New Mountain Finance (NMFC) 9 Aug 222022 Q2 Earnings call transcript

Good morning. And welcome to today's New Mountain Finance Corporation Second Quarter 2022 Earnings Call. My name is Tandy, and I will be your moderator for today's call. All lines will be placed on muted during the presentation portion of the call with the opportunity for question-and-answer at the end. [Operator Instructions]. to conference like host to now Mr. would hand over the our I of Corporation Mountain Hamwee, New Robert CEO Finance to begin.

Thank welcome to quarter morning everyone Finance good XXXX. second for earnings you Corporation's call New and Mountain and

remarks. NMFC. On make of of and before John ask NMFC; Kajee, Chairman But Kline, and the Steve of some NMFC; Mountain of of NMFC line Shiraz today's today the some me I'd are Steve with call. does, Laura to Klinsky, like New to President Shiraz CEO introductory important is Capital; going here regarding Holson, statements he CFO COO to make

Thanks Rob. Good morning everyone.

latest to are like our to Before this on the our be is and To strictly would time, presentation broadcast audio filings and We the actual like over slide Klinsky, New form we Mountain today's that SEC beginning projections I the the replay Steve? this please I the include our NMFC's in is of slide in August in filings to who recorded. call copies regarding any At this presentation, webcast also to with will projections. may by required page to Harbor release Safe recent page the our and access our conference www.newmountainfinance.com. call, available undertake at your that SEC two into get and some to five press factors Steven are any most advise press give disclosure statements they we refer projections our Please highlights presentation. and differ slide to Today's unauthorized obtain referencing and call and statements website results cause property prohibited. update call Finance turn to the of to throughout Xth Chairman, materially that release. not attention forward-looking the law. or statements of important presentation will Corporation you about customary on everyone being could I'd that call webcast to from would like unless to forward-looking that Information the visit of that note we earnings of ask statements. do forward-looking and for those call

in great of Thanks NMFC Shiraz. able of both today per and income quarter more per Chairman fellow was the It's address that Net as shareholder. of major paid guidance. a for June be by XX covering to and start our to all exceeding the share I'll the the $X.XX was cash share you highlights second of dividend covering than quarter. on $X.XX as investment our prior

or to value Difficulty] regular spreads Our represents yield net The $X.XX dividend set [Technical share share. X.X% credit per at per at share, asset decrease $X.XX for dividend value, from net widening a just quarter's was market. on an last X%. largely investment of $XX.XX This income per least due estimated XXXX annualized net the in QX asset $X.XX again based was

mission. controls Mountain's risk always protection and earnings New downside been discussed we As calls, part on of founding previous have

Our team approximately of firm total as now billion $XX people. manages a in assets with XXX whole over a

of never an payment or a interest in equity history had We bankruptcy have work. missed the private our

and by healthcare defensive loans environment we XXXX. sectors today. portfolio positioned be cyclical efforts. we credit net began the as downside applied growth and services, NMFC's challenging and and continues macro default protection are particularly that a in software, in we and that enterprise the types with are to as on times to focus These zero business industries credit team We of services of since believe evidenced The great of our tech strength enabled in more this due tailwinds, such effectively to operation all in secular ones loss average bulk right defensive the technology. in an have well We investment NMFC same our are think growth strategy, are attractive our

risk call two despite continued earnings Over our improved portfolio be company XX% have addition again positions green, to rated since quarter. ratings positions non-accrual our portfolio small of this now Our is last of riskiest list to our our the reduced. and

extent have call. turn this mountains in into on management our NMFC to shareholders, largest add the credit although $X.XX share, explain fall activities. continue the below want to that personally NMFC's positions as earnings will million to quarter. and continue our protection to it, me place do remind had the team positively to invested Together, I rates you Rising new use we remains currently professionals not dividend $XXX I New our we per as let power, we will which impact the not have remain earnings over recent in and Rob. back program expect. to interest Lastly, ever With Mountain to that, most and call

Thank you, rating. representing as heat volatility. be and migration updated of maps rating, three $XX this on page positions, summarized worsening our nine, million to representing portfolio fair value improving Steve. in continues The well for the overall, of show in positioned believe periods macro-economic $XXX positions, quarter, million particularly with just We risk five very positive

and our Integro X.X% green to Risk this portfolio As last on positive represents our we an a signed it portfolio broker position challenged nonaccrual position, on the migrated publicly of position, most the XX% second Starting page reflect movers and of debt insurance the XX% Conversely, from majority XX, to felt with rated a acquirer. Scale. traded formerly is was covers improved and on of lien insurance of our the acquire of uncertainty of after over [ph] interest. the We meaningfully four the the Rating agreement business [pick] green now of the positively prudent down names benefits quarter. place now quarter. full our represent million orange X.X% of that of mentioned, which earnout pleased portion definitive and names, first orange at to evaluation Steve the our the represent on an lien collectability our a are that business equity over for likely clears which to lien debt, depending second fully our least $XX red performance

However, from due as both as the ceased Permian migrated and its and coverage overall in April exposure carriers to at risk a operating already we as yellow due the also from reduced logistics reminder insurance to credit which improved believe of orange July. a Haven, of our known the to signing as on we fire company operations the times. plant XX, to our further up from amounts has formerly a pay yellow work received late business been to transaction. insurance distribution environment with The companies. and assess interim providers stronger payment for an orange result, the Pinilla,

as improved include hospitality small to again with all map placed products and travel to green updated the NHME, which receipts. on negative yellow and a some further movers experienced industry on demand challenges faced top-line Page from supply and shown impact is the chain inflation headwinds, non-accrual specialty on The position are management business, been COVID which heat that Lastly, idiosyncratic supply continued firm business this has XX. combined business has chemicals a the has issues. chain due inflation and we relatively of The three quarter

portfolio defensive bias care, portfolios services, of vast are and As our energy landscape you to of we sectors no to continue spend on the well software, continue our and significant now towards to name, like which our can X.X% time economic matter believe value. given we see, majority our remaining represents fair how assets at develops, business and orange strong the red positioned health just perform

the Page names is credit several a portfolio positive performance heatmap. view of to migration color corresponding the LTM of on company We EBITDA quarter. leverage the are XX pleased this that based shaded continued and relative underlying in sizable our to

can vast increases, see, cases results of very leverage in majority projections our exhibiting the green have that you decreases. either consistent our minor shown this or rated very why positions underwriting with are many As

of and turn With conditions, that, other conditions volatility parts the show of of a orange a portion in to companies perspective, adverse companies underperformed that a that a most of the certain card prospect group to of From me. small portfolio On John our important the improved it their and and adequate that nine right that and have page, [indiscernible] economy. market a believe business performance for times to by These companies lower have than more these yellow, metrics. resources to leverage will have caused represent performance. a reasonable majority I side we rated the discuss red partially to two negative liquidity half the of over of which we pursue due plan

continued last asset everyone. has morning, in across be investing environment Good Rob. Thanks, the Since to our May, call challenging. most overall classes

of most otherwise tangible certain provided rates, one seen structures, resilient higher continues with debt and have ratios low We evidence corporate base attractive value secured asset all investors be loan economy. of classes and the markets. environment. economic across spreads, now stability Floating inflation, softness rates, financial have to difficult valuable instability, investing interest in lending the area this geopolitical direct period, Through to of and

added Additionally, our the defensive strategy to to making margin that loans safety of businesses provides market. overall of non-cyclical lending compared of

consistently basis XX% opportunities deal investments market to with remains see where are we lower The year. equity a to direct activity materially least XX% remain structures attractive new continue than sponsor most they the XXX the spreads contributions half the at wider of points than were beginning deal new latter at While of the investment XXXX, range. compelling in of in loan

and is the XX an financing not highlight into currently an lending effect our loan insight to other yield clarity NMFCs syndicated Page share represents of take direct the rate important the price is analysis offer available rates on that in execution, private continues these markets. asset it meaningful increasing of as certainty high solutions bond classes positive Finally, from to base earnings. that provides capital overall and interest ease that market

rate is a loan and our As floating are fixed while XX% XX% the portfolio liabilities XX% fixed floating and rate. rate reminder, NMFC XX% rate

we to and capital rates. increasing positive long LIBOR exposure are this Given thus material have structure mix,

to lower liabilities our April in the many LIBOR QX the noting LIBOR to about early locked at continue X of During in borrowers rate on is June throughout reset about worth floating three-month our quarter. that quarter X% from on while rates, to second increased XX. It X.X%

not Given quarter. tailwind these circumstances, rates during were second the a base

rates, portfolio improve. yield However, current loans to will as at begin our the reset base

or earnings different various around power static slightly our a contracts, of timing base sensitivity slightly rough LIBOR each valuable resets While of make and have regarding their the provide SOFR rates. we for at the to portfolio choices borrowers of duration rate it's the think different

increase by on a other averaged For per X%, incremental approximately earnings go cents example, LIBORs annual Meanwhile, on presence run assets, and to X%, share given return rate XX% hedge investment averaged higher, base our offer of will all NII points, $X.XX optionality floors general At provides decline if positive share. settings equal. rates representing the NMFC's material rates an rate be the our against forward income being per inflation. an NMFC's would This net variables rate $X.XX XX remains power shareholders continues limited. LIBOR if and attractive downside basis, interest which enhancement rising basis potential

side increase Page changes our fair page, behind the that the to share driven show value we this left detail on the XX, quarter. we value decline Starting Turning book QX catalysts $X.XX more from net present Edmentum. credit per in resulted of and UniTek, positive of share a performance Integro per NAV in good at to underlying QX. Haven supported and credit This net and Permian increase for was $X.XX by

share vast by addresses that experienced write credit performance associated long-term portfolio inception. depreciation the in per with of credit represented majority of remaining since is the Page XX Our overall general its which spread downs market. widening NMFC's $X.XX

the non-accrual. the of than On side investments where billion have X.X X.X% portfolio of we we of the XX or at portfolio fair the million currently show of left page, with current on less value our state

of losses X.X% only Since value. the strong. Of plus a we made the of in portion non-accrual, been both our year shown right of had lien become XXXX, million current on and earlier, NMFC's realized page on mentioned second placed of history. of non-accrual. we XXX X.X XX only on did XX.X represent million XX NHME which which our have million Integro inception performance or our have book the credit cumulative As side investments, non-accruals of put only the over course billion total remains

IPO company's in on the overall Page The performance next its economic realized offset As the been gains losses page, since XXXX. more default shown in elsewhere the by have tracks chart XX, than on portfolio.

As you of shareholders, can by supported net dividends million to the paid fully initial which have billion $X see of has listing, at regular the page, since been our our of income. XXX top investment NMFC

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$XX net realized $X billion unrealized have IPO. which generated a remains we our NII since loss just tiny that On in fraction cumulative at yellow, and the bottom stands of the show the million, we right

an ago. BDC public X%. as As the years compound NMFC have the this stock and now an favorably best-in-class current and discuss as recent details peers averaged our over team COO, equity a has on at turn index, Laura cumulative in represents we construction. call to and of has Holson annual year detailing most cash credit since rates have. of XX free have environment NMFC's return been period shows our more least This well has look we maintaining to returns flow oriented chart less that remains Over XX yield will very performance equity I very the to than NMFCs strong forward, a which XX.X%, portfolio. as small focused exceeded risk long over Page a on compared that index our as throughout where generated materially of reversing originations its high IPO the loss indexes portfolio return quality

John. Thanks,

business over originated As with modest range. QX and and sales, Page our services on and in software, XX, invested enterprise We funded shown primarily services. high-end core healthcare verticals, keeping originations of at repayments leverage in of defensive growth us we fully amount $XXX our these the technology million a including and target

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our and a as course we always, on and As we any focusing raised the opportunities, are our our remain extremely absorbs fully quality opportunities through as that any as well from selective range flow loan leverage remain expect deal on in target ordinary program. incremental proceeds widening credit to capital ATM highest invested repayments,

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diversified illustrated as a on Page Finally, have XX, we portfolio.

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you, Thank Laura.

on For Form refer please with commentary, financial to more our XX-Q the results SEC. was filed the that last today's in details evening

asset down prior end excluding $X.X SBA $X.XX, statutory fair billion attention billion, had Now portfolio Slide of to billion, of of billion, your drawn X. guarantee turn $X.X X.X I'd or to was to X.X investments quarter over At a X% per or XX total debt-to-equity were quarter. liabilities value at X.XX and debt billion, total like from $X.X and assets $XX.XX value of outstanding the of in at ratio was which June debentures. was three total statutory XX, million Net share dollars our

our leverage X we Consistent available impact cumulative our goal of credit historical net and within Slide of show and the the long-term. of X.XX leverage dividends. stable target value NAV range. adjusted with our special sheet XX, to cash book leverage maintaining balance for ratios However, a losses minimizing historical on net over is the

adjusted that is realized Slide below believe our to dividends slide see income losses stable above NAV special NAV that while quarterly we our be line the from investment current for results. our appropriate income net show the the and our we with years will We You highlights line, most of XX ago. can is gains measure generate performance. unrealized continue volatile and IPO over in line. XX statement The NII quarterly

earned total a quarter, quarter-over-quarter, the to resets $XX.X higher a due rate higher was interest the base we all net For the income from $X.X increase debt. rate quarter. costs from million and This due prior higher in million quarter. current increase expenses investment $X.X million, in of fee to income $XX.X Total were primarily million, approximately income floating initial

this advisors view the the important discussed waived. XXXX We've for committed needed It's fees per and X.XX% that if exceeded investment of share. did weighted the share during use the investment to earnings NII XXXX to and pledge. recoup dividend cannot fee to years. quarterly in previously the advisor Based expect quarterly dividend. also regular fully our This as of to our management of pledged results which our As per average period fee $X.XX to power incentive $X.XX on per $X.XX support of this reduce calendar a share, business, not $XX.X we QX note million, of forward

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line our red Slide shows to XX, dividend Turning coverage. the

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are covenants will of lend reminder, performance, the a time. As Bank underlying tied the Fargo facilities that any at operating performance given [indiscernible] and than Deutsche to Wells businesses to credit generally the both investments our the rather

Finally, our schedule. maturity on Slide XX, leveraged we show

at we've issuance, manage As maturity is our we've diversified of maturity and successful debt been up to liquidity, XX% XXXX. our [indiscernible] over to our debt better

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about prospects for Shiraz. and NFMC we years in optimistic closing, In the Thanks months ahead. the are

and thank Our good serve and growth businesses all health. operator forward longstanding focus of to will the to should all back the us on strong your to to sponsors continuing an lending Operator? you now to We ahead. once And to again, continue look by maintaining our I support turn defensive well. days stakeholders dialogue for transparent with open interest. supported things begin you Wish Q&A.

Jordan Thanks [Operator line the of of Fargo. comes Wathen our from first So Instructions] question Wells you.

now line go Please ahead. Your is open.

morning. Hi, good

Just a at big it a you just a you to to this there chosen How percentage been as becomes pretty too point that nice asset like have question Obviously, you feel is where added to Edmentum. have And with guys it's on one. something thinking over results time. you've guys the something gains. impressive rather which have than it some becomes hold the about are And today? capital And you more move to that portfolio of on have?

Yes, Hey, Jordan.

own our you also, for big reason, we sales, fortunately to position has And series table the now become a just company. closer over the through down as significantly. fair so XX% good cash a one taken value So amount grown on right, and has of has the may of sold off of point as recall, owned company, there, at XX% Edmentum we a as we've we've Edmentum the of as it

that. that can't company percentage, has rise. decreasing like, it's so ownership to it's the there. that over so critical the to real no obviously But in monetized despite And exact possibility. portfolio equity strongly enterprise that see come obviously, we'd valuation a And certainly think, certainly of a the quarters I I there's of monetize broadly to grow reflected the the part reasonable said, time continued chance speak to It's that's our a All that that certainly specifics. and is to continues the intention Edmentum value guarantees just

know you're Okay, And of what's and we the talk deals to you're could pick you thinking you how [KCS] isn't? there? those seeing as mega And about higher you. investments thank what you preferred, new and about maybe part then that guys interesting had [ph], yielding maybe structured more out what the

Sure, one? want John, that you to address

Sure.

definitely going on junior preferred. will continue our situations to and when pick this really we and in that interesting think course now, we're that's in very see the of think buy environment our to comments, as deal tranche that portfolio, for clients the piece Unit going capital said I that. our just be we where the as markets. be the makes mentioned, overall pricing expect our Generally, very unit can is down gotten has bread a tranche better but sponsor sense in great I more structure on big. we've structure compelling as we active Structures next. side, we we over the capital participating which been yield year the loans a mostly selectively butter. you And But has And to is much attractive, do see, can I for are more enhancer the great. equity think are of right yield as contributions

think unit So and said, environment tranche preferred the as will I for be investments. and both good I select

questions. Okay. Thanks the so much for taking

from a of registered question Ryan KBW. Thank you. Lynch There's new

go Please is now Your line ahead. open.

good morning. Hey,

very credit And actually stress investments, just Slide give the versus to movements to think actually First NAV helpful. compliment the spread of related movements showing a the broad helpful. of, some question. a slide was also also on Well, you I have the movements race ton NAV XX, related on both of movements deck, the to first information to incredibly I clients, wanted helpful improvements into

kind broad gave if talk guys done So well wondering wanted My analysis, so or have, reset for of interest potential the impact what quarter because kind just about, expect your quickly, not but lag. was you guys really may with deck. some third I sort on of of any you rates recently, on to first you on the you from the and and rising slide moving commentary, I for rates, movements may commentary rates run had the they're question based they

as very mentioned, the much kind given they're so from quarter, that, And a you but lag. on this high resetting second were haven't of of rates gotten really because BDCs, benefit most

wonder third what have if the potential And at so guys rising reset I analysis you an rates done you beginning of the the a as for impacts of expect? quarter

a that John, want on bit, a touched around you little give you detail to little more that?

facilities it's our asset rates resets. LIBOR little about day, rise, one real moving, to just And difficult looking think and number a look all I tailwind. something LIBOR, may And to three-month and that's cluster just a tell different to regard a are it our at the in And companies it's this discussed then there bit as movements they at as we will our choose a certain very mix every is while dates, about whatever I to are to a forced to the every assets, take allude a as LIBOR higher asset be and to to long just just goes a you, when side, slightly month, not quarter, different and constantly general, cents it's those I'd cases And is our reset terms we because in bet days, Ryan, month on say it's of one at contract. I take precise think either Sure. longer of where Page good different going get the we material LIBOR, is reevaluate as put for some floating the certain in rate It's we exposures, But at. articulate, is can the XX. which month, to move tailwind -- day, -- cases, but with us. tried tried it that tend some something that positive, companies going on be be in we're are totally of that LIBOR liabilities, to forced given But have rates, it's are is And be to up, looking every companies that our we reset loans constantly we share, consistent. when thing, a resets, of per going liability to positive. to given

Okay. It's again of That's I fair commentary. a I but complicated appreciate enough. kind situation, the fluid understand.

than You in participate gave do would we've broader in comments to and you have purchase how what could lending is certainly while multiples in see it's mean, in I'm also environment just become less some be you guys environment, more making it's lenders a become are a current equity or program this equity time ago, direct a that I'm lender to done friendly, a kind the environment, more for which you does I past? lower, co-investments the radically sort price on but of be deploying changes other curious, equity your this favorable also appetite certainly talk lending more assume have any co-investment decent of about investments. what consistent which heard from lot just guys you announced money, this very guys standpoint. has which of curious,

I Yes, good a question. it's think

the say, lows I trying our wait, dollars, is or oh, not the we equity always a because we're Ryan, do market think our small the six And terms we're time and and bottoms, and do months. make think of to co-invest, just approach don't we're equity gosh, to selective sort slow further to value long-term, I in of program, something But steady build the the think tops in much in to there And on is a to book will of will necessarily where lows that now in think be trying of us. still expect topic would goal it continue are to makes additions portfolio perfect the ahead. I think that co-invest. going on be high-graded call quarters sense. for to I building really but And we'll over very see I

add see that really from are bottom idiosyncratic we we really fits something things. some interesting up, it's will that. think very the that we program said, well, the when seeing more with And I

of would expect to couple couple a I see So next the additions quarters. in of

It's okay. That makes sense.

nothing markets, about more it's accelerating from for and So really abroad decelerating today.

meaningful you coverage set don't going But seen a form pretty could have haven't in -- curious, that the actually over the that which and you in that at? of you I'm over is where other policy your would think raising to dividend are mind, sense? I guys ever the you choose earning a do earnings growing have to of out fees. paying core some The Or that dividend? just book sort if implementing it bit territory do of well It in in a extra that earnings way, what anticipate dividend? commented to trying be you potentially over we I dividend you Because those core could supplemental have, policy stated Would long fine, change. And either value dividend or like the like little the other guys new guys a while of the looks seen the had your given the the waivers a get those be do things like guys of has meaningful over there guys next to quarters, we interest I willingness approaching fee could a potential think earnings, BDC you looks you quarter trajectory of guys dividend, couple incentive question of you've earning sort the course, above come and are rates, dividend. some guys the guys, some dividend? guys is meaningfully just

great a question. talking it's Yes, it's And we something about. of spend time a lot

a think we consistent I to our philosophically, way. it out in NII, we do want want pay to

at had crystal going to ball we the the XX we're “Hey, years XX X.X%, the crystal next are over reset and years, earn base dividend going obviously course, the we therefore, it's and a dividend next volatile thing. rates if We don't interest x. problem, know the the in ball be So are raising to that, to for said, a years two consider XX or by what rates months, is would very match for of

we'd if So term but point and our don't specials, gotten value, plateau, back back happen, can in we some dividend, in we've medium what cases, in all distribute or so over direction, and now but don't we've continuously while virtually form book I or is consistent want raised we I the to say from feel reevaluate and book the at at is because, over -- raise forth then at Fed is of to I LIBOR could earn, never to new a all, probably XX want be XX basis do think points. the below cut that reevaluate, plan is then potentially think either to and reverses months that

Ryan that's fulsome to I more are we But having that's do yes, I So feel and about the do philosophically, distribute, think, we want little a sure. for then tension the navigating, NII way, cushioning good guess. we

Yes.

makes that sense. ton think I of a

the want You Fed rates dividend. you your market for the and to don't in really earn on, dependent SKIs to in the with certainly order with get broader just goes over

sense. So that me I the today. makes for appreciate all time. That's

Ryan, you, Great, interest. appreciate thank your you. Thank I

further to over no are for remarks. there Robert As this to I'd At time, like questions. call the back turn closing

Well, operator. you, thank you, everyone. Thank

and -- great quarter summer. everyone again and And you. to the of end has to time to communicating the look a here appreciate forward again the Thank interest. we always, month I hope next we to we're As always And talk ahead. we're and the

to and great Ladies Mountain like you. I'd New you wish gentlemen, Corporation concludes that earning Thank Finance ahead. now day today's a call.

your may now You disconnect lines.