thank everyone on the call for listening in today. We appreciate your continued support, and we hope you enjoy the remainder of the summer. Stay safe and good night.
spk01: This concludes today's call. Thank you for attending.
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