Q3 2019 Earnings Call

Ladies and gentlemen, this is the conference operator, please continue to hold and the conference will begin shortly.

Good morning, and welcome to the New Mountain Finance Corporation that caught out 2019, and it's cool and wet Pos.

All participants will be in listen only mode should you need assistance. Please take note conference specialist suppressing the stocky followed by <unk>.

After today's presentation, there will be an opportunity to ask questions to ask a question. He May press Star then one on your touched trying fine to withdraw your question. Please press Star then too. Please note. This event is being recorded.

I would now like to introduce Mr., Robert can wait Chief Executive Officer. Please go ahead.

Thank you good morning, everyone and welcome to New Mountain in 10 minutes corporations third quarter earnings call for 2019.

Along the lines to meet your today are Steve Klinsky, Chairman of NFC, and see Oh, you balanced capital.

John Cline, President and COO of 10 minutes C and sharav catchy CFO of NSC.

Steve Klinsky going to make some introductory remarks.

Before he does I'd like to have to shut off to make some important statements regarding to getting school.

[laughter]. Thanks, Thanks, Rob.

Good morning, everyone.

Before getting to the presentation I would like to advise everyone to today's call and webcast being recorded.

Please note that they had a property if the mountain Finance Corporation and that's funny any unauthorized forecasting any form is strictly prohibited information about the audio replay of this cool is available in one of them. The six earnings press release.

I'd also like to call your attention to the customary safe Harbor disclosure in our press release, how page two of the slide presentation regarding forward looking statements.

Today's conference call and what best May include forward looking statements and projections, we ask that you referred to almost switching filings with the FCC.

Good morning factors that could cause actual results to differ materially from those statements and projections.

We do not undertake update all forward looking statements all projections unless required to by low.

Okay copies of our latest FCC volumes to access to slide presentation that we will be referencing throughout the school.

Please visit our website at Www Dot New Mountain Finance dotcom.

Scott I'd like to turn the call over to Steve Klinsky M. A c's trimming well get some highlights beginning on page four dislike presentation Steve.

The team will go through the details in a moment, but let me start by presenting the highlights up another strong quarter for New Mountain finance.

Your mom financings net investment income for the quarter ended September Thirtyth 2019 was 36 cents per share above the high end of our guidance of 33 to 35 cents per share and more than covering our quarterly dividend of 34 cents per share.

Your mountain financings book value was down six cents to $13. Some 35 cents per share.

Reflecting generally stable financial market conditions, and limited portfolio company valuation changes.

We're also able to announce our regular dividend, which for the 31st straight quarter will again be 34 cents per share an annualized yield of approximately 10% based on last friday's close.

The company had a record quarter met deal generation.

Investing $452 million in gross originations.

Versus moderate repayments of $67 million.

Its continued significant balance sheet growth was impart funded by our recent equity issuance and keeps us fully levered at our target range.

Credit quality remained strong with no new non accruals for the fifth consecutive quarter.

Hi, and other members of New Mountain continued to be very large owners of our stock would aggregate ownership of 10.5 million shares today inclusive of the 400000 shares purchased in our most recent equity issuance.

Finally, the broader new mountain platform that supports and MFC continues to grow with over $20 billion of assets under management and approximately 160 team members.

In summary, we are pleased with Adam FCS continued performance in progress overall with that let me turn the call back over to Rob Hamwee, adding up season CEO .

Okay.

Thank you Steve.

Before diving into the details of the quarter as always I'd like to give everyone. A brief review of NMS speed and our strategy is.

As outlined on page six of the presentation.

The next C is externally managed by new mountain capital, leading private equity firm.

Since the inception of our debt investment program in 2008.

Taking new mountains approach that private equity.

Slide at the corporate credit with a consistent focus on defensive growth business models and extensive fundamental research within industries that are already well known to new mountain.

Or more simply put we invest in recession resistant businesses that we really know and that we really like.

We believe this approach results in a differentiated and sustainable model that allows us to generate attractive risk adjusted rates of return across changing cycles and market conditions.

To achieve our mandate, we utilized the existing new mountain investment team as our primary underwriting resource.

Turning to page seven you can see our total return performance from our IPO in May 2011.

November Onest 2019 in the eight and a half years since our IPO, we have generated a compounded annual return to our initial public investors of 10.6%.

Meaningfully higher than our peers and the high over the next and approximately 900 basis points per annum above relevant risk free benchmark.

Page eight those into a little more detail around relative performance against our peer set.

Benchmarking against the 10 largest externally managed bdcs that have been public at least as long as we have.

Page nine shows return attribution total cumulative return continues to be largely driven by our cash dividend, which in turn has been more than 100% covered by net investment income.

The bar on the far right illustrates over the eight plus years, we had been public we have effectively maintained stable book value inclusive of special dividends, while generating a 10.3% cash on cash return for our shareholders.

We attribute our success to one our differentiated underwriting platform to our ability to consistently generate the vast majority of our eni from stable cash interest income in an amount that covers our dividend three our focus on running the business with an efficient balance sheet and always fully utilizing inexpensive appropriately structured.

Rich before accessing more expensive equity and for our alignment of shareholder in management interest.

Our highest priority continues to be our focus on risk control and credit performance, which we believe overtime is the single biggest differentiator of total return in the BDC space.

Credit performance continues to be strong material quarter over quarter credit deterioration in only one significant mean PPV eight which has effectively been an ongoing liquidating trust under came in law for a number of years and which has been added to our internal watch list as a threex as our one signets.

Gently troubled asset we continue to spend a lot of time attempting to maximize our recoveries from the p. PVA entity to state.

Given the complex mix of underlying assets and litigation claims while we believe our valuation of 74 cents currently fairly reflects the midpoint of likely recovery scenarios significant volatility exists around the midpoint.

For the fifth consecutive quarter and 10 of the last 11 quarters, we've had no non accruals.

If you refer to page 10.

Once again lay out the cost basis our investments.

The current portfolio and our cumulative investments since inception of our credit business in 2008, and then show what has migrated down the performance ladder.

Since inception, we have made investments of approximately $7.4 billion in 282 portfolio companies.

Which only eight representing just $125 million of costs have migrated to non accrual, which only four representing $43 million cost have thus far but resulted in realized default losses.

Furthermore, over 99% of our portfolio at fair market value is currently rated one or two on our internal yeah.

Page 11 inches leverage multiples for all of our holdings over seven and a half million dollars, when we entered and investment and the leverage levels for the scene investment as of the end of the most recent reporting period.

Well not a perfect metric the asset by asset trend and leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical fundamental support.

Well, our internal ratings and marks.

As you can see by looking at the table leverage multiples are roughly flat or trending into right direction only a few exceptions.

There are currently three names that have had negative migration of two and a half turns or more.

To our names we have discussed from any previous quarters. The previously restructured Edmentum. We're operating results in enterprise value continue to meaningfully improve.

And company COO, where the combination of improving operating results and ongoing sponsor support through equity capital contributions make us confident about the future prospects alone.

New name on the list is be previously restructured unitek, representing two different securities CLL and C. M for a few operational missteps that to weaker financial results in 2019.

But were secular trends continue to be strong in the company's key operating division, providing us with optimism for improvement in 2012.

The chart on page 12 helped attract the Companys overall economic performance since its IPO.

At the top of the page we show how the regular quarterly dividend.

Being covered out of net investment income as you can see we continue to more than covered 100% of our tubular Reg regular cumulative regular dividend out of an IR.

On the bottom of the page we focus on below the line items first we look at realized gains and realized credit and other losses as you can see looking at the ROE highlighted in Green, we've had success generating real economic gains every year through a combination of equity gains portfolio company dividends and trading profit.

Conversely realized losses, including default losses highlighted an orange has generally been smaller and less frequent and show that we are typically not avoiding nonaccruals by selling poor credit at a material loss prior to actual default.

As highlighted in blue.

Neither had a net cumulative realized gain which currently stands at $18 million.

Looking further down the page, we can see that cumulative net unrealized depreciation highlighted in gray stands at $58 million and cumulative net realized and unrealized loss highlighted in yellow is a $40 million.

The net result of all this is that in our over eight years. The public company. We have earned net investment income of $674 million.

In total cumulative net losses, including unrealized of only $40 million.

Turning to page 13, we have seen significant growth in the portfolio over the last year as we've increased our statutory leverage from 0.81 to 1.2 of inclusive of our October equity offering.

Consistent with this strategy, we articulated when we received shareholder authorization to increase leverage more than 100% of the growth in assets has come from senior securities as through repayments in sales non first liens has actually shrunk on an absolute basis by $91 million.

Well first lien assets have grown by $1.1 billion.

I'll now turn the call over to John Cline, and sees president to discuss market conditions and portfolio activity John .

Thanks, Rob.

Outlined on page 14, after a slow start in Q1 direct lending deal flow in our core sectors has been exceptionally strong throughout the summer and into the fall.

New issue loans are priced at attractive levels, which support and that feed investment income targets.

We have observed that the enterprise value multiples for the best quality businesses are in the mid teens some deals trading for over 20 times EBITDA.

Overall, there continues to be heavy competition for loans to high quality businesses. Although recently lenders have shown increased discipline on structure in pricing. Additionally, there's more caution around financing businesses that have exposure to uncertain end markets.

Looking forward, we expect transaction flow to be very steady from now until the end of the year and we remain well positioned to select and access the best deals available in the marketplace.

Turning to page 15, given our current asset liability mix LIBOR has been a headwind in our business.

Thus far in 2019, we've seen LIBOR move from 2.8% in early January to 1.9% today. The forward LIBOR curve currently suggest a three month LIBOR couldn't declined by 30 basis points in the coming quarters.

Based on the sensitivity shown on page 15, if this does occur declining LIBOR would represent a modest one cent per quarter headwind.

We believe that the current spread environment and our improved debt to equity mix inclusive of the ongoing ramp or SP I see investing program will enable us to successfully address this potential downward trend in the base rate.

Turning to portfolio activity on pages, 16, 17, and 18 NFC had a very strong quarter with total originations of $452 million offset by $111 million of sales and repayments, representing a $341 million increase in our portfolio.

Our new investments were highlighted by a number of middle market club deals and the expansion of our third senior lending program.

Consistent with market trends that discussed in my opening remarks, most of our new deals our fresh buyouts trading at very healthy enterprise value multiples that are supported with historically high amounts of equity as a percentage of the total purchase price.

These purchase price multiples, which have steadily increased over the past year enhance the loan to value ratios on our loans indicates strong sponsor support and validate the attractiveness of the defensive growth niches that we target.

Our average loan to value on new originations in Q3 was 38%.

Page 19 shows our continued origination momentum since the ended the quarter, where we have invested $122 million, a new transactions with 18 month, and 89 million of sales and repayments.

Notable post quarter end transactions, including a new net lease deal originated in our REIT subsidiary and two new loans purchased in our SP I see investing program, which we continue to expand.

Looking forward, we have a solid pipeline of new investment opportunities in our core defensive growth verticals.

Turning to page 20, our mix of route of originations continue to skew meaningfully towards first lien loans accounting for 73% of total new originations this quarter.

Our sales and repayments were balanced evenly between first and second lien assets overall, our Q3 mix should it continued shift towards first lien assets consistent with our stated plan to employ increased portfolio level leverage with a more senior oriented asset mix.

As shown on page 21, and in a seat asset level portfolio yield has declined by about 10 basis points since the end since Q2.

From approximately 9.4% to 9.3%.

The decline is primarily due to the decrease in LIBOR or from the end of Q2.

While we are very mindful of the potential continued decrease in the base rate, we remain comfortable with our portfolio yield which solidly supports our quarterly dividend.

The top of pays 22 showed a balanced portfolio across our defensive growth oriented sectors in the services section of the Pie chart, we breakout sub sectors to get better insight into the significant diversity within our largest sector.

The chart on the bottom left or the page presents our portfolio by asset type, where you can see the shift towards firstly oriented assets that we discussed earlier in the call currently only one third of our investment our junior in the capital structure.

The chart in a lower right shows that the vast majority of our portfolio is performing broadly in line with expectations.

Finally, as illustrated on page 23, we have a diversified portfolio with our largest investment at 3.3% a fair value and the top 15 investments accounting for 33% of fair value.

And you can see on the lower right side of the page we've added more position diversity in each of the last four quarters to decrease our risk to any one borrower.

We expect this trend to continue going forward.

With that I'll now turn it over to our CFO Shiraz Kajee to discuss financial state.

Financial statements and key financial metrics Trust.

Thank you John .

For more details in our financial results in today's commentary please flip and Form 10-Q , two was five last evening with the FCC.

I would like to turn your attention to slide 24.

Portfolio had approximately $3 billion in investments at fair value at September 32019, and total assets of $3.1 billion, where total liabilities of $2 billion of which totaled statutory to outstanding was 1.6 billion, excluding $184 million have gone as they guaranteed debentures.

Net asset value of $1.2 billion $13.35, but.

Was down six cents from the prior quarter.

I will statutory debt to equity ratio was 1.2 to one pro forma for the equity raise we had in October .

And this offering and MFC issued 9.2 million shares raising $125 million in proceeds.

Lucille $46.8 million cash payment to the company by the investment manager and I'm actually not at $30.60 per share, which was above book value and accretive to all shareholders.

Since our IPO, we have had 13 follow on offerings in which the advisor has paid over $23.7 million in subsidies such that MFC always netted proceeds above book value.

On slide 25, we shall I wish historical leverage ratios.

Up and leverage over the past six quarters is in line with our current target statutory debt equity ratio.

On the slide we also saw our historical NPV adjusted for the cumulative impact of special dividends, which shows the stability of our book value since our IPO.

On Slide 26, we show our quarterly income statement results.

We believe that our nine is the most appropriate measure of how quarterly performance. This slide highlights of our realized and unrealized gains and losses can be volatile below the line. We continued to generate stable net investment income above the line.

Focusing on the quarter ended September Thirtyth 2019, we on total investment income of $72.6 million, an increase of $6.1 million from the prior quarter due to high interest income from the increased asset base and a stronger fee quarter.

Total net expenses of approximately $41.4 million, a 2.8 million dollar increase from the prior quarter due to higher borrowing cost Sophie.

As in prior quarters investment advisor continues the way of certain management fees.

The effective annualized management fee this quarter was 1.28%.

It is important to note that the investment adviser cannot recoup fees previously waste.

This results in third quarter, Eni of $31.2 million or 36 cents per weighted average share.

Which is above our guidance and more than covered our Q3 regular dividend of 34 cents per se.

As a result at the net unrealized depreciation in the quarter to quarter ended September Thirtyth 2019, but an increase in net assets, resulting from operations of 23.4 million ounce.

Slide 27 demonstrates our total investment income is recurring in nature and predominantly paid in cash.

As you can see 95% of total investment income as are occurring and cash income remained strong at seven at 87 side of this quarter.

We believe this consistency shows the stability and predictability of our investment income.

Turning to slide 28, as briefly discussed earlier, our NII for the third quarter more than covered our Q3 dividend.

Given our belief that our Q4 2019, and I will fall within our guidance of 30 335 cents per share.

Our board of directors have that has declared a Q4 2019 dividend of 34 cents per share, which will be paid on December 27th 2019 to holders of record on December 13 2019.

On slide 29 will highlight on various financing sources.

Taking into account SPD guaranteed debentures, we had over $2 billion of total borrowing capacity at quarter end.

During Q3, we successfully upsized, both our wells Fargo, and Deutsche Bank credit facilities by $80 million and $60 million respectively.

As a reminder, both our wells Fargo Endos Bank credit facilities covenants are generally types, the operating performance, but the underlying businesses that we lend to rather than the marks of our investments or any different time.

Finally on slide 30, we show our leverage maturity schedule.

As we've diversified our debt issuance, we've been successful at Laddering, all maturities to better manage liquidity.

Currently has no near term maturities.

With that I would like to turn the call back over to rough.

Thanks for us.

It continues to remain our intention to consistently pay the 34 cents per share on a quarterly basis for future quarters. So long as Eni covers the dividend inline with our current expectations.

Closing I would just like to say that we continue to be pleased with our performance to date.

Most importantly from a credit perspective, our portfolio overall continues to be quite healthy.

Once again like to thank you for your support and interests and at this point turn things back to the operator to begin today operator.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your touch time fine.

Using is they can find placed pick up your handset before pressing the case to withdraw your question. Please press Star then Kerry.

Your first question comes from Ryan Lynch with KBW. Please go ahead.

Hey, Ryan.

Hey, guys. Good morning, Thanks for taking my questions.

First one I wanted to discuss wise I'm looking at some of your originations this quarter.

Particularly in the healthcare industry as I look through some of these investments fine that dermatology affinity data on my eye Dr. Center for site.

There are several investments that look to kind of fit the traditional sort of health care or roll up a strategy.

We've seen several of those those businesses and in other parts of the market have some some pretty meaningful issue. So can you maybe just speak to some of your health care investments this quarter I wasn't particularly maybe some ones that I read I commented on are they kind of a traditional healthcare roll up and if so how you guys get.

Comfortable, particularly in the light up some weakness and some other companies in the broader market.

Yes, absolutely. So I mean healthcare is arguably our strongest vertical at the from overall, we've had incredible success hovered over 20 years.

In private equity in healthcare and and great success on the credit side, there as well now healthcare is is clearly an area, where you have winners and losers and I think having the intellectual capital to distinguish between those two is absolutely critical.

And so it is an area, where I think leveraging the platform is it's a particular importance in terms of some of those specific.

Platform companies you mentioned.

No there are definitely historically winners and losers and we'll prospectively be winners and losers in that space I think we're focused on.

Sectors within that whether its term or dental or I care that have but we believe that high levels conviction.

The best possible macro trends have the best underlying micro element.

Around reimbursement around all the other issues that are that are important obviously execution is critical service management teams that we know and believe in.

So.

We are.

By definition on single, we'd like them invested in them, but we're very very comfortable I think our track record we've done many of these over the years.

And to date knock on wood, they worked out but that will and I think weve every reason to believe these loans prospectively, well and I do we we'd say that with a lot of conviction because it's a it is a space we know incredibly well.

Okay. That's that's helpful commentary.

Can you maybe talk about the really robust portfolio growth that you had this quarter you guys have been very efficient in capital deployment, particularly after raising deploying that capital in a in a very efficient manner.

Can you talk about why there was such a robust growth this quarter and then also if I look at [noise].

Your slide deck, where it shows the amount you invested and into the tranche size you guys are typically investing in less than 50% of a tranche sizable investments. So there's one strategy that when you guys have.

Additional capital to deploy you guys can just increase your hold size and some of these deals did you guys were were planning on closing if if if the capitals there.

So so yeah, a couple of things on that so in terms of the pace of deployment I think in any three month period. There is some idiosyncratic element to it although as I think I've said in the past it certainly over a rolling six or 12 month period, our deployment pace is expanding.

And part of that is due to the overall growth in the platform and we now have within our core verticals.

Incremental sub verticals to address as mountain overall has gotten bigger and frankly better at what we're doing and part of it is the market is coming to US I think I've said before when you look at private equity capital formation, and we're fundamentally a sponsor finance provider.

The amount of capital flowing into funds that focus in our space is a has grown significantly and frankly, that's where the economy is going right into services away from.

Basic manufacturing and particularly into things like enterprise softer in certain areas of healthcare and business technology enabled business services. So I think overall private equity capital formation is getting bigger that drives deal flow to us I think overall direct lending continues to take share generally Andy.

Vertical that we focus on our growing faster than the already growing private equity industry. So I think all those things continue to lead.

When coupled again with the overall growth of the mountain private equity platform that drives our our credit business all of those things lead to continued growth and then in any quarter you can have a little bit more or less just depending on on that roll the short time period.

In terms of the percent of tranche issues now we think about follow on investments.

I'll make a couple of observation.

One is that often times the percent of traunch just at the BDC is a little bit misleading as as you know we have a few other other funds here private funds that co investment the BDC. So institutionally, we will typically have a larger percentage the challenge than just the piece that shows up on the BDC side.

And then secondly, you are right in that.

Many of their businesses that we lend to our themselves growing platforms of need for incremental capital over time, and we certainly like to put additional capital behind the businesses that that that we know unlike and have lived there for a period of time.

Does that answer the question Ryan.

Yeah that answers or not that's that's good commentary.

Mm one one last question maybe somewhat of a philosophical question. It's interesting you talked about on on slide 14, a high quality businesses often trade for you know 15 to 22 times EBITDA, but but there's a there's a larger.

Would you checks written for some of those kind of bridge the gap I wanted to get your.

Your your thoughts on how you guys view risk in a business that maybe has higher leverage you know the leverage and in a in a businesses, it's higher than where wise three or four years ago, but because there is larger equity shacks theres, a lower loan to value on those businesses.

Now these are a b L lending businesses. These are businesses that are went on cash flow. So how do you view the amount of leveraging a business, which has higher versus a lower loan to value because a larger equities Jack do you view those businesses as as a safer or more risky.

So I think there's a couple of items wrapped up in that question I think.

Listen by definition a business.

Relative to itself has the same amount of value intrinsic cash flow, etc, whether its levered four times already times, whether the loan to value is 30% or 70%.

But that said in the real World I think one of the reasons and there are lot of reasons, but one of the reasons. These multiples have gone up.

For the businesses is that these are businesses that are actually growing in generating cash at a higher rate I think than businesses. We've seen in the past. So I actually think it's not just pure multiple inflation for the same exact types of businesses that were purchased at a lower multiple five years ago that same business now come in.

And you know at five point higher multiple there's clearly some multiple inflation on a like for like basis, but the mix has shifted that we talked about businesses that trade at 18 times.

That a sponsor is putting in 11 and a half turns of equity.

That is a different business then I think we've seen in the in the past just just from a pure academic financial analysis perspective in terms of the growth profile the margin profile the free cash profile.

So we do feel that these are businesses that can support a modestly higher level of debt and I think you're talking probably about half a turn or sell relative to three or four years ago relative to you know four or five extra turns of equity capital.

So I think a little bit you're comparing apples to oranges, there and then I would say even if it was pure apples to apples there is value and having a sponsor have again four or five more turns of equity that will absolutely impact behavior in the event that incremental.

Capital is needed to to help out down the road people do look at money in the ground and well known in the end is going to throw good money after bad behavior at the margin in a significant way is impacted.

By the magnitude of the equity check. So I do think that is that is a truly helpful piece, even on an apples to apples basis is that all makes sense.

Yep Yep and it makes sense any I was comparing yeah, an apples to apples same business that now has more leverage but but the multiple has has grown.

Even more than that you know is that a more risky business today versus you know five years ago, so, but but not all that commentary makes sense and and I. Appreciate it that that's all for me I appreciate the dialogue.

Yes, no great. Thank you for the questions and appreciate the interest.

Thank you once again, if you wish to ask a question. Please press star one on your telephone and white Cnineteen out.

Your next question comes from Oh, and allow with Oppenheimer. Please go ahead.

Good morning, and thank you for taking my question.

So I have a modeling question your originations seems to be handled the quarter was very strong over $120 million. So given your conversation with with their clients. How should we think about the pays off the originations for the rest of this quarter or should we expect these will slow down a little.

But going into the holiday seasons.

Additionally, subsequent to the quarter and above 40% off the originations were a second lien.

Compared to about 26% off the total portfolio and I know you up in shifting towards first lien, but these anything we should the weight into this thank you.

Absolutely. So on the first question for Q4 pace of originations for the balance of the quarter.

We wouldn't expect Q4 to be as as heavily.

As mentioned origination as Q3, I think that was.

He is emphatically very strong quarter, but we do have a robust pipeline as John mentioned and we'd certainly expect to see.

A significant additions to the portfolio through the ended the year the market remains robust and I think what we typically see is a push into the second third week of December and then clearly things shut down for the for the holiday and into early January .

In terms of the second question no I would not read anything into that it's obviously, a very tiny sample size I think thats five deals.

And that's when you look at our forward pipeline.

We see.

Signet significant percentage back to a first lien so.

I think that are our mix will continue to be consistent with what we've seen over the course of the last 12 or someone.

So that the answer the question, yes, that's perfect and then on slide 15, and and I think somebody in the faster as discussed too concerned about the downside scenario if interest rates continue to go down.

Could you. Please elaborate more about what levers you can potentially potentially pool to maintain the different coverage. Thank you.

Yeah, absolutely I mean, I think obviously one leverage is one will want to lever is the leverage which we don't modulating within a band I think the second lender is the mix, which again, we modulating within a band I think not a lever, but but certainly something we continue to see is there is a.

An inverse correlation between base rate and spread so the at the base rate goes down we continue to expect to see maybe another one to one offset but a material offset in the in the spread environment. So I think all of that continues to give us confidence that.

Irrespective of the base rate environment.

We have high confidence in our ability to continue to earn earn the dividend.

That's great. Thank you very much.

You're very welcome.

Thank you once again, if you wish to ask a question. Please press star one on your telephone and White CNN stand out.

Your next question comes from saying I shared with Wells Fargo Securities. Please go ahead.

Hey fan.

Hey, good morning.

Just want to expand on a couple of Oh, Brian's earlier questions not not the philosophical one but the earlier ones.

Ali.

Health care services companies.

I want to tie this into your focus on new elbow deals switch.

Tend to be.

Ill higher quality.

But I think these days from.

Market observation often entail.

You know looser looser documentation to accommodates a rollout strategy.

So can you give some context on you know where you're coming in and these stories.

And what do you know what sort of EBITDA.

You know.

Or let's say.

How much higher as the adjusted EBITDA.

Down the road and the end and what.

Does that entail for for a new elbow these days.

Sure. So I guess two questions one in terms of timing.

We're typically coming in.

Yes, when there is enough scale in critical math.

Such that we're dealing with enterprise values, you know typically well north of $100 million I think on average, it's probably grew to $400 million. So we're not necessarily doing very early stage financing for a roll up we think theres less execution risk once the platform itself has as critical mass in turn.

As of adjustment look we all know that you know, there's a often times A.H.E. owning chasm between GAAP EBITDA and financing EBITDA one of our big Big.

Elements of our job is to underwrite what we actually think is real world.

Your earnings and cash club and you are really good at it because we do all the time on the P. side and so.

We are seeing a lot of a lot of.

A lot of the things thrown in there and we we sort of come up with our own view and definition and that's what we presented investment committee and that's what we focus on or not that interested in.

Slide number we're interested in the real number and that's what we factor into our investment or investment decisions and we obviously strive to have the credit agreement you know the as constrained around those types of things as is as it is reasonable let me do walk away from thing where either you know were unable to get comfortable.

So with and earnings level that makes sense or we have a document that allows for effectively infinite add backs as they think about go forward draws on facilities to allow for the Rollup to continue.

That's helpful. Thank you and then sort of another.

Quick question on on new investment.

You know, obviously, you're continuing to grow at a.

At a consistent pace and.

Looking at the new originations.

Pretty much looks consistent in terms of the amount you invest some of the some of the trust sizes are mid size summer or larger you know four or 500 million.

This quarter there was one looks like European syndicated jumpstart was a much larger facility.

Right.

As we're all seeing now today were.

The markets.

Pushing toward the private side on a lot of these you know six seven 800 million unitranches going private.

What are you.

How are you viewing those you know even in the context of your normal.

30, 40 50 million bite size do you see.

Those deals you know your your Connectwise and so for us.

Yes on attractive opportunity compared to the more core.

300, 400 million dollar facility size that you've been sticking to [noise].

Yeah listen it's a good question, but but I think we've always said that first principle is industry and business quality and that is that is really what we focus on you know kind of first second and third and if there's a great company integrate industry that we know intimately with less concerned whether the enterprise value.

As to 50 or a billion it so so so.

There are pros and cons as you think about.

Different sizes, but but it is a it is a it is a much further down the list of what we're focusing on we've never wanted to pigeonhole ourselves as you know were upper middle market lower middle market Middle Middle market. It's always been from the beginning that great defensive growth businesses that we know intimately tupi.

And then you can be flexible around that so so we continue to reemphasize that and yes as we've seen.

You know the direct lending sort of take share from the syndicated market increase at scale and ability to provide sponsors the solutions that sponsored want we're going to participate in that.

When that intersects with the great business that we know fairly well.

Fair enough that's all for me. Thank you so much.

Great. Thank you.

Thank you once again, if you wish to ask your question. Please press star one on your telephone and might see I named <unk>.

Your next question is a follow up question from Ryan Lynch with KBW. Please go ahead.

Hey, guys just had one follow up question, we've heard a and read about some I'm a little bit of early on so a little bit of softening and some of the liquid markets, but that seems to be particularly around some some maybe some some.

Perceive riskier credits or some credit Federated.

Minus EUR three.

You guys focus on you know noncyclical very strong durable businesses that are viewed as some of the highest quality. So it's a little bit of a different market than what seems to be having a little bit of softness I'm. Just wondering is that the case are you guys seen.

Any bit of softness or increasing her out better terms or structures in your market or is it as competitive as it has been over the last year.

It could certainly competitive but can you touch on an important thing that we absolutely are seeing and I think to our to our benefit which is the beat three market.

Is this is true mostly technical yes, it's late cycle, except for but mostly technical filos are very worried about their triple C. Buckets. How did you get to be a triple C will typically first year would be three and so the FILO buyers of classic syndicated first liens are death.

Currently shying away from B, three paper and you know our view there there there are businesses that deserve to be be three and capital structures in their businesses I, probably don't deserve to be three and there is some knock on effect.

You know via the our market ultimately benchmarks off of the bigger more liquid market and occasionally there actually action will things for us.

In the more liquid market. So so yes. It is a it is a yellow driven it's not it's not really that the numbers are getting worse. There are always areas of the economy or certain industries that are doing worse, but that hasn't fundamentally changed what's what's changed is that we're seeing.

Oh, just over time as the cycle lengthened feel those are piling up things in their triple C. Buckets are starting to get pretty full which means there is a desired at the margin irrs yellow manager to avoid.

Be three exposure because that means your one step away and that is having a EBIT of a knock on effect into the overall market, which in general is helpful to us from a spread in terms perspective, and John anything you'd add to that.

I mean, the only thing and the only thing I would add is when you look at some of the press around the syndicated market. You know it is clear there had been pockets of weakness in syndicated market I think.

Theres an article on Bloomberg said, 4.2% of the low markers trading below 80, and the observation I would make about those loans are typically there and you know the energy sector retail restaurants industrials.

It's fair to say there are couple of health care loans in there that that you know in sectors in areas that we proactively avoided.

So.

I think about the real stress in the syndicated loan market I think it's just.

Challenged industries that have.

You know where the underlying companies have had struggled and and the loans are going to trade down and there will be problems in those and those pockets of economy.

Okay that that is helpful color.

That's my one follow up thanks.

Great. Thanks, Ron.

Thank you.

Once again, if you wish to ask your question. Please press star one on your telephone and might Cnineteen out well pause briefly to limit questions to enter the Q.

We are showing no further questions at this time and this does conclude our question and answer session I would like to turn the conference back over to Mr. family for any closing remarks.

Yep is always just want to thank everybody for their time and attention and obviously, we're here for any follow up but otherwise look Florida speaking to people on our next call. Thanks very much by now.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect [noise].

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