New Mountain Finance (NMFC) 3 Nov 232023 Q3 Earnings call transcript

Good morning, everyone, and welcome to the New Mountain Finance Corporation's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO. Please, go ahead.

Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's Third Quarter 2023 Earnings Call.

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

Good morning, John. Thanks, everyone.

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

great Thanks, was all share net than a to you per paid address for third $X.XX covering in XX. quarter major share, on was both September Laura. NMFC's to and our It's more regular dividend as be as fellow the shareholder. Adjusted $X.XX investment Chairman able income today, that cash per

of Our sequentially and QX over earnings by of year. to last this increased $X.XX compared $X.XX QX year,

net positioned our asset that times. performance continued an Our quarter, attractive all certain overall per compared and well are particularly demonstrating $X.XX credit value to right in loans less defensive $XX.XX, stable are in growth to times believe economic in portfolio. We our decreased last share think industries slightly decline across we

bankruptcy Page Mountain's $XX over on XX assets. years manages a positive equity for ago, has of QX. The of the earnings. funds NMFC missed realized firm unrealized be environment a our an higher New this have since billion private our experienced or of with the over and million of XX of now had payment quarterly shown net rate as Similarly, presentation, continues investments, interest never substantial gains all as books only $XX on end its credit depreciation to of across inception

factors regular to all share our if to per outperform hold current interest expect dividend at rates, significantly We $X.XX other continue constant.

The excess earnings The record earnings remainder $X.XX will high consecutive raise the out variable third quarter, this these the half share, which our quarter will may which of in end amount December supplemental future. will quarterly of equal distributions dividend to of to regular all be dividend make share our at the variable dividend Given QX our previous paid in is share earnings $X.XX our this of per $X.XX. This of our pay XX and of of $X.XX will in our sheet December on excess be guidance. holders to dividend we per will of remain this for balance XX. quarter, additional of on the per the total for is NMFC as supplemental payment. $X.XX dividend

just an Our represents dividend annualized current at dividend $X.XX yield XX%. under of

Looking by NMFC to $X.XX rates. We This quarter elevated of the believe to supported performance incremental variable forward share, regular is expect strong to dividend generate dividend, to XXXX. we continued QX, of a payable by addition in base in supplemental New quality per Mountain of the the our $X.XX is credit of payout first our strength and $X.XX driven expected team. and of

members, XXX growth now specialties software, attractive as developed technology, numbers health information life infrastructure care such sectors, in has a New supplies, cyclical Mountain and growth the defensive firm overall is that science and informed high-conviction underwriting services decisions. knowledge investing provide expertise extensive industry credit we group to our our very us efforts, utilize experts and allows engineering. When digital of pursuing to that unique make

team. the continued quality of overall last we Over the months, X our to have expand

and management, shareholders the XX% shares share turn that, John. ownership been management NMFC. and to approximately total major of time, let own employee over call now as continue we, NMFC's me we as Senior Finally, personally. With rising of has

disciplined I some more Thank on you, selection, like direct Steve. to Good details our offer and noncyclical list revenue strategy free morning we highlight are would cash record. Starting again, X, great lending drivers, Page industry margin These everyone. shows on characterized of and conversion. which our track diversified streams, niches predictable sectors. and sectors stability exposure growth by a flow durable to industry investment defensive

industries, could avoided secularly invest successfully have environment. volatile cyclical, rate to and today's higher riskier which in challenged areas be We

operate and distributing provides where track business, in generating allows record XX%. of all Our enhanced through strategy return over years high-level to our our NMFC our billion virtually a dividend shareholders. Since $X.X yield to show excess our in avoiding annualized over program, losses consistent we to returned environment. Page by has delivering company, income XX-plus been as of of an it X XXXX, has snapshot IPO shareholders consistent confidence approximately our economic any of a public a long-term with and us

are our who primarily last where capital owned supportive the we that financial to and is performing industries risk exposed the by dollar sophisticated is portfolio that significant owners junior is and current are for in loans businesses of price purchase the XX% Our sponsors to of to well, companies with approximately business. We make. good that paid lend

Turning portfolio quarter-over-quarter, of were risk relatively to ratings of Page XX. approximately our portfolio stable The XX% with internal green. our rated

in XX% book within Our categories most material Page names orange represent XX. face XX% book and challenged is valuation levels, fair NMFC's value. approximately downside marking red red entirety risk these our not names orange face of value. The names and its have our names on the value, to do our our of heat map represent derisked by we shown to X% value future and to of At weaker only our updated

total prospects about we health We of operational two recovery migrate and the quarter. to representing Given our defensive fair proposition portfolio's landscape a for on did sectors well like positioned X% names long-term believe how software, experiencing business are are to assets our value only value orientation our Both towards short-term we have remain and economic companies perform, develops. no continue first this services positions. negatively full optimistic care, headwinds, but lien the matter

quarter we yellow repaid names, reflect we a green that yellow more that positive one this to the moved side, of par lien, the are subsequently our was are in during may $X.XX, outcomes name, in second on prospects at report to pleased the EaglePicher we previously the and Overall, On at as like optimistic which we have was marked October. future. positive

more of decrease XX, environment as $X.XX Starting we left. on book in value during due Page Credit-specific a supplemental by the the current Steve at nonaccrual par minor value, credit valuation graphical movements XX challenged to mentioned accrued at per changes portfolio driven balance that value. earlier, value loans all [ the Combined, our these issue companies. Broad green fair market the book Turning we to overearned continue NAV to during $X.XX by book we at addresses decline $XX.XX provide compared tailwind, regular were if for NMFC's movements of equity note relatively represented to were our and And an $X.XX to modest to reflecting would QX analysis share, changes NAV value which to credit an value the performance. for actual rated in netted $XX.XX and of the of is be our a important the new ] markdowns, to quarter. X/XX. Page dividends supply. $X.XX book mid-cap spreads book as value tightened value, quarter. It the our

$X.X On next of billion a the on chance exiting current on portfolio are decreased the Of number vintages, written nonaccrual. of in fair currently move we medium have this value, million XX the accrual or recovery as investments increased left second have term. to show we page, conviction name our where back full older X.X% side status of good to lien nonaccrual, nonaccrual a portfolio at in of companies materially to of quarter with the state we the down portfolio, the $XX the The due most and the have from Integro the been on of of remain months.

call depreciation, NMFC's a XX billion netting strong this at consistent in we gains since index $XX well Page overall predictable million compound shows return of side with credit billion index shareholders. Page high-yield as returns. period, of will our $X.X cumulative compelling has is Holson, excess preserving generated stock generating NMFC and least and distributing IPO, financial who value cumulative our a XX, value performance discuss now Chief very realized BDC Operating Cumulatively, our of net cash a that Chief public has $X.X million. net our achieved the as an on Officer NMFC's only been to and and flow-oriented results. gains realized approximately chart since delivered dividends. On of our of investment $XX right and positions portfolio value of all represents principal of XX%, IPO, earned On income current quarterly billion returns Interim page, which nearly NMFC created have. I all of show million through the return while both and of peers unrealized have detailing we Financial where net construction since long income, showing has our of over annual net of turn investment the the and Over to we in net for consistent we $X.X Laura $XX performance over investments present made equity IPO. NMFC economic proposition This Officer, have to

We given well borrowers. moment. flurry and medium- sponsor levels to XXXX Labor bullish vast contributions John. be continues remain return direct the be some believe the of and outlook reset we and deal capital positive. outlook is for wall-facing to the leverage the of at M&A, opportunity to very of episodic magnitude in equity the world to capital of below need while of the where equity the but including sponsor-backed have but and overall, saw to structures issuance, dry long-term for activity there expectations remain continues maturity compelling, to flow loans down representing the in majority higher powder base as valuation with ongoing a the Day, our for as Deal bit remaining are XXXX make in the we levels Thanks, it the yields market rates, as private significant the meaningfully pockets post of verticals structures. We growth LPs general activity a defensive opportunistic of attractive peak at rest continue lending selective. Yield on

presents it borrowers to over of a portfolio only overall higher market the market deal. Page is to seeking portfolio syndicated earnings. continue ratings. analysis incremental into accretive for reopened, good lending the existing toward with base lower companies an lending market the large to while positive opportunities sponsors, the loans the rate has primary certain practically deal on direct to our to effect unique provides XXX M&A. Despite well-performing market borrowers, continues direct we execution insight remains that of for increasing make XX pursue Given issuers see interest push rates Ongoing more NMFC's open volume, select volatility of

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

debt-to-equity Moving In on X.XXx we continued to XX. on middle range. to our deleveraging modest towards our Page QX, the focus of X

companies refinancings a due borrowers to of some DDTL repayments result, the we lien of highlight both several positions, were to incremental two second actually I'd with second outside strong performance M&A. repayment whereby as first the net draws, modest lien As out repaid that activity, or lien. experienced take enables

Given outearn of base the environment, high dividend. not rate ability has minor impact impeded the deleveraging regular to our our significantly

end, quarter deals. continue we overview, market and received repayments have that available opportunities, the conviction capital compelling deployment provide in our to for highest discussed I see into should a As post additional few some

In addition $XX.X mentioned, quarter a a management we dermatology PhyNet, that end of John position the received practice EaglePicher repayment also $XX.X in to our post million million repayment business.

Page XX. our about our senior first is prior SLPs lien, equity X/X in Which are asset our net the investments, Turning consistent to Approximately of is side of mix with shown right positions, and the of nature. that which quarters of X% show of on are largest comprised lease of inclusive page. the the portfolio where

As mentioned in cash-yielding these hope those we rotate dollars prior the of in and into quarters, assets. positions medium monetize certain term to equity

in for Our protection brief owning own weighted class, well tenants XX of a nature critical thought downside facilities the and the longer X% strong leased at yield approximately refresher that We core annual performer, rent essential $XX current average be net was enter glance. geographically diversified the operationally growth asset properties, sale-leaseback estate. like realized cash with real our continues We XX transactions pharmaceutical facilities, only with of and properties to lease warehouses of on We've including strategy. our and creditworthy the while verticals. We physical associated generated to the portfolio, portfolio, a worth are the to portfolio manufacturing XX and strategy as duration defensive of and shows the packaging escalators operationally a in we million as the manufacturing XX%. Page a tenants. it into date gains

shows trends XX spreads attractive to higher We speaking, Generally XX.X% have longer increased exposure. Page support NMFC's QX credit shift the borrowers. net scale the underlying QX, from and our retail base XX for highlights average XX.X% the of target. Page yield to or the our has that portfolio and office primarily no remain investment rate in in of curve. income due for

EBITDA As of has you borrowers average the over our last million. can see, quarters $XXX the several weighted increased to

be an first our new opportunity internal concentrate foremost to criteria that knowledge, how safer, else borrowers defensive all marginally on and larger we and While maps we equal. believe growth tend against

an of the relevant to portfolio. from weighted continue We X.Xx the average the loan-to-value be see the to over been several interest rates coverage last average current interest interest modest coverage continued the on rise. Loan-to-values The Portfolio leverage coverage also declined quarters. has show perspective, and has compression to across quite portfolio consistent portfolio an leverage quarter. company stats and we've XX%. From slightly X.Xx, as base last compelling,

continued We continue to expect investment are interest note to and additional coverage valuations. support ratios proactively consists stabilize, liquidity performing is to that that sponsors and are we've companies and attract that indication able a well company This of healthy portfolio that activity. M&A great and seen our

now XX% and XXX our Finally, cover XX of about of total illustrated portfolio on will represents top we our for as value SLP portfolio results. names. I highest a The XX, across companies. have fair investments Page diversified inclusive conviction funds lease our and account net financial

was please yesterday SEC. our on quarterly the details, to that with more Form XX-Q report filed refer For

mentioned portfolio on had quarter. with prior our and At on on shown debt X debt-to-equity I XX, cash show investments share of of which quarterly consistent SBA of $XX.XX sheet the to billion, was and debentures. Net net at September we sheet, $XXX statutory statement Slide liabilities X.XXx ratio $X to value in the $X.X asset outstanding balance or our quarter per down compared previously. On of balance with million the was results. available slightly excluding $X.X billion drawn $X.X end, income the As deleveraging X.XXx value XX, billion assets total $X.X was of approximately total total billion, Slide billion, XX statutory guaranteed of fair

For million, investment year. over prior an we of prior total year. earned XX% Total million, increase XX% $XX.X income the quarter, current expenses a approximately $XX.X net were over increase

As important reduce note also support during for that pledged adviser committed 'XX has of has a It calendar X.XX% recoup management to cannot fee, the reminder, dividend. previously and share needed, XXXX per to to regular this to $X.XX fee adviser investment is waived. fees if the investment the quarterly the incentive period as adviser a The years. fully investment this and

NII for regular quarter QX $X.XX exceeded adjusted weighted per meaningfully was dividend average our the of share. $X.XX Our which per share,

demonstrates, QX. of is given XX income Slide in investment this fees the total our XX% quarter, As earned recurring minimal

see believe that the shows this is is our You predictability will cash. of in quarterly historically of of We average, and over income stability on and XX% over nature our paid XX% recurring income income. in investment consistency regularly our

Importantly, income over green names. our is generated our XX% of rated from quarterly noncash

our XX. dividend. The the Slide to red regular line shows of coverage Turning

share. QX This quarter dividend regular NII our per exceeded adjusted $X.XX by

diversified For Directors dividend various supplemental as of account quarter at regular a declared million financing end, again share $X.XX SBA debentures, profile. highlight QX on and total base subject our sources we we into leverage per capacity billion has lines dividend with well XXXX, of of per limitations. $X.XX to Taking XX, our available guaranteed borrowing share. On Board of revolving a had our Slide $XXX $X.X as borrowing

We fixed and the and fixed rate continues debt XX% an have valuable a floating of debt, rate to earnings tailwind. of be mix

the given important are during covenants times. Bank a the our Wells our As the rather underlying Fargo time, marks both than more Deutsche reminder, that of to, we tied which businesses credit performance investments think under lend facilities operating generally we volatile at of any is to of and particularly

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

of Pro have XXXX. forma or Bank maturities company of XXXX debt upsized liquidity. for been Fargo maturity extended additionally that, our and Post successful XXXX, manage at Deutsche As and extend respectively. We in end, Wells XXXX. to XX% over matures to revolver we've maturities quarter our to laddering after management our and diversified we facilities both successfully we've credit our our debt to issuance, amended

unsecured like access back various markets to maturities the John. most provide investment-grade call that to the continue turn to multiple cost-efficient explore over further to us ladder our that, would credit Our manner. With we debt to in I ratings

Thank you, Laura.

again As the we deliver our XXXX, we thank of portfolio, we of begin confident stakeholders. I for open for forward to to look the shareholders. We over track returns continue support are now maintaining to and believe quality back and dialogue and things in your great of investment will out with balance Q&A. Operator? to you remain transparent the to risk-adjusted all look once on operator an turn our our

[Operator Instructions] Finian from Wells Our first Fargo. question comes from O'Shea

expand post your how revolver if remaking that might structure the you upsize quarter? play on adviser Can into applicable. And the of capital

Sure. Yes.

quarter we historically $XX ever but liquidity. post end December end, million this the to we 'XX. liquidity. We've and the stack, for series incremental to also part drawn So it's have of 'XX just from quarter just focus things push years to overall And X think commitment on to did management of of, upsized big continues it try But side just a million just signal relatively do would good revolver the from liability support that generally also I but December again, a a say, our to help an it as remains still on company portion post not our from liability And facility. adviser, investment maturities, just to small which important it's extended was $XXX maturity we us. be out from

more, you just don't as and use drill Right. down really you helpful. touch out, That's pointed it. to And

a that of indicate show that to is use your is you supplemental upsize other more it a might support it? might of -- liquidity you lending the does facilities for of this need? So sort Or

force. those with strong with of of try key And all and said, bigger Laura we we as get mean as maximize facilities in just relationships I to uncertain many view show extended somewhat recently. of we why we our that as tools And this really available as all we're wouldn't have environment, an have. providers. I a we liquidity

every was more balance strength said, for to do that but Laura sheet that. we and So liquidity and avenue to just want really manager use to we as the it, than we could show don't happy expect

quarter in we've commentary. seen Great. on rate. touched that the event, the follow-up, going your Okay. but sort fee waiver to I that of And know are the was extension, more a fee the just X.XX% way last you base BDCs

way keep course, to And So it it model so discussions are your sort end so, that permanize it people of if not of the with at why that on credit? less, you can, any of leaning 'XX? or give still about color how and would Just matter private more a but this term long helpful. understanding be is confidence it you're just thinking more

Sure.

I industry. We've a think I for hope I of it's credit been a fees for base when been fair being to We've our topic management extended do lot it there's I of -- about base But there say X that I get at think investors, know it think activity a And management is on X.XX%. fee, we while. around discussion. some quarters. think I with the

fee. still you I when think we're look at the top quartile management base

about been feel we being So and around for We've our to at, where Board do friendly. we're aspects management to we're maintain just do other have at. going good said, always and fee with while. shareholder adviser our We of record agreement. That track dialogue a that at a where our we're X.XX%

our And from comes B. Riley. question Rowe Bryce from next

John.

more maybe sheet how it and this plays now. taking it seen row see, repayment the feels balance a activity and activity quarters in but the quarter, into in on of approach couple it we've for wanted like last Let's slightly into down sheet leverage. of balance how come and terms plays I some you're leverage, a of talked about it conservative to start origination a We

you're view this Or of the kind seeing a whole activity, of kind for is leverage? in leverage investment and kind some lower? the relatively what then terms as of the as far macro third subsequent terms repayment -- more to continue around is, work discussion it question third opportunities? you muted guess do origination quarter. sheet of activity here And see the of And quarter, think we'll working in I activity that of that is environment You with just balance so trend highlighted just

cover to Sure. that. I'm happy

are. So of kind of where deleveraging the we just in terms and

on -- do leverage we comfortable where So have X we're range a I to operating tried to But is focused the because X.XXx row as where there of that get range middle had quarters to trying several I highlight, have think had continue that high we our to perspective. we the are at we end from very stated of think been a that to range, of been we more in range. within

macro of of sense And so it given come we kind bit just the range. in, we're to a environment little down thought made middle more towards the the

what is that our here. results So QX is reflected in

little received more it's predict. think of to that kind think we I in hard the a range. redeploying obviously depending to after think It repayments of we're does quarter kind we I of continuing leverage get. those and proceeds end, around the operate middle bounce But repayments comfortable the bit on that I

in the originations, were definitely they terms So of QX more muted.

other been As little to of been leverage decision bit was necessarily in as the as we said, good still a have might some are do not have couple market we furious conscious of and more see but -- active kind commentary, market as years of and to ago, in fast be continue that NMFC. But pockets we we as continue overall think the profile conservative it opportunities. It's capital to for of I I some. -- seeing get see from that we said, have, want intentional. a good reflective some but did to that make it's I don't opportunities we a

redeploy quarter do some of and received some be those repayments end to I so able we'll that opportunities. post attractive think And we

I stuff. that for around $X.XX. to possibly That's that a up bit that you prospects good then following mark par, you yellow speak made repaid more names yellow And for same at little And from Can me. were highlighted comment think in you rated more more detail? the John, one rated name the there a maybe getting path.

on in mean yellow mean And repay. I'm I names at back It to wanted can't to I that just that list any don't good names mentioned, have going when to green. red. look And any performing I we're chance yet know good have I don't make looking I we at yellow because we the doesn't the good some specific think trip around. there's we one-way point name do general, to it that pretty optimism to the them go we Sure. it's yellow that of list names names. yellow that But that a perform. we is have way do I as could the names, But a on some They're see doesn't want that see not as outcomes. specific our

very every had a at So yellow when feel position, a and particularly gets it par, a even of paid excited repaid, we're though very value yellow time through we marked at gets that was fair does $X.XX good. that small it

[Operator Instructions] KBW. have from We now a question Paul from Johnson

I only have a few.

the current of margin so anything in you the guys business? drove On just that valuations lower? specific gave. the mark $X.XX Was the for Edmentum, this down What or slide quarter is or

overall business. to good the Edmentum a Particularly right? that No. history when of be continues Yes. just us, you think for about performer

kind for positions little we taking -- this so so come where in, were in the of that some every of we quarter And is all quarter. as industries, to bit we of I down the value sympathy with and just it valuations, down fair consistent M&A we're would have a think, bit markdown more some the look with a just overall just for environment say that our little

think I have from I there income what of And this stuff rate you that kind it of I the is kind go, there you'd from in been lower? it. quarter. future third sort as that off for for expect the growing those you slightly SLPs as any $X.X a the investments, decent so all quarters but then of is or know be what is joint run Is JVs? be to ventures, a mean, million has obviously Or onetime far for Got just around getting the good

rate. Yes. those given There's no as stabilize, But are just rate from of seen bit. seems benefit good to a SLPs massive in floating think the just particular, also I Obviously, we've estimate. the underlying good do all and think rising good I benefits environment, start it reasonably a SLPs onetime relatively the indication. move quarter-over-quarter, rates items. a JV, but lease, the naturally it's that's net a little little bit, they All do assets around

been in is first going because are One thing lien those on JVs syndicated the assets. LLF loan that's

better year, out helpful very of Over been have been spread spread dollar yields. course trade driving price. the lower and And names buy we to the names at higher in similar able of that's

fund. So see we yield enhance increased in feel of credit good taking And risk. the to very we continue good portfolio we're opportunities about that doing to the what without

funds are mini within these exciting So our NMFC. little

And this over John our Kline. the like question-and-answer to session. concludes to turn I'd conference

third look forward thanks, year. with next Thank everyone, Well, conference our quarter and call, to Great. you. you speaking for joining earnings we

has now attending conference Thank for concluded. so today's much you The presentation.

disconnect. now may You