This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Good afternoon. Thank you for your patience and holding. The conference will start shortly. Again, thank you for your patience. Welcome to the Aramark Financial Corp Q3 2022 Investor Conference Call. I would like to turn the call over to Julie Morocco, Investor Relations of Aramark Financial Corp.
spk01: 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. Aramark Financial has based the forward-looking statements included in this presentation on information available to us as of September 30, 2022, unless otherwise noted. The company undertakes no duty to update any forward-looking statement made herein. In today's call, the management of Aramark Financial will be providing prepared remarks. Investors have the opportunity to address their questions directly to management by calling Investor Relations at 212-468-5441 or emailing InvestorRelations at AramarkFinancialCorp.com. Now I will turn the call over to Sanjay Bosley, Chief Executive Officer of Aramark Financial.
spk04: Thank you, Julie. Good afternoon, and welcome to Aramark Financial's investor call for third 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 will provide Aramark Financial's 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. In regards to the markets, both the equity and credit markets continued to experience volatility in the third quarter. Most major indices declined, extending their year-to-date drawdowns as inflation and global recession fears intensified. Despite the risks to the economy, the U.S. Federal Reserve reiterated their commitments to combating inflation. As such, the Fed implemented two 75 basis points increases to the federal funds target rate during the quarter. After the quarter end, the Federal Reserve raised the Fed funds rate and additional 75 basis points, marking a total of 375 basis points increase this year, and indicated that additional rate hikes were likely into 2023. With continued inflationary pressures and special focus on a tight labor market, We expect the Fed to continue on its current path of rate increases and anticipate a resulting slowdown in economic growth. Whether there is a hard or soft landing, and despite all the volatility as a result of 2022 Fed hikes, we believe that our time tested portfolio monitoring process enables us to better get ahead of credit concerns in our portfolio, and prudently manage our NAV. For example, recently, our diligence showed that one of our borrowers shifted its business focus, which deviated from our initial investment thesis. As a result, we reduced our exposure to this particular bank through a secondary market sale at prices close to par. I'm happy to share that for several years, our NAV has, in our opinion, remained fairly stable when compared to volatility in the credit and equity markets. With the long-term view in mind, I want to reiterate that Aramark Financial continues to prioritize risk mitigation and credit quality when seeking new investments for and managing the current investments in the portfolio. We believe that our investment portfolio is well positioned despite potential macro headwinds and current market volatility. It is worth mentioning again that our due diligence is conducted using the breadth and depth of resources available to the company through our affiliate Aramark Partners. Aramark Financial benefits from the operational resources and research expertise made available to it across asset classes, including Money Center Bank-issued regulatory capital, and community bank investments. In addition, the portfolio management team has experience managing investment portfolios through multiple economic cycles and market conditions. We hope the continued increase in earnings, combined with the relatively stable NAV, become transparent to the market as to the quality of the resources made available to the company to navigate through these volatile markets. It's also worth noting that in a rising rate environment, all other things constant, the company's earnings are positively impacted as highlighted by the 46 cent earnings for the third quarter. I will share more color on this in my comments in a few minutes. Moving on to portfolio, Aramark Financial's investment portfolio is made up of securities primarily issued by global money center banks and U.S. community banks with approximately 83% of our portfolio consisting of regulatory capital securities. The underlying loans within most of these regulatory capital securities typically have a rated average risk rating of BBB or BBB and are well diversified by borrower, geography, and industry sectors. We also invest in term loans. trust preferred and preferred securities, all priority ranking securities issued by community banks. Like their money center bank counterparts, community banks are also poised to benefit from increases in lending rates. Given strong capital ratios and conservative balance sheets for our portfolio of banks, we expect the banking sector to be resilient in general during any near-term potential economic slowdown. As a result, we believe taking a conservative approach at initial investment combined with ongoing portfolio monitoring promotes attractive returns even in challenging markets. 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 83% of the company's total investments are in floating rate assets, which provides a potential 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 a penny to one penny per share per quarter in net income. all things being equal. At the end of last week, Fed Funds futures were pricing in a peak policy rate of nearly 5.2% in Q2 2023, which, if accurate, suggests there could be as much as 150 basis points of additional rate increases that could drive anywhere between 3 to 6 cents of earnings per quarter, just related to the increase in base rates for all floating rate assets. The impact to net income from an increase in rates is dependent on a number of variables. These include the mix of the floating rate assets, the timing of the resets of the base rates, and the average amount of borrowings under our credit facility, for example. That said, investors can begin to see the contributed results of a rising rate environment as reflected in our third quarter earnings. Now onto Aramark Financial's results for the third quarter. We are pleased to report that net investment income for the third quarter was approximately 3.3 million or 46 cents per share, up 7% from the prior quarter. I also want to emphasize that for the first nine months of 2022, net investment income was up approximately 17%. as compared to the same period in 2021, and meaningfully higher than the published inflation rate for the U.S. Also of note, Aramark Financial over-earned the third quarter $0.39 per share declared dividend by $0.07 per share, or approximately 20%. Similarly, we over-earned the $0.39 per share declared dividends in the first and second quarter of 2022 by 3 cents and 4 cents per share respectively. Our net asset value at the end of the quarter was $20.74 per share, down 20 cents per share or less than 1% from the prior quarter. Our NAV is holding up much better than many income generating publicly traded funds who are seeing NAV declines. Our NAV has also been relatively stable when compared to the equity and credit markets overall performance during the quarter. We believe this performance is indicative of the unique investment merits of the regulatory capital asset class, as well as the quality of the underlying credit profile of the community bank investments. Now, let me turn to the portfolio review. During the third quarter, The company invested a total of $17.9 million in four regulatory capital transactions. The securities were purchased in the primary market and together have an effective weighted average coupon of 13.7% and a yield to maturity of 14.9%. The $17.9 million of investments were offset by 14.9 million proceeds from the sale of approximately 10.4 million of community bank assets and approximately 4.5 million of regulatory capital partial payouts. As I mentioned previously, as a result of part of our portfolio monitoring process and proactive investment management, we reduced some of our community bank exposure at prices close to par. One silver lining of these secondary market trades is that even during volatile market conditions, a portfolio can exhibit liquidity, as highlighted by asset sales close to par. Next, the estimated annualized yield of the portfolio investments as of September 30th was 11.85%, up 174 basis points over the last quarter end. I want to highlight that the third quarter portfolio yield performance is the highest in the company's history. At quarter end, total assets of the portfolio were reported at approximately $212.3 million, and the invested portfolio was reported at $193.2 million. Going forward, we are being prudent on how we deploy our investable cash. We are being opportunistic so as to be able to take advantage of volatility and potentially buy discounted assets in the secondary market similar to our secondary market purchases in dislocated markets of 2020. The primary or new issue market is also relatively more attractive as we are also seeing a general widening in spreads in new issue regulatory capital and community bank securities due to current market conditions. Now, I want to turn it over to Dana Staggs, president of the company, who will discuss the origination pipeline.
spk02: Thank you, Sanjay. In the third quarter, industry-wide regulatory capital origination was steady throughout the quarter, with an estimated issuance of $3 to $3.5 billion, bringing the year-to-date 2022 issuance to approximately $7 to $8.5 billion. The new issue market for REDCap is expected to meet 2021 issuance levels of $11 to $13 billion for 2022, as the asset class is increasingly considered a value-add core balance sheet management tool for large global banks. In the third quarter, we saw new issue spreads widen by approximately 150 to 200 basis points relative to the beginning of 2022. Regulatory capital continues to be one of the few asset classes that generated positive returns in the third quarter. However, as Sanjay mentioned, we continue to be opportunistic in our investment strategy to take advantage of volatile markets as we did in 2020, when during a short window, we were able to buy attractive regulatory capital investments at favorable discounts from forced sellers in the secondary market. Moving on to community bank investments in the third quarter, The community banking space new issue market was relatively quiet, as many banks who were able to take advantage of cheap financing in 2020 and 2021 and appear to be relatively well capitalized. We are waiting for further widening in this mostly fixed rate community banking security space as the Fed continues. Currently, the secondary market in this space is getting more attractive as rates widen to six. and 7% versus 3% to 4% for most of 2021. Now I will turn it back to Sanjay.
spk06: Thank you, Dana.
spk04: We firmly believe that during these volatile times, the company is well positioned to deliver superior financial results, benefiting from the strategic mix of floating rate red cap and fixed income community bank investments. We believe Aramark Financial is the only public company that offers the opportunity to participate in regulatory capital investments. With a strategy and with a stock at a 9.2% yield, we believe Aramark Financial continues to offer exceptional value to investors. Now I want to turn the call over to Pat Farrell, Chief Financial Officer of the company.
spk03: Thank you, Sanjay. 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 September 30th was $20.74 per share, down 20 cents from the prior quarter. The NAV is composed 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 $5.3 million, or 75 cents per share. Total expenses for the quarter were $2 million, or 29 cents per share, resulting in net investment income for the quarter of $3.3 million, or 46 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 NAV. the net realized capital gains from investment activities were approximately 4.7 million or 65 cents per share. The third component, changes in unrealized appreciation 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 6.6 million or 92 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 distributions. The regular cash distribution for the quarter was 39 cents per share. The distribution of 39 cents per share was paid on September 29th. In summary, we began the quarter with a net asset value of $20.94 per share. During the quarter, we generated net income of 3.3 million, net realized capital gains of approximately 4.7 million, and the unrealized value of the portfolio and foreign currency transactions decreased by 6.6 million. The sum of these components, reduced by a distribution of 39 cents per share, resulted in a net asset value of $20.74 per share on September 30th, which was down 20 cents from the prior quarter. We believe this NAV is a true representation of the value of the company. Although we don't believe we could 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 BDCs. In the third quarter, approximately 68% 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 of $212.3 million, consisting of total investments of $193.2 million, and cash, interest, and dividends receivable and prepaid assets totaling approximately $19.1 million. At quarter end, our dividend yield was approximately 9%. As of today, the dividend yield is approximately 9.2%. As was the case in prior years, our fourth quarter dividend to be declared by the Board of Directors in December will include any required annual tax distributions of income or capital gains from the fund. Based on year-to-date results, we may have a capital gain distribution as a result of realized gains during the year. The final amount of the total distribution will be based on the fourth quarter performance of the fund, as well as other factors. Now let me update you on our credit facility. On September 30th, the company had $62.3 million drawn from the facility, or 29% of total assets. As a registered investment company subject to the Investment Company Act, we may only borrow up to 33.3% of our total assets. Now I want to turn the call back over to Sanjay.
spk06: Thank you, Pat.
spk04: I would like to thank everyone on the call for listening in today. This will be the last conference call before the holidays, so I'd like to take the time to wish everyone a wonderful holiday season as we close out 2022. On behalf of the entire team at Aramark Financial, best wishes for the new year.
spk06: Good night and see you in 2023. The 2022 third quarter financial call for Arrowmark Financial has now concluded.
spk05: Thank you for attending today's presentation. You may now disconnect.
Disclaimer