ArrowMark Financial Corp.
Q2 2022 Earnings Call Transcript

Published: 6 Aug 2022

[Operator:]

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 Muraco, Investor Relations of ArrowMark Financial Corp.

[Julie Muraco:]

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 [phone] or e-mailing [e-mail]. Now I will turn the call over to Sanjai Bhonsle, Chief Executive Officer of ArrowMark Financial.

[Sanjai Bhonsle:]

Thank you, Julie. Good afternoon, and welcome to ArrowMark 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 ArrowMark 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. Before I begin, I want to recognize the appointment of Dana Staggs as President of ArrowMark Financial Corp. effective June 9, 2022. Dana has over 27 years of experience leading organizations. He has been with ArrowMark 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 on to the markets. During the second quarter, the equity and credit markets continue to experience volatility with the S&P 500 down 16% 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. Heightened fears of a recession, driven by high inflation, tightening Central Bank monetary policy, supply chain disruptions and geopolitical risks from the war in 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 point 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 obtain 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 a long-term view in mind, I want to put the macro factors affecting the markets into perspective when it comes to ArrowMark Financial and our underlying investments. ArrowMark Financial's portfolio is made up of securities, primarily issued by money center 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

[Dana Staggs:]

Thank you, Sanjai. In Q2, industry-wide regulatory capital origination was robust with an estimated $3 billion to $3.5 billion of issuance, bringing the year-to-date 2022 issuance to approximately $4 billion to $5 billion. The new issue market for reg cap is expected to meet or exceed 2021 issuance levels. Continued growth of the reg 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. The recent rise in subordinated loan interest rates have been primarily driven by recent increases in the five and 10-year treasury yield. 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 bank subordinated 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 Sanjai.

[Sanjai Bhonsle:]

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 reg cap and community bank investments. ArrowMark 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 ArrowMark 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.

[Pat Farrell:]

Thank you, Sanjai. 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 30 was $20.94 per share, down $0.50 from the prior quarter. The decline in NAV in part reflects the volatility of the credit market. NAV is comprised of four components

[Sanjai Bhonsle:]

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.

[Operator:]

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

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