Note 1 — Organization
ArrowMark Financial Corp.
(“AMFC” or the “Company”) is a Delaware corporation registered as a non-diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended, (the “Investment Company Act”) which commenced investment operations
on November 13, 2013. In addition, AMFC has elected to be treated for tax purposes as a regulated investment company (‘‘RIC’’)
under Subchapter M of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’).As an investment company, the
Company follows the accounting and reporting guidance of the FinancialAccounting Standards Board and theAccounting Standards CodificationTopic
946“Financial Services — Investment Companies.”
Investment
Objectives — ArrowMark Financial Corp.’s primary investment objective is to provide stockholders with current
income, and to a lesser extent, capital appreciation.There can be no assurance that the Company will achieve the investment objectives.
Investment
Strategies — The Company is focused on income generation, capital preservation, and providing risk-adjusted rates of
return. The Company attempts to achieve its investment objective through investment in preferred equity, debt and subordinated debt, structured
notes and securities, convertible securities, regulatory capital securities and common equity issued or structured by banks and financial
institutions including community banks, larger regional, national and money center banks domiciled in the United States and foreign and
global money center banks. (“banking-related securities”). The Company makes investments that will generally be expected to
pay the Company dividends and interest on a current basis and generate capital gains over time. The Company may seek to enhance the Company’s
returns through the use of warrants, options and other equity conversion features. The Company has a policy to invest, under normal circumstances,
at least 80% of the value of its net assets plus the amount of any borrowings for investment purposes in such banking-related securities.
The Company focuses its
portfolio on making long-term, passive, non-control investments in the banking sector, including “regulatory capital securities”
which are securities issued or structured by banks seeking capital that is treated more favorably under banking regulations than other
types of capital, acquisitions and other refinancing activities regulatory capital securities are issued or structured by a bank to maintain
or reduce its regulatory capital requirements by transferring certain credit risks to investors. Regulatory capital securities may be
structured in a variety of ways and are highly bespoke to the needs of the bank or other deposit-taking institution involved. Regulatory
capital securities may be in the form of structured notes (e.g., credit-linked notes), contingent convertible securities, and other structured
products or transactions. The Company intends to continue to direct investments in numerous issuers differentiated by asset size, business
models and geographies. The Company also may invest in an option strategy that will normally consist of writing (selling) call options
on bank equity securities in the Company’s portfolio (“covered calls”).The Company invests in foreign securities and
the Company is not limited in the amount of assets the Company may invest in such foreign securities.
The Company indirectly
invests in securities issued or structured by banks through structured securities and credit derivatives, including collateralized loan
obligations (CLOs) and credit-linked notes. The Company currently invests in credit-linked notes for which the performance and payment
of principal and interest is tied to a reference asset such as a pool of loans originated by a bank and held on its
|
12
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ArrowMark
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|
balance sheet. The Company
also invests in equity and junior debt tranches of CLOs, and other debt securitizations, that are collateralized by a portfolio consisting
primarily of unsecured, subordinated loans made to (and, to a lesser extent, unsecured, subordinated debentures and notes issued by) community
banks or savings institutions or their respective holding companies. The Company may also invest in other securities and instruments that
are related to these investments or that the Adviser believes are consistent with the Company’s investment objectives, including
senior debt tranches of CLOs and loan accumulation facilities. These indirect investments provide exposure to and focus on the same types
of direct investments that the Company makes in banking companies and, accordingly, the Company’s investments in structured securities
(such as credit-linked notes and CLOs) and credit derivatives that provide exposure to the banking industry are considered an investment
in banking securities. The loans or other assets pledged as collateral in these securitizations may not be publicly rated by any rating
agency, and may have greater credit and liquidity risks than investment-grade corporate obligations that are publicly rated. The Company
believes that the use of such instruments complements the Company’s overall strategy and enhance the diversity of the Company’s
holdings.
The Company may also
incur additional leverage to the extent permitted by the Investment Company Act. Although the Company normally seeks to invest substantially
all of the Company’s assets in banking-related securities, the Company reserves the ability to invest up to 20% of the Company’s
assets in other types of securities and instruments.
Additionally,the Company
may take temporary defensive positions that are inconsistent with the Company’s investment strategy in attempting to respond to
adverse market, economic, political or other conditions. If the Company does so, the Company may not achieve the Company’s investment
objective.The Company may also choose not to take defensive positions.
Consolidation
of Disregarded Entities — The Company makes investments in securities through Marshall Holdings II, Limited and Marshall
Holdings III, Limited, both organized under the laws of the Cayman Islands (the “Disregarded Entities”).The consolidated financial
statements of the Company include all assets and liabilities of the Disregarded Entities. All inter-company accounts and transactions
have been eliminated. As of June 30, 2024, the net assets of the Designated Entities were $103,127,729, which represented 67.14% of the
Fund’s net assets.
Note 2 — Significant accounting
policies
The following is a summary
of significant accounting policies consistently followed by AMFC in the preparation of its financial statements. The preparation of the
financial statements is in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ) and
requires the Board of Directors, inclusive of the sub-committees, and ArrowMark Asset Management, LLC (the Advisor ) to make estimates
and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Cash and Cash
Equivalents — AMFC considers all highly liquid debt instruments with a maturity of three months or less at the time
of purchase to be cash equivalents.
InvestmentValuation–The
most significant estimates made in the preparation of the financial statements of ArrowMark Financial Corp. are the valuation of equity
and debt investments and the effective yield calculation with respect to certain debt securities, as well as the related amounts of unrealized
appreciation and depreciation of investments recorded. The Company believes that there is no single definitive method for determining
fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances
of each portfolio investment while employing a consistently applied valuation process for the types of investments that AMFC makes. The
Company is required to specifically fair value each individual investment on a quarterly basis.
|
Semi-Annual
Report | ArrowMark Financial Corp. |
13 |
The Company complies with
ASC 820-10, Fair Value Measurements and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements.
ASC 820-10 clarified the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure
assets and liabilities in interim and annual periods subsequent to initial recognition. ASC 820-10 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between
market participants at the measurement date. ASC 820-10 also establishes the following three-tier fair value hierarchy:
|
• |
Level 1— Quoted prices in active markets for identical securities; |
|
• |
Level 2 — Other significant observable inputs. These inputs may include
quoted prices for the identical instrument on an active market, prices for similar instruments, interest rates, prepayment speeds, credit
risk, yield curves, default rates, and similar data; and |
|
• |
Level 3 — Significant unobservable inputs, including the Company’s
own determinations about the assumptions that a market participant would use in valuing the asset or liability, and that would be based
on the best information available. |
To the extent securities
owned by the Company are actively traded and valuation adjustments are not applied, they are categorized in Level 1 of the fair value
hierarchy. Securities traded on inactive markets or valued by reference to similar instruments are generally categorized in Level 2 of
the fair value hierarchy.
The availability of valuation
techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including the type of
security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market,the determination of
fair value requires more judgement. Those estimated values do not necessarily represent the amounts that may be ultimately realized due
to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those
estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed.
Accordingly, the degree of judgment exercised by AMFC in determining fair value is greatest for securities categorized in Level 3. In
certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure
purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls, is determined based on
the lowest level input that is significant to the fair value measurement. The valuation levels are not necessarily an indication of the
risk associated with investing in those securities.
Fair value is a market-based
measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions
are not readily available, AMFC’s own assumptions are set to reflect those that market participants would use in pricing the asset
or liability at the measurement date. AMFC uses prices and inputs that are current as of the measurement date,including periods of market
dislocation. In periods of market dislocation,the observability of prices and inputs may be reduced for many securities. This condition
could cause a security to be reclassified to a lower level within the fair value hierarchy.
AMFC will determine fair
value of its assets and liabilities in accordance with valuation procedures adopted by its Board of Directors. The Company may utilize
the services of one or more regionally or nationally recognized independent valuation firms to help it determine the value of each investment
for which a market price is not available. AMFC’s Board of Directors will also review valuations of such investments provided by
the Advisor. To the extent AMFC invests in securities for which market quotations are readily available, such market value will be used
to value those securities. If a market
|
14
|
ArrowMark
Financial Corp.| Semi-Annual Report |
|
value cannot be obtained
or if the Advisor determines that the value of a security as so obtained does not represent a fair value as of the measurement date (due
to a significant development subsequent to the time its price is determined or otherwise),fair value shall be determined pursuant to the
methodologies established by the Board of Directors. In making these determinations, the Company may engage an independent valuation firm
from time to time to assist in determining the fair value of our investments. The methods for valuing these investments may include fundamental
analysis, discounts from market prices of similar securities, purchase price of securities, subsequent private transactions in the security
or related securities, or discounts applied to the nature and duration of restrictions on the disposition of the securities, as well as
a combination of these and other factors.
Structured
Debt Securities– AMFC may acquire equity or preferred equity in structured debt securities or other structured financings.
In valuing such investments, AMFC attempts to obtain a minimum of two marks provided by recognized industry brokers as a primary source,
supplemented by actual trades executed in the market at or around period-end, as well as the marks provided by the broker who arranges
transactions in such investment vehicles. Any event adversely affecting the value of such structured debt securities and other structured
financings, including events that impact the value of the underlying collateral held by such vehicles, would be magnified to the extent
leverage is utilized. AMFC’s investment in structured debt securities and other structured financings that utilize leverage may
make it more likely that substantial changes in the Company’s net asset value (“NAV”) will occur.
The fair value of the structured
debt securities is determined using market price quotations (where observable) and other observable market inputs. When using market price
quotations from brokers, fair value is calculated using the average of two or more indicative broker quotes obtained as of the valuation
date. When quotations are unobservable,internal valuation models (typically including discounted cash flow analysis and comparable analysis)
are employed. Structured debt securities are generally categorized as Level 2 or 3 in the fair value hierarchy, depending on the availability
of broker quotes and observable inputs. At June 30, 2024, AMFC’s investment in Community Funding 2018, LLC was valued on the basis
of the average of two broker quotes.
Service fees are paid
to StoneCastle Investment Management, LLC, (“The Servicer”).The Servicer rebates the entire service fee to AMFC quarterly.
For the six months ended June 30, 2024 this amounted to $58,297 relating to Community Funding 2018, LLC.
Regulatory Capital
Relief Securities. Regulatory capital relief securities are senior unsecured debt obligations that are credit linked to the performance
of a reference portfolio of certain loan related claims on corporate and similar entities. The fair value of regulatory capital relief
securities is generally based on broker quotes. Regulatory capital relief securities are generally categorized as Level 2 or 3 in the
fair value hierarchy, depending on the availability of broker quotes.
Preferred and Trust
Preferred Securities. The fair value of preferred securities and trust preferred securities is generally determined using market
price quotations (where observable) and other observable market inputs (including recently executed transactions). When using market price
quotations from brokers, fair value is calculated using the average of two or more indicative broker quotes obtained as of the valuation
date. When quotations are unobservable, internal valuation models (typically including discounted cash flow analysis and comparable analysis)
are employed. Perpetual preferred and trust preferred securities are generally categorized as Level 2 or 3 in the fair value hierarchy,
depending on the availability of observable inputs.
Debt Securities.
Under procedures established by the Board of Directors, we value secured debt, unsecured debt, senior term loans, subordinated term loans
and other debt securities, for which market quotations are readily available, at such market quotations (unless they are deemed not to
represent fair value).We attempt to obtain market quotations from at least two brokers if available. If not available
|
Semi-Annual
Report | ArrowMark Financial Corp. |
15 |
or when market quotations are deemed not to represent
fair value, we typically utilize independent third party valuation firms to assist us in determining fair value. Our independent valuation
firms consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations for
such Level 2 and Level 3 categorized assets. Investments that are not publicly traded or whose market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction of the Board of Directors. Such determination of fair value
may involve subjective judgments and estimates.
Equity Securities. AMFC may invest
in equity securities (including exchange traded funds) for which bid and ask prices can be observed in the marketplace. Bid prices reflect
the highest price that the marketplace participants are willing to pay for an asset. Ask prices represent the lowest price that the marketplace
participants are willing to accept for an asset. The Company’s policy for listed securities for which no sale was reported on that
date is generally to value the security using the last reported “bid” price if held long, and last reported “ask”
price if sold short. Equity securities are generally categorized as Level 1 or 2 in the fair value hierarchy, depending on trading volume
levels.
Forward Contracts. Forward contracts
are traded on the OTC market. The fair value of forward contracts is determined using observable inputs, such as currency exchange rates
or commodity prices, applied to notional amounts stated in the applicable contracts. Forward contracts are generally categorized in Level
2 of the fair value hierarchy.
The Company’s assets measured at fair value subject
to the disclosure requirements of ASC 820-10-35 at June 30, 2024, were as follows:
| |
|
TOTAL FAIR
VALUE AT 6-30-24 |
|
|
LEVEL 1
QUOTED PRICE |
|
|
LEVEL 2
SIGNIFICANT
OBSERVABLE INPUTS |
|
|
LEVEL 3
SIGNIFICANT
UNOBSERVABLE
INPUTS |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Term
Loans |
|
$ |
10,091,750 |
|
|
$ |
— |
|
|
$ |
1,941,750 |
|
|
$ |
8,150,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Structured Debt
Security |
|
|
11,091,504 |
|
|
|
— |
|
|
|
11,091,504 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Regulatory Capital
Relief Securities |
|
|
183,755,901 |
|
|
|
— |
|
|
|
102,639,311 |
|
|
|
81,116,590 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Trust Preferred
and Preferred Securities |
|
|
1,793,400 |
|
|
|
— |
|
|
|
— |
|
|
|
1,793,400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Money Market Fund |
|
|
740,039 |
|
|
|
740,039 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign Currency Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Forward
Foreign Currency Contracts |
|
|
11,336 |
|
|
|
— |
|
|
|
11,336 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Assets |
|
$ |
207,483,930 |
|
|
$ |
740,039 |
|
|
$ |
115,683,901 |
|
|
$ |
91,059,990 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
ArrowMark
Financial Corp.| Semi-Annual Report |
|
| |
|
TOTAL FAIR
VALUE AT 6-30-24 |
|
|
LEVEL 1
QUOTED PRICE |
|
|
LEVEL 2
SIGNIFICANT
OBSERVABLE INPUTS |
|
|
LEVEL 3
SIGNIFICANT
UNOBSERVABLE
INPUTS |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign Currency Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Forward Foreign Currency
Contracts |
|
$ |
(95,917 |
) |
|
$ |
— |
|
|
$ |
(95,917 |
) |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Liabilities |
|
$ |
(95,917 |
) |
|
$ |
— |
|
|
$ |
(95,917 |
) |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Level 3 categorized assets listed above have been
valued via the use of a) independent third party valuation firms, or, b) fair valued as determined in good faith by the Board of Directors,
in accordance with procedures established by the Board of Directors.
For fair valuations using significant unobservable inputs,U.S.
GAAP requires AMFC to present a reconciliation of the beginning to ending balances for reported fair values that presents changes attributable
to total realized and unrealized gains or losses, purchase and sales, and transfers in and out of Level 3 during the period. Transfers
in and out between levels are based on values at the end of a period. U.S. GAAP also requires AMFC to disclose amounts and reasons for
all transfers in and out of Level 1 and Level 2 fair value measurements. A reconciliation of Level 3 investments is presented below:
| |
|
TERM
LOANS |
|
|
REGULATORY
CAPITAL
RELIEF
SECURITIES |
|
|
TRUST
PREFERRED
AND
PREFERRED
SECURITIES |
|
|
TOTAL |
|
| Balance at December 31, 2023 |
|
$ |
— |
|
|
$ |
83,962,068 |
|
|
$ |
— |
|
|
$ |
83,962,068 |
|
| Realized loss including earnings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Net change in unrealized depreciation on investments |
|
|
75,000 |
|
|
|
(1,915,748 |
) |
|
|
— |
|
|
|
(1,840,748 |
) |
| Purchases |
|
|
— |
|
|
|
23,204,601 |
|
|
|
— |
|
|
|
23,204,601 |
|
| Sales |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Transfers in |
|
|
8,075,000 |
|
|
|
4,792,276 |
|
|
|
1,793,400 |
|
|
|
14,660,676 |
|
| Transfers out |
|
|
— |
|
|
|
(28,926,607 |
) |
|
|
— |
|
|
|
(28,926,607 |
) |
| Balance at June 30, 2024 |
|
$ |
8,150,000 |
|
|
$ |
81,116,590 |
|
|
$ |
1,793,400 |
|
|
$ |
91,059,990 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net change in unrealized depreciation on Level 3 securities held as
of June 30, 2024 was $(1,840,748).
| |
|
|
FAIR
VALUE AT
06-30-24 |
|
|
|
VALUATION
TECHNIQUES |
|
UNOBSERVABLE
INPUTS |
|
|
ASSUMPTIONS |
|
|
IMPACT
TO
VALUATION FROM AN
INCREASE TO INPUT |
|
| Term
Loans |
|
|
$ |
8,150,000 |
|
|
|
Broker Quote |
|
— |
|
|
— |
|
|
— |
|
| Regulatory Capital Relief Securities |
|
|
|
81,116,590 |
|
|
|
Broker Quote |
|
— |
|
|
— |
|
|
— |
|
| Trust Preferred and Preferred Securities |
|
|
|
1,793,400 |
|
|
|
Broker Quote |
|
— |
|
|
— |
|
|
— |
|
| |
|
|
$ |
91,059,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with Regulation S-X Rules 3-09 and 4-08(g),
the Company evaluates its unconsolidated subsidiary-Community Funding 2018, LLC ( CF 2018 ) as a significant subsidiary under the respective
rules. However, as of June 30,2024, CF 2018 was not considered a significant subsidiary under Regulation
| |
Semi-Annual
Report | ArrowMark Financial Corp. |
17 |
S-X Rule 1-02(w).
SecuritiesTransactions, Investment Income
and Expenses — Securities transactions are recorded on trade date for accounting and financial statement preparation
purposes. Realized gains and losses on investments sold are recorded on the identified cost basis. Interest income is recorded on the
accrual basis. Accretion of discounts and amortization of premiums are recorded on a daily basis using the effective yield method except
for short term securities, which records discounts and premiums on a straight-line basis. Dividends are recorded on the ex-dividend date.
Dividends and Distributions to Shareholders
— Dividends from net investment income, if any, are declared and paid quarterly. Distributions, if any, of net short-term
capital gain and net capital gain (the excess of net long-term capital gain over the short-term capital loss) realized by AMFC, after
deducting any available capital loss carryovers are declared and paid to shareholders at least annually. Income dividends and capital
gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S.GAAP. These differences
include the treatment of non-taxable
|
18
|
ArrowMark
Financial Corp.| Semi-Annual Report |
|
dividends, losses deferred due to wash sales and excise
tax regulations. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications within
the components of net assets.
Forward Foreign Currency Transactions/Contracts
— The Fund may enter into forward foreign currency contracts to hedge against foreign currency exchange rate risk on their
non-U.S. dollar denominated securities or to facilitate settlement of foreign currency denominated portfolio transactions. A forward foreign
currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The contract is marked-to-market
daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is extinguished,
through either delivery or offset by entering into another forward foreign currency contract, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was extinguished.
Forward foreign currency contracts involve elements of
market risk in excess of the amounts reflected in the Statements of Assets and Liabilities. The Fund bears the risk of an unfavorable
change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts
from the potential inability of the counter parties to meet the terms of their contracts. For the six months ended June 30, 2024, the
Fund’s average monthly volume of forward foreign currency contracts was as follows:
| |
Forward
Foreign |
Forward
Foreign |
|
| |
Currency |
Currency |
|
| |
Contracts
— |
Contracts
— |
|
| |
Purchased |
Sold |
|
| |
$52,698,301 |
$61,906,507 |
|
Foreign Currency Translation —
The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in
a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end.The effect of changes in foreign currency
exchange rates on investments is included within net realized and unrealized gain (loss) on investments. Changes in the value of other
assets and liabilities as a result of fluctuations in foreign exchange rates are included in the Statement of Operations within net change
in unrealized gain (loss) on foreign currency translations. Transactions denominated in foreign currencies are translated into U.S. dollars
on the date the transaction occurred, the effects of which are included within net realized gain (loss) on foreign currency.
Master Netting Agreement —
In order to define its contractual rights and to secure rights that will help mitigate its counterparty risk, the Fund has entered into
an International Swaps and Derivatives Association, Inc. MasterAgreement (“ISDA MasterAgreement”).An ISDA MasterAgreement
is a bilateral agreement between the Fund and a counterparty that governs certain OTC derivatives and typically contains, among other
things, collateral posting terms and netting provisions in the event of a default and/or termination event. Under an ISDA Master Agreement,
the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or
receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically
permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. Bankruptcy or insolvency
laws of a particular jurisdiction may restrict or prohibit the right of offset in bankruptcy, insolvency or other events. In addition,
certain ISDA Master Agreements allow counterparties to terminate derivative contracts prior to maturity in the event the Fund’s
net assets decline by a stated percentage or the Fund fails to meet the terms of its ISDA Master Agreements. The result would cause the
Fund to accelerate payment of any net liability owed to the counterparty.
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Semi-Annual
Report | ArrowMark Financial Corp. |
19 |
Collateral Requirements —
For derivatives traded under an ISDA Master Agreement, the collateral requirements are typically calculated by netting the mark-to-market
amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Fund
and the counterparty. Cash collateral that has been pledged to cover obligations of the Fund and cash collateral received from the counterparty,
if any, is reported separately on the Statement of Assets and Liabilities as cash pledged as collateral and cash received as collateral,
respectively. Non-cash collateral pledged by the Fund, if any, is noted in the Portfolio of Investments. Generally, the amount of collateral
due from or to a counterparty is subject to a certain minimum transfer amount threshold before a transfer is required, which is determined
at the close of business of the Fund. Any additional required collateral is delivered to/pledged by the Fund on the next business day.Typically,
the counterparty is not permitted to sell, re-pledge or use cash and non-cash collateral it receives. The Fund generally agrees not to
use non-cash collateral that it receives but may, absent default or certain other circumstances defined in the underlying ISDA Master
Agreement, be permitted to use cash collateral received. In such cases, interest may be paid pursuant to the collateral arrangement with
the counterparty. To the extent amounts due to the Fund from its counterparties are not fully collateralized, they bear the risk of loss
from counterparty nonperformance. Likewise, to the extent the Fund has delivered collateral to a counterparty and stands ready to perform
under the terms of its agreement with such counterparty, it bears the risk of loss from a counterparty in the amount of the value of the
collateral in the even the counterparty fails to return such collateral. Based on the terms of agreements, collateral may not be required
for all derivative contracts. For financial reporting purposes, the Fund does not offset derivative assets and derivative liabilities
that are subject to netting arrangements, if any, in the Statements of Assets and Liabilities.
The following tables present derivative assets and liabilities
net of amounts available for offset under a master netting agreement and any related collateral received or posted by the Fund for forward
foreign currency contracts as of June 30, 2024:
| |
Derivative |
Derivative
Available |
Collateral |
Derivative |
| Counterparty |
Assets
- Gross |
for Offset |
Received |
Assets
- Net* |
| |
|
|
|
|
| NatWest |
$11,336 |
$(11,336) |
$— |
$— |
|
* |
Net amount represents the net receivable from the counterparty in the event of a default. |
| |
Derivative |
Derivative
Available |
Collateral |
Derivative |
| Counterparty |
Liability
- Gross |
for Offset |
Posted |
Liability
- Net** |
| |
|
|
|
|
| NatWest |
$95,917 |
$(11,336) |
$— |
$84,581 |
|
** |
Net amount represents the net payable to the counterparty in the event of a default. |
Currency Risk — The Fund
invests in securities of foreign issuers, including American Depositary Receipts. These markets are subject to special risks associated
with foreign investments not typically associated with investing in U.S. markets. Because the foreign securities in which the Fund may
invest generally trade in currencies other than the U.S. dollar, changes in currency exchange rates will affect the Fund’s NAV,
the value of dividends and interest earned and gains and losses realized on the sale of securities. Because the NAV for the Fund is determined
on the basis of U.S. dollars, the Fund may lose money by investing in a foreign security if the local currency of a foreign market depreciates
against the U.S. dollar, even if the local currency value of the Fund’s holdings goes up. Generally, a strong U.S. dollar relative
to these other currencies will adversely affect the value of the Fund’s holdings in foreign securities.
|
20
|
ArrowMark
Financial Corp.| Semi-Annual Report |
|
Foreign Securities Market Risk —
Securities of many non-U.S. companies may be less liquid and their prices more volatile than securities of comparable U.S. companies.
Securities of companies traded in many countries outside the U.S., particularly emerging markets countries, may be subject to further
risks due to the inexperience of local investment professionals and financial institutions, the possibility of permanent or temporary
termination of trading and greater spreads between bid and asked prices of securities. In addition, non-U.S. stock exchanges and investment
professionals are subject to less governmental regulation, and commissions may be higher than in the United States. Also, there may be
delays in the settlement of non-U.S. stock exchange transactions.
DisclosureAbout Derivative Instruments and
HedgingActivities — The following tables provide quantitative disclosures about fair value amounts of, gains and losses
on, the Fund’s derivative instruments as of June 30, 2024.
The following table lists the fair values of the Fund’s
derivative holdings as of June 30, 2024 grouped by contract type and risk exposure category.
| |
|
Balance
Sheet |
|
Equity |
|
Foreign
Currency |
|
|
|
|
| Derivative
Type |
|
Location |
|
Contracts |
|
Contracts |
|
|
Total |
|
| |
|
Asset
Derivatives |
|
|
|
|
|
|
|
|
| Forward
foreign currency contracts |
|
Unrealized
appreciation on forward foreign currency contracts |
|
$— |
|
$ |
11,336 |
|
|
$ |
11,336 |
|
| Total
Value - Assets |
|
|
|
$— |
|
$ |
11,336 |
|
|
$ |
11,336 |
|
| |
|
Liabilities
Derivatives |
|
|
|
|
|
|
|
|
|
|
| Forward
Foreign Currency Contracts |
|
Unrealized
depreciation on forward foreign currency contracts |
|
$— |
|
$ |
(95,917 |
) |
|
$ |
(95,917 |
) |
| Total
Value - Liabilities |
|
|
|
$— |
|
$ |
(95,917 |
) |
|
$ |
(95,917 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
The following table lists the amounts of realized gains
or losses included in net increase in net assets resulting from operations for the six months ended June 30, 2024, grouped by contract
type and risk exposure.
| |
|
Income
Statement |
|
Equity |
|
Foreign
Currency |
|
|
|
|
| Derivative
Type |
|
Location |
|
Contracts |
|
Contracts |
|
|
Total |
|
| |
|
Realized
Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Forward
Foreign Currency Contracts |
|
Net
realized gain from forward foreign currency contracts |
|
$— |
|
$ |
2,174,270 |
|
|
$ |
2,174,270 |
|
| Total
Realized Gain (Loss) |
|
|
|
$— |
|
$ |
2,174,270 |
|
|
$ |
2,174,270 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The following table lists the amounts of change in
unrealized appreciation (depreciation) included in net increase in net assets resulting from operations for the six months ended June
30, 2024, grouped by contract type and risk exposure.
| |
|
Income
Statement |
|
Equity |
|
Foreign
Currency |
|
|
|
|
| Derivative
Type |
|
Location |
|
Contracts |
|
Contracts |
|
|
Total |
|
| |
|
Change
in appreciation (depreciation) |
|
|
|
|
|
|
|
|
|
|
| Forward
Foreign Currency Contracts |
|
Net
change in unrealized depreciation on forward foreign currency contracts |
|
$— |
|
$ |
(335,245 |
) |
|
$ |
(335,245 |
) |
| Total
change in depreciation |
|
|
|
$— |
|
$ |
(335,245 |
) |
|
$ |
(335,245 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Note 3 — Investment Advisory Fee and Other Fee Arrangements
ArrowMark Asset Management, LLC, serves as investment
advisor to AMFC pursuant to a management agreement with AMFC (the “Management Agreement”). For its services as the investment
advisor, AMFC pays the Advisor a fee at the annual rate of 1.75% of managed assets. AMFC will pay the
| |
Semi-Annual
Report | ArrowMark Financial Corp. |
21 |
management fee quarterly
in arrears, and it will be equal to 0.4375% (1.75% annualized) of our managed assets at the end of such quarter, including cash and cash
equivalents and assets purchased with borrowings.
In
addition, for the period ended June 30, 2024, the Advisor reimbursed the Fund $41,468 for expenses related to Investor Relations Fees,
representing approximately 0.03% of net assets.
AMFC
currently pays each Director who is not an officer or employee of the Advisor a fee of $55,000 per annum, plus $1,500 for each in-person
meeting of the Board of Directors or committee meeting. The chairman of AMFC’s audit committee, nominating committee and the Lead
Independent Director are each paid an additional $10,000 per year. Directors do not receive any pension or retirement plan benefits and
are not part of any profit sharing plan. Interested Directors do not receive any compensation from AMFC. AMFC has incurred $105,919 of
Directors fees for the six months ended June 30, 2024.
Note
4 — Purchases and Sales and Redemptions of Securities
For
the six months ended June 30, 2024, (i) the cost of purchases was $21,396,595 (ii) the sales and redemptions of securities was $8,012,690.
Note
5 — Federal Tax Information
The
Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Internal Revenue Code and, as such, to not
be subject to federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify for RIC tax treatment,
AMFC is required to distribute at least 90% of its investment company taxable income, as defined by the Code.
Because
federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance
with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences
may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statement to reflect their
tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.
Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
AMFC
has followed the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires AMFC to determine
whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. AMFC has determined that there was no effect on the financial statements from
following this authoritative guidance. In the normal course of business, AMFC is subject to examination by federal, state and local jurisdictions,
where applicable, for tax years for which applicable statutes of limitations have not expired.
As
of December 31, 2023, the components of distributable earnings on a tax basis were as follows:
| Capital
Loss Carryforwards |
$ |
(5,090,959 |
) |
| Unrealized
Depreciation* |
|
(7,114,901 |
) |
| Undistributed
Ordinary Income |
|
12,261,646 |
|
| Other |
|
(3,911,862 |
) |
| Total |
$ |
(3,856,076 |
) |
| |
|
|
|
* Includes
unrealized depreciation on foreign currency translations.
For the year ended December
31, 2023, the tax character of distributions paid by the Company was $12,220,585 of ordinary income dividends and $2,987,081 of long-term
capital gains. For the year
| 22 |
ArrowMark
Financial Corp.| Semi-Annual Report |
|
ended
December 31, 2022, the tax character of distributions paid by the Company was $11,702,625 of ordinary income dividends. Distributions
from net investment income and short-term capital gains are treated as ordinary income for federal tax purposes.
The
Company declared a $0.45 per share dividend on March 6, 2024 and June 14, 2024, which was paid on March 28, 2024 and June 28, 2024, respectively.
At
June 30, 2024, the federal tax cost, aggregate gross unrealized appreciation and depreciation of securities held by AMFC were as follows:
| Federal
tax cost |
$ |
217,480,430 |
|
| Gross
unrealized appreciation |
|
1,834,950 |
|
| Gross
unrealized depreciation |
|
(11,842,786 |
) |
| Net
unrealized depreciation |
$ |
(10,007,836 |
) |
| |
|
|
|
Pursuant
to federal income tax rules applicable to regulated investment companies, AMFC may elect to treat certain capital losses up to and including
December 31 as occurring on the first day of the following tax year. For the period after October 31, 2023 and ending December 31, 2023,
any amount of losses elected within the tax year will not be recognized for federal income tax purposes until 2024. For the year ended
December 31, 2023,AMFC had no ordinary income or long-term capital loss deferrals.
Accumulated
capital losses represent net capital loss carry forwards as of December 31, 2023 that may be available to offset future realized capital
gains and thereby reduce future capital gains distributions. AMFC is permitted to carry forward capital losses incurred for an unlimited
period. Additionally, capital losses that are carried forward will retain their character as either short-term or long-term capital losses.
For the year ended December 31, 2023, AMFC had capital loss carryforwards of $5,090,959, of which $723,044 are short-term losses and $4,637,915
are long-term losses.
Note
6 — Risk Considerations
Risks
are inherent in all investing. The following summarizes some, but not all, of the risks that should be considered for the Company. For
additional information about the risks associated with investing in the Company, please see the Company’s prospectus as well as
other Company regulatory filings.
Investment
and Market Risk — An investment in the Company’s common shares (“Common Shares”) is subject to investment
risk, including the possible loss of the entire principal invested. Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Company dividends and distributions. The Company expects to utilize leverage,
which will magnify investment risk.
Preferred
and Debt Securities Risk — Preferred and debt securities in which the Company invests are subject to various risks,
including credit risk, interest rate risk, call/prepayment risk and reinvestment risk. In addition, preferred securities are subject to
certain other risks, including deferral and omission risk, subordination risk, limited voting rights risk and special redemption rights
risk.
Credit
Risk — The Company is subject to credit risk, which is the risk that an issuer of a security may be unable or unwilling
to make dividend, interest and principal payments when due and the related risk that the value of a security may decline because of concerns
about the issuer’s ability or willingness to make such payments.
Leverage
Risk — The use of leverage by the Company can magnify the effect of any losses. If the income and gains from the securities
and investments purchased with leverage proceeds do not cover the cost of leverage, the return on the Common Shares will be less than
if leverage had not been
| |
Semi-Annual
Report | ArrowMark Financial Corp. |
23 |
used.
Moreover, leverage involves risks and special considerations for holders of Common Shares including the likelihood of greater volatility
of net asset value and market price of the Common Shares than a comparable portfolio without leverage,and the risk that fluctuations in
interest rates on reverse repurchase agreements, borrowings and short-term debt or in the dividend rates on any preferred shares issued
by the Company will reduce the return to the holders of Common Shares or will result in fluctuations in the dividends paid on the Common
Shares. There is no assurance that a leveraging strategy will be successful. See Note 7 for additional information on leverage.
Call/Prepayment
and Reinvestment Risk — If an issuer of a security exercises an option to redeem its issue at par or prepay principal
earlier than scheduled, the Company may be forced to reinvest in lower yielding securities. A decline in income could affect the Common
Shares’ market price or the overall return of the Company.
Risks
of Concentration in the Banking industry/Financial Sector — Because the Company concentrates in the banking industry
and may invest up to 100% of its managed assets in the banking industry and financials sector, it will be more susceptible to adverse
economic or regulatory occurrences affecting the banking industry and financials sector, such as changes in interest rates, loan concentration
and competition.
Regulatory
Risk — Financial institutions, including community banks, are subject to various state and federal banking regulations
that impact how they conduct business, including but not limited to how they obtain funding. Changes to these regulations could have an
adverse effect on their operations and operating results and our investments. We expect to make long-term investments in financial institutions
that are subject to various state and federal regulations and oversight. Congress, state legislatures and the various bank regulatory
agencies frequently introduce proposals to change the laws and regulations governing the banking industry in response to the Dodd-Frank
Act, Consumer Financial Protection Bureau (the “CFPB”) rulemaking or otherwise. The likelihood and timing of any proposals
or legislation and the impact they might have on our investments in financial institutions affected by such changes cannot be determined
and any such changes may be adverse to our investments. Federal banking regulators recently proposed amended regulatory capital regulations
in response to The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and Basel III protocols
which would impose even more stringent capital requirements. In the event that a regulated bank falls below certain capital adequacy standards,
it may become subject to regulatory intervention including,but not limited to,being placed into a Federal Deposit Insurance Corporation
( FDIC )-administered receivership or conservatorship. The effect of inadequate capital can have a potentially adverse consequence on
the institution’s financial condition, its ability to operate as a going concern and its ability to operate as a regulated financial
institution and may have a material adverse impact on our investments.
Interest
Rate Risk — The Company is subject to interest rate risk, which is the risk that the preferred and debt securities
in which the Company invests will decline in value because of rising market interest rates.
Convertible
Securities/Contingent Convertible Securities Risk — The market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature,
the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock. Contingent
convertible securities provide for mandatory conversion into common stock of the issuer under certain circumstances. Since the common
stock of the issuer may not pay a dividend, investors in these instruments could experience a reduced income rate, potentially to zero;
and conversion would deepen the subordination of the investor, hence worsening standing in a bankruptcy. In addition, some such instruments
have a set stock conversion rate that would cause a reduction in value of the security if the price of the stock is below the conversion
price on the conversion date.
| 24 |
ArrowMark
Financial Corp.| Semi-Annual Report |
|
Illiquid
and Restricted Securities Risk — Investment of the Company’s assets in illiquid and restricted securities may
restrict the Company’s ability to take advantage of market opportunities. Illiquid and restricted securities may be difficult to
dispose of at a fair price at the times when the Company believes it is desirable to do so. The market price of illiquid and restricted
securities generally is more volatile than that of more liquid securities, which may adversely affect the price that the Company pays
for or recovers upon the sale of such securities. Illiquid and restricted securities are also more difficult to value, especially in challenging
markets. The risks associated with illiquid and restricted securities may be particularly acute in situations in which the Company’s
operations require cash and could result in the Company borrowing to meet its short-term needs or incurring losses on the sale of illiquid
or restricted securities.
Regulatory
Capital Relief Securities Risk — Regulatory capital relief securities are subject to several risks. In particular,
to all capital securities, banking regulators could change or amend existing banking regulations which could affect the regulatory treatment
of regulatory capital relief securities, where stricter regulation could make regulatory capital relief securities less desirable, or
undesirable, for banks to issue, reducing the supply of new investments. Should an adverse regulatory development occur in the future,
it would likely result in the bank issuer of such securities being able to redeem an investment early, which subjects the Company to reinvestment
risk. Regulatory capital relief securities remain subject to the same sector specific and other risks as any banking-related investment
that the Company may acquire, including, but not limited to, credit risk, interest rate risk, prepayments, adverse changes in market value
or liquidity and the quality of the loans extended by each bank to its clients.
Note
7 — Revolving Credit Agreement
The
Company has utilized a revolving credit agreement with Texas Capital Bank, located in Dallas, Texas. (the “Credit Agreement”
or “Facility”) since June 9, 2014. The Credit Agreement has been modified since then to reflect changes in borrowing amounts
and lending terms.
The
most recent modifications are as follows:
On
May 25, 2017, the Company amended its Credit Agreement to the following terms:
|
● |
The
cost of the Facility has decreased to a significantly lower credit spread of LIBOR +2.35%, down from LIBOR +2.85%. |
|
● |
The
maturity date of the facility has been extended for five years to May 16, 2022. |
|
● |
The
size of the Facility has been adjusted from $70 million to $62 million. |
|
● |
The
Company is charged a fee of 0.50% on any undrawn commitment balance. |
|
● |
The
Company was no longer required to maintain a deposit account of $3.5 million. |
On
May 25, 2022, the Company amended the following terms of its Credit Agreement:
|
● |
The
maturity date of the Facility was extended to May 27, 2025 (which may be extended until May 27, 2026 at the option of the Company). |
|
● |
The
maximum size of the Facility was increased from $62 million to $70 million and the cost of the Facility was priced at Secured Overnight
Funding Rate ( SOFR ) + 2.61%. |
|
● |
At
closing, two additional lenders joined Texas Capital Bank as the lending group |
The
CreditAgreement contains customary covenants, negative covenants, and default provisions, including covenants that limit the Company’s
ability to incur additional debt or consolidate or merge into or with any person, other than as permitted, or sell, lease, or otherwise
transfer, directly or indirectly, all or substantially all of its assets. The covenants also impose on the Company asset coverage requirements,
| |
Semi-Annual
Report | ArrowMark Financial Corp. |
25 |
which
are more stringent than those imposed on the Company by the Investment Company Act, as well as the Company’s policies.
The
Facility was rated “A3” by Moody’s Investor Services as of December 31, 2021. As of January 12, 2022, the rating was
Baa1.The Facility remains secured by substantially all of the assets of the Company.
As
of June 30, 2024, $58,800,000 has been committed and drawn and is at fair value. Such borrowings constitute financial leverage. For the
six months ended June 30, 2024, the average daily loan balance was $48,074,725, a weighted average interest rate of 7.94% with respect
to these borrowings, interest expense of $1,984,566 is included in the Statement of Operations.
Note
8 — Indemnification
In
the normal course of business, AMFC may enter into contracts that provide general indemnifications. AMFC’s maximum exposure under
these arrangements is dependent on claims that may be made against AMFC in the future, and therefore, cannot be estimated; however, based
on experience, the risk of material loss from such claims is considered remote.
Under
the AMFC’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance
of their duties to AMFC.
Note
9 — Origination Fees and Other Income
Includes
closing fees (or origination fees or structuring fees) associated with investments in portfolio companies. Such fees are normally paid
at closing of the Company’s investments, are fully earned and non-refundable, and are generally non-recurring. Other Income includes
service fees earned from the Community Funding 2018, LLC. AMFC had closing fee income of $64,255 and other income of $58,297 for the six
months ended June 30, 2024.
Note
10 — Capital Share Transactions
As
of June 30, 2024, 50,000,000 shares of $0.001 par value capital stock were authorized. Of the authorized shares,AMFC is authorized to
issue 40,000,000 shares of common stock and 10,000,000 shares of preferred stock. Prior to commencement of operations on November 13,2013,
AMFC issued 4,001 shares of common stock. On November 13, 2013, AMFC sold 4,400,000 shares of common stock via an initial public offering
at a price of $25.00 per share. On December 3, 2013 and December 11, 2013AMFC sold an additional 125,000 shares and 167,047 shares, respectively,
of common stock at a public offering price of $25.00 per share pursuant to the underwriters’ exercise of the over-allotment option.
On November 7, 2014, AMFC sold an additional 1,600,000 shares of common stock via an initial public offering at a price of $23.00 per
share. On December 2,2014,AMFC sold an additional 202,000 shares of common stock at a public offering price of $23.00 per share pursuant
to the underwriters’ exercise of the over-allotment option. On July 13, 2021, AMFC sold an additional 492,234 shares of common stock
at a public offering price of $21.89 in a registered direct offering. The purchase price for one share of common stock was $21.89. The
Net Asset Value at the time of the transaction was $21.85. The registered direct offering was accretive to current shareholders.
On
October 21, 2021, the Company filed a prospectus supplement with the U.S. Securities and Exchange Commission (“SEC”), under
which it could offer and sell up to $30,000,000 of its common stock (the “Common Stock”) from time to time through an “at-the-market”
equity offering program (the “ATM Offering”). Shares of Common Stock were offered through B. Riley Securities, Inc., which
served as the sales agent.
| 26 |
ArrowMark
Financial Corp.| Semi-Annual Report |
|
For
the period of October 21, 2021 to December 31, 2021, the Company sold 5,771 shares of its common stock, for total net proceeds to the
Company of $127,331. In connection with such sales, the Company paid a total of approximately $1,299 in sales agent commissions.
For
the period January 1, 2022 to December 31, 2022, the Company sold 21,114 shares of its common stock, for total net proceeds to the Company
of $458,370. In connection with such sales, the Company paid a total of approximately $6,496 in sales agent commissions.
For
the period January 1, 2023 to June 30, 2024, the Company did not sell its common stock. The Company’s shelf registration
statement expired on May 28, 2024.
Total
shares of Common Stock issued and outstanding at June 30, 2024 were 7,118,920.
Note
11 — Subsequent Events
Management
has evaluated the impact of all subsequent events on the company and has determined that there were no subsequent events requiring recognition
or disclosure in the financial statements.
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Semi-Annual
Report | ArrowMark Financial Corp. |
27 |
For federal income tax purposes, the following information
is furnished with respect to the distributions of the Company, if any, paid during its taxable year ended December 31, 2023.
1.90% of ordinary income dividends paid qualify for
the corporate dividends-received deduction.
Under the Jobs and Growth Tax Relief Reconciliation
Act of 2003 (the “Act”), 1.90% of ordinary dividends paid during the fiscal year ended December 31, 2023 are designated as
qualified dividend income,” as defined in the Act, and are subject to reduced tax rates.
Eligible shareholders were mailed a 2023 Form 1099-DIV
in early 2024. This reflected the tax character of all distributions paid in calendar year 2023.
Availability of Quarterly Schedule of Investments
The Company files their complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-PORT. The Company’s Form N-PORT is available
on the SEC’s website at http://www.sec.gov. The Company’s Form N-PORT may also be obtained upon request and without charge
by calling Investor Relations (877) 855-3434 or on the Company’s website at ir.arrowmarkfinancialcorp.com.
Availability of Proxy Voting Policies and Procedures
A description of the policies and procedures that the
Company uses to determine how to vote proxies relating to portfolio securities is available (1) without charge,upon request,by calling
Investor Relations (877) 855-3434; (2) at ir.arrowmarkfinancialcorp.com; and (3) on the SEC’s website at http://www.sec.gov.
Availability of Proxy Voting Record
Information about how the Company voted proxies relating
to securities held in the Company’s portfolio during the Annual period ended June 30 is available upon request and without charge
(1) at ir.arrowmarkfinancialcorp.com or by calling Investor Relations (877) 855-3434 and (2) on the SEC’s website at http://www.sec.gov.
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ArrowMark Financial Corp.| Semi-Annual Report |
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The Annual Meeting of Stockholders of ArrowMark Financial
Corp. was held on June 14, 2024, for the purpose of considering and voting upon the proposal presented at the Meeting. The following table
provides information concerning the matter voted upon at the Meeting:
Election of Director
| |
Voted
For |
Votes
Withheld |
| Michael
Stolper |
5,167,315.064 |
636,441.000 |
| |
Semi-Annual Report | ArrowMark Financial
Corp. |
31 |
Board of Directors and Executive Officers
Our business and affairs are managed under the direction
of the board of directors. Accordingly, the board of directors provides broad supervision over our affairs, including supervision of the
duties performed by the Advisor. The Advisor is responsible for our day-to-day operations. The names, ages and addresses of our directors
and officers and specified employees of the Advisor, together with their principal occupations and other affiliations during the past
five years, are set forth below. Each director and officer will hold office for the term to which he is elected and until his successor
is duly elected and qualifies, or until he resigns or is removed in the manner provided by law. Unless otherwise indicated, the address
of each director is c/o ArrowMark Financial Corp., 100 Fillmore Street, Suite 325, Denver, CO 80206. The board of directors will initially
consist of three directors who are not “interested persons” (as defined in the Investment Company Act) of the Advisor or its
affiliates and two directors who are “interested persons. ”The directors who are not interested persons are also independent
pursuant to the NASDAQ stock exchange listing standards, and we refer to them as “independent directors.” We refer to the
directors who are “interested persons” (as defined in the Investment Company Act) are referred to below as “interested
directors.” Under our certificate of incorporation, the board is divided into three classes. Each class of directors will hold office
for a three-year term. However, the initial members of the three classes have initial terms of one, two and three years, respectively.
At each annual meeting of our stockholders, the successors to the class of directors whose terms expire at such meeting will be elected
to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and
until their successors are duly elected and qualified.
Interested Directors
| Name |
|
Age |
|
Position(s) Held
with
Company |
|
Term
Served |
|
Term
End |
|
Principal
Occupation(s)
Last
5 Years |
|
Other
Directorships
Last
5 Years |
| Sanjai
Bhonsle |
|
54 |
|
Chairman,
Class III Director |
|
Since
February 2020 |
|
2025 |
|
Partner
and Portfolio Manager of ArrowMark Partners, 2012 to Present |
|
Brown
(RI) Management, LLC and Affiliates from 2018–Present |
| Karen
Reidy, CFA |
|
57 |
|
Class
I Director |
|
Since
February 2020 |
|
2026 |
|
Partner
and Portfolio Manager at ArrowMark Partners from 2008–Present |
|
Brown
(RI) Management, LLC and Affiliates from 2018–Present |
| 32 |
ArrowMark Financial Corp.| Semi-Annual Report |
|
Independent Directors
| Name |
|
Age |
|
Position(s)
Held with
Company |
|
Term
Served |
|
Term
End |
|
Principal
Occupation(s)
Last
5 Years |
|
Other
Directorships
Last
5 Years |
| Emil
Henry |
|
63 |
|
Class
I Director, Lead Independent Director |
|
Since
November 2013 |
|
2026 |
|
CEO
and Founder of Tiger Infrastructure Partners |
|
Director
of Easterly Government Properties, Director of numerous private companies that are Tiger Infrastructure portfolio companies |
| Michael
Stolper |
|
78 |
|
Class
II Director, Chairman of Nominating Committee |
|
Since
February 2020 |
|
2024 |
|
Financial
Advisor at Stolper & Co. from 1975–2017 |
|
Director
of Meridian Funds from 1985- Present; Director of Windowpane Funds (one portfolio) |
| John
S. Emrich |
|
56 |
|
Class
III Director, Chairman of Audit Committee |
|
Since
February 2020 |
|
2025 |
|
Director
of Meridian Funds from 2010–Present; Director of Destra Funds from 2015–Present |
|
Director
of Meridian Funds from 2010–Present; Director of Destra Funds from 2015–Present |
Executive Officers Who are not Directors
| Name |
|
Age |
|
Position(s)
Held with
Company |
|
Term
Served |
|
Principal
Occupation(s)
Last 5 Years |
| Dana
Staggs |
|
51 |
|
President |
|
Since
June 2022 |
|
Managing
Director of ArrowMark Partners. |
| Patrick
J. Farrell, CPA |
|
64 |
|
Chief
Financial Officer |
|
Since
April 2014 |
|
Chief
Financial Officer of StoneCastle Partners, LLC from April 2014 to Present. |
| Rick
Grove |
|
55 |
|
Chief
Compliance Officer |
|
Since
February 2020 |
|
Chief
Compliance Officer of ArrowMark Colorado Holdings, LLC.; Chief Compliance Officer of ArrowMark Asset Management, LLC.; Vice President
Secretary and Chief Compliance Officer of Meridian Fund, Inc. |
| Blake
Rice |
|
46 |
|
Secretary |
|
Since
September 2021 |
|
ArrowMark
Partners General Counsel; former Managing Director and Associate General Counsel at Neuberger Berman. |
| Kelsey
Auble |
|
33 |
|
Controller |
|
Since
September 2021 |
|
Controller
of ArrowMark Partners; Assistant Treasurer of Meridian Fund, Inc. |
| |
Semi-Annual Report | ArrowMark Financial
Corp. |
33 |
Biographical Information
Interested Directors
The following sets forth
certain biographical information for our Interested Directors. An Interested Director is an “interested person” as defined
in Section 2(a)(19) of the 1940 Act:
Sanjai Bhonsle.
Sanjai joined ArrowMark Partners in October 2012 and serves as Partner and Portfolio Manager for ArrowMark’s leveraged loan investments
and CLO funds. Prior to joining ArrowMark, he founded MB Consulting Partners in 2009,where he specialized in financial and operational
restructuring advisory to stressed and distressed middle-market companies. With more than 10 years of restructuring experience, he has
led several assignments across various industries. Sanjai was a Senior Portfolio Manager at GSO Capital Partners, a subsidiary of The
Blackstone Group, and member of the Investment and Management Committee (2005-2009). Prior to joining GSO Capital Partners, Sanjai was
an Assistant Portfolio Manager for RBC Capital Partners’ debt investment group and was a member of the Investment Committee (2001-2005).
He also led the group’s restructuring efforts related to distressed investments and represented the firm’s interests on creditor
committees. From 1999-2001, Sanjai was a Senior Investment Analyst at lndosuez Capital Partners. Sanjai received a bachelor’s degree
in Mechanical Engineering from the University of Wisconsin -Madison and an MBA from the Eli Broad Graduate School of Management at Michigan
State University.
Karen Reidy.
Ms. Reidy is a founding Partner and co-manages ArrowMark Partners’ collateralized loan obligation and specialty finance investments
and research analyst team. Prior to founding ArrowMark, Ms. Reidy served as Executive Vice President and Portfolio Manager at Janus Capital,
managing $10 billion for two strategies: Janus Balanced Fund and Janus Core Equity Fund, as well as institutional separate accounts (2000-2005).
Ms. Reidy was also the Assistant Portfolio Manager of the Janus Fund (1998-2000). She joined Janus Capital as an equity analyst in 1995.
Prior to Janus Capital Group, she worked at PricewaterhouseCoopers LLC in the audit and mergers and acquisitions departments. Ms. Reidy
graduated from the University of Colorado with a bachelor’s degree and holds the Chartered Financial Analyst designation.
Independent Directors
The following sets forth
certain biographical information for our Independent Directors. Independent Directors are not “interested persons” of ArrowMark
Financial Corp., as defined by the 1940 Act:
Emil W. Henry,
Jr. Mr. Henry is the CEO and Founder of Tiger Infrastructure Partners, a private equity firm focused on infrastructure investment
opportunities. Prior to founding Tiger Infrastructure Partners, he was Global Head of the Lehman Brothers Private Equity Infrastructure
businesses, where he oversaw global infrastructure investments. In 2005, Mr. Henry was appointed Assistant Secretary of the Treasury for
Financial Institutions by the President of the United States. Until his departure in 2007, he was a key advisor to two Treasury Secretaries
on economic,legislative and regulatory matters affecting U.S. financial institutions and markets. Before joining the Treasury, Mr. Henry
was a partner of Gleacher Partners LLC, an investment banking and investment management firm, where he served as Chairman of Asset Management,
and Managing Director, and where he oversaw the firm’s investment activities. Mr. Henry began the formative part of his career at
Morgan Stanley in the mid-1980s in that firm’s merchant banking arm where he executed management buyouts for Morgan Stanley’s
flagship private equity fund. He holds an M.B.A. from Harvard Business School and a B.A. in Economics from Yale University.
Michael Stolper.
Mr. Stolper provides broad financial advisor, and brokerage business experience serving as the President of Stolper & Co., Inc., an
investment adviser for over 35 years. Based upon his years of experience, he possesses a keen understanding of the securities industry
and the regulatory framework applicable to it, including the funds. He also holds a Master of Arts degree in Finance.
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ArrowMark Financial Corp.| Semi-Annual Report |
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John S. Emrich.
Mr. Emrich has significant experience in the investment management and financial services industry. Mr. Emrich served as a financial analyst
or portfolio manager for over 13 years for various investment advisory firms. Prior to such positions he also performed business valuations
and appraisal analyses at KPMG Peat Marwick, an accounting firm.
Executive Officers Who Are Not
Directors
Dana Staggs.
Dana Staggs leads the private direct lending strategy at ArrowMark and is a team member of ArrowMark’s Capital Solutions Group where
he sources, structures, and manages non-control private equity and private debt investments. Prior to joining ArrowMark Partners in 2017,
he worked in similar capacities at firms to include Goldman Sachs & Co, Barclays Private Credit Partners LLC and GE Capital. Dana
previously served over 10 years as a surface warfare officer in the U.S. Navy, having attained the rank of Lieutenant Commander. He earned
a Bachelor of Science degree in Physics from the United States Naval Academy and an MBA from The Mason School of Business at the College
of William and Mary.
Patrick J. Farrell.
Chief Financial Officer. Mr. Farrell has over 40 years of hands-on management experience in finance and accounting, specifically focused
on domestic and offshore mutual funds, bank deposit account programs, investment advisory and broker dealer businesses. Prior to joining
StoneCastle Partners as Chief Financial Officer in February 2014, Mr. Farrell was CFO/COO of the Emerging Managers Group, L.P., a specialty
asset management firm focused on offshore mutual funds. Prior to that, Mr. Farrell was CFO at Reserve Management, where he oversaw all
financial activities for the company. Earlier in his career, he held financial positions at Lexington Management, Drexel Burnham, Alliance
Capital and New York Life Investment Management, all focused on investment advisory and mutual fund activities. He began his career at
Peat Marwick Mitchell & Co. Mr. Farrell holds a B.S. in Business Administration-Accounting from Manhattan College. Mr. Farrell is
a Certified Public Accountant in New York State and a member of the American Institute of Certified Public Accountants.
Rick Grove.
Rick is a Principal and Chief Compliance Officer at ArrowMark Partners. He was previously Vice President and Chief Compliance Officer
for Black Creek Global Advisors (2007-2008). Prior to that position, Rick served as Vice President and Chief Compliance Officer for Madison
Capital Management (2005- 2007), Assistant Vice President and Director of Compliance at Janus Capital Group (1993-2005), and Fund Accountant
for Oppenheimer Funds (1992-1993). Rick graduated from the University of Wyoming with a bachelor’s degree in Accounting.
Blake Rice. Blake
serves as ArrowMark Partners General Counsel. In his role, Rice leads and manages legal and compliance efforts at ArrowMark and ensures
the firm is well-positioned for the continued growth of its business and investment strategies while thoughtfully managing risk. Prior
to ArrowMark, Blake worked at Neuberger Berman where he spent the last 13 years as Managing Director and Associate General Counsel for
the alternatives business. In his role, Blake managed a team that oversaw legal matters for the alternatives business which consists of
private credit,private equity,real estate,infrastructure, and several other alternative strategies. Blake received his B.A. from Trinity
University and his J.D. from the University of Chicago.
KelseyAuble.
Kelsey serves as Controller for ArrowMark Partners and Assistant Treasurer for Meridian Fund, Inc. Prior to joining ArrowMark,
she was a Supervisor in the Alternative Investment Accounting group at ALPS Fund Services, a third-party fund administrator and distributor
(2012-2016). Kelsey graduated from the University of Colorado with a bachelor’s degree in Accounting.
| |
Semi-Annual Report | ArrowMark Financial
Corp. |
35 |
Additional information
regarding the Directors of ArrowMark Financial Corp. can be found in the Statement of Additional Information, which is available, without
charge, upon request, by calling 1-877-373-6374 and is also available on the Company’s website at ir.arrowmarkfinancialcorp.com
| 36 |
ArrowMark Financial Corp.| Semi-Annual Report |
|
The
following information is a summary of certain information about the Fund and changes that occurred since the effective date of its registration
statement on Form N-2 on May 28, 2021. (the “prior disclosure date”). This information may not reflect all of the changes
that have occurred since you purchased the Company’s shares.
There
have been no changes in the Company’s investment objective or principal investment policies since the Company’s December 31,
2023 Annual Report.