Q4 2020 New Mountain Finance Corp Earnings Call
Good day and welcome to the New Mountain Finance Corporation fourth quarter, 'twenty and 'twenty Conference call. All participants will be in a listen only mode should you need assistance. Please signal our conference specialist by pressing Star then zero.
After today's presentation, there will be and opportunity to ask questions to ask a question. You May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Rob Hamley CEO. Please go ahead.
Thank you and good morning, everyone and welcome to New Mountain Finance Corporation's fourth quarter earnings call for 2020.
On the line with me here today are Steve <unk>, Chairman of NMFC, and CEO of New Mountain capital.
John Kline, President and C O O N and that's C and Shiraz <unk> CFO of NMFC.
Before diving into the business update and we do want to recognize that we continue to live through a public health crisis that is taking a significant human toll on our community across our country and around the globe. We hope that everyone is staying safe and that you and your families remain in good health.
Turning to business, Steve is going to make some introductory remarks, but before he does I'd like to ask Shiraz to make some important statements regarding today's call.
Thanks, Rob.
Morning, everyone.
Before we get into the presentation I would like to advise everyone on today's call and webcast are being recorded.
Please note and that the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited.
Formation about the audio replay of this call is available and our February 24th and earnings press release.
I would also like to call your attention to the customary safe Harbor disclosure in our press release and on.
On page two of the slide presentation regarding forward looking statements.
Today's conference call and webcast may include forward looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections.
We do not undertake to update on forward looking statements or projections unless required to by low.
To obtain copies of our latest SEC filings and to access the slide presentation, we will be referencing throughout this call.
Please visit our website at Www Dot New Mountain Finance dotcom.
At this time I'd like to turn the call over to Steve Glinski, and unless he's chairman who will give some highlights beginning on page four of the slide presentation Steve.
Thanks Shiraz.
It's great to be able to speak to all of you today as both the chairman of NMFC and as a fellow shareholder.
New mountain as an organization.
As always sought to explicitly emphasize downside safety and risk control as well as upside returns and therefore has emphasized defensive growth industries that can best survive unexpected market downturns.
New mountain and started with private equity 20 years ago.
And now manages over $30 billion of assets, including both private equity and credit.
Risk control was part of our founding mission.
Happily we have never had a PE portfolio company bankruptcy or missed an interest payment and the history of our private equity effort.
Similarly as of today we.
We have had only $79 billion of realized default losses.
<unk>, 0.4% loss rate on the over $12 billion of total debt, we have bought since beginning our credit arm and 2008.
Meanwhile, we have had significant gains both in private equity and credit.
And I'm F. C has paid $839 million of total cash dividends since NMFC went public in 2011 or about $13.50 of dividends per share and all.
New mountain was built with defensive growth industries, and risk control and mind long before Covid hit.
The great bulk of Nmfc's loans are in areas that might best be described as repetitive tech enabled business services, such as enterprise software or.
Our companies often have large installed client base of repeat users who depend on their service day in and day out.
These are the types of defensive growth industries that we think are the right ones and all times, and particularly attractive and difficult times.
With that background, let me turn to the specifics of this earnings report on page four.
Net investment income for the quarter ended December 31 was 30 cents per share fully covering our dividend of <unk> 30 per share and in line with our prior guidance.
The regular Q4, 'twenty and 'twenty dividend of <unk> 30 per share was paid in cash on December 30th.
Every borrower paid their interest and Q4 and.
And new and no new borrowers were placed on non accrual this quarter.
We currently do not anticipate any additional portfolio companies going on non accrual in Q1.
Our December 31st net asset value was $12.62 per share.
And increase of 38 cents per share or a three point and 1%.
From the September 30th and they'd be up $12.24 per share.
The regular dividend for Q1 2021 was again set at <unk> 30 per share and will be payable on March 31, 2021 to holders of record as of March 17th.
New mountain as the manager and it's been highly supportive of NMFC.
And has significant resources, including a strong balance sheet to further support NMFC.
And I and other members of new Mountain.
<unk> to be the largest shareholder of the company with ownership of approximately 12%.
Insiders have added approximately 1 million shares to our holdings should be on.
And set up the crisis.
In conclusion, we remain proud of the work that our team did and carefully building a portfolio to withstand the crisis and I remain confident and nmfc's own competitive advantages and future prospects.
Let me turn the call back to Rob Hambly, CEO and I'm F C.
Yeah.
Thank you Steve.
While key quarterly highlights and our standard review of NMFC are detailed on pages five and six respectively. Once again this quarter I would like to focus my time on getting into more detail on the crisis impact on asset quality net asset value and leverage migration and net investment income and.
As detailed on page seven and order to assess how the crisis is impacting our borrowers and we continue to have extensive conversations with both company management and sponsors.
Based on those discussions we have updated each portfolio company scores on the two metrics, we used to generate our overall risk rating as a reminder, the first metric COVID-19 exposure rank from one to four the degree to which the company is currently being directly impacted by Covid.
The second metric overall company's strength is a combination of three sub metrics.
Pre COVID-19 business performance liquidity and balance sheet strength and sponsor support which we rank on a scale of agency base.
Based on our rankings for the two metrics and the resulting risk rating for each company. We once again plotted the overall portfolio accordingly to create and risk rating pizza.
The updated heat maps show that risk migration has been positive and summarized on pages, eight and nine with over $200 million migrating from either orange to yellow or yellow to green and no issuers showing negative migration overall, we are pleased that the asset quality and credit.
Trends across the portfolio.
The updated heat map is shown on page 10, and you can further see from the heat map given our portfolio's strong bias towards defensive sectors like software business and federal services and Tech enabled health care. We believe the vast majority of our assets are very well positioned.
And to continue to perform well.
And matter, how the public health and economic landscape develops we continue to spend significant time and energy on our remaining red and Orange names and believe if the impact of the pandemic recede and the months ahead. The majority of those credits will benefit materially.
Our largest orange asset benefit continues to make progress towards value recovery as the impact of our new executive Chairman, New CEO and are fully engaged P. E. Operating team begins to be reflected and the operating metrics of the business.
We have increasing confidence that the strategic plan that has been developed has a reasonable likelihood of cheese cheeping full principle recovery and even potential gains and the coming years.
Page 11 outlines the quarter's net asset value increase and the path back to pre Covid book value.
And Q4, we recovered an additional 38 cents per share of the dramatic decline we witnessed in Q1, the largest driver of this quarter's recovery, representing 23 cents, what the continuing market impact and our green names.
Fred for well performing credits and our core verticals continued to decline.
The other significant driver accounting for 18 cents was a further recovery and our restructured and equity portfolio, particularly in our net lease REIT, where large declines and cap rates led to material asset appreciation.
Looking forward, we believe we should see further positive price movement, and our green and yellow rated loans.
If our risk assessment is correct should continue to recover and coming quarters as the world normalizes.
Even in our Orange and Red current pace of charities, while risks are clearly elevated.
And we would expect a significant majority of those to continue to pay full interest and principal and ultimately move back towards par.
We also believe there is further opportunity across our restructured and equity portfolio for book value recovery in the quarters to come, particularly and it mentum benefits and unitek and <unk>.
On the slide illustrates if the yielding assets returned to par we would require 16 million dollar of $16 million of value increase across the restructured and equity portfolio to return to our pre COVID-19 and book value.
And the underlying operating trends and a number of these businesses. We believe this is achievable in the medium term and $16 million represents just a 6% increase from the current holding value of these securities.
Turning to page 12, and Mentum had a noteworthy fourth quarter as the ongoing strength and the business allowed the company to sell a significant stake and attractive valuation.
As you May recall at mountain is a leading provider of K 12 online learning programs and 2012, NMFC invested $31 million and and Mentum second lien term loan to support the merger of Pleader, Plato learning with archipelago learning.
Softness and the business began in 2014 due to a significant change and competitive dynamics within the industry and a lack of product investment and innovation.
In 2015, NMFC, partially echoed type its position and became a meaningful equity owner of the business.
NMFC and other equity owners installed a new management team and invested in a multiyear significant product refresh and leading to a printer turnaround and performance and.
And NFC put further capital and to the business at this point significantly increasing our ownership.
Covid has been a further tailwind for it meant and driving both immediate and sustainable growth.
And December 'twenty and 'twenty the victory of group, a Chicago based private investment firm acquired a 50% stake and the company deleveraging the balance sheet and resulting in a full recovery plus significant gains for NMFC.
And then and I see chose to reinvest a meaningful portion of the proceeds and remain a significant shareholder due to our strong conviction and the continued growth of the company and the likelihood of material further value creation.
In summary, we have invested a total of approximately $78 million into advent them. Prior to the recent sale and have now received cumulative gross cash proceeds from this transaction of $117 million inclusive of accrued pik a $60 million.
Of which we will reinvest $89 million.
We look forward to keeping you all updated on what we hope will be further positive developments on this important and exciting portfolio company and the quarters ahead.
Page 13 shows that we continue to manage our statutory leverage ratio at a very comfortable level.
Gross debt for the fourth quarter was basically flat so the increase and net asset value drove further reduction and our net statutory leverage ratio, which is now down to one two times.
We continue to have a number of portfolio companies currently in active sale processes.
The anticipated culmination of which will give us additional financial flexibility to either reinvest or further delever.
This point, we only have $15 million of Undrawn D. D. T. L exposure, our intention is to manage the business and statutory leverage ratio net of cash of 1.0 to 1.25 times.
While our first priorities in this environment continued to be asset quality and balance sheet strength.
Also want to continue to maximize net investment income while preserving enterprise safety.
To that and quarterly net investment income is stable at 30 and Q4, we continued to mean company absent a dramatic change and market conditions and our ability to generate approximately 30 cent of NII per quarter going forward to support the dividend.
With that I will turn it over to John Kline to discuss market conditions and other elements of the business John.
Thanks, Rob.
The course of last year, despite the ongoing Covid health crisis direct lending market conditions steadily improved.
While there are pockets pockets of ongoing stress as a result from the pandemic, we see robust multiple and strong prospective sponsor interest and high quality defensive companies.
After a seasonally slow January we have seen the pipeline and continue to build week over week, leading us to believe that we will experience solid portfolio activity going into the spring.
Secondary trading levels and the broader sub investment grade credit markets, which we view as a gauge of market health and nearly returned and in some cases surpassed pre COVID-19 levels.
Companies and our core defensive growth sectors, such as software health care technology, and and technology enabled business services are performing particularly well.
We believe these sectors will continue to attract significant capital and 2021 as investors seek to maximize exposure to forward thinking companies that will be well positioned and a post COVID-19 world.
While we've seen and some pressure on yields and private credit the returns and our marketplace remain highly attractive compared to most other credit asset classes.
Turning to page 15, we now show how potential changes and a base rate could impact nmfc's future earnings and youth.
And see the vast majority of our assets are floating rate loans with our liability evenly split between fixed and floating rate instruments.
And I must use current balance sheet mix offers our shareholders consistent and stable earnings even if LIBOR remains under 1%.
If base rates rise above 1% as the economy normalizes post COVID-19, there is meaningful upside to Nmfc's net investment income.
For example, assuming our current asset and liability mix, if LIBOR reaches 2% our annual NII would increase by 9% or 10 cents per share at 3% LIBOR earnings would increase by 19% or 20 threep per share.
Page 16, and dresses historical credit performance, which shows NMFC is long term track record.
On the left side of the page we show the current state of the portfolio, where we have $2 97 billion of investments at fair value with $25 million or less and 1% of our portfolio currently on non accrual.
This quarter as mentioned earlier, we did not place any new borrowers on non accrual.
On the right side of the page, we present nmfc's cumulative credit performance since our inception in 2008, which shows that across $8 1 billion of total investments. We have 600 million that had been placed on a watch list with $236 million of that amount and migrating to non accrual.
Oh, and non accruals only $79 million and become realized losses over the course of our 12 plus year history.
Page 17 is a view of our credit performance based on underlying portfolio company leverage relative to LTM EBITDA.
As you can see even despite COVID-19 and the majority of our positions have shown results that are very consistent with our underwriting projections exhibiting either very minor leverage increases or in many cases leverage decreases.
There are seven companies were securities that have more than two and a half turns of negative leverage drift.
Two of these names are red names on our Covid rating scale, which have materially underperformed as a result of COVID-19, but given that the vaccine.
Brighter prospects for the second half of 2021.
And there are two orange names with material negative drift one as a marketing services company, which we have mentioned in the past that has suffered various operational challenges and the other day distribution business, which has experienced material COVID-19 impact, but continues to have significant liquidity to support long term it's long.
Term business plan.
Our yellow names include company BZ and unitek.
Any BZ is a pre K through 12 education related business that has experienced enrollment headwinds and pre K segment, but remains well positioned over the long term.
You attack expects to have a materially improved year and 2021 and its core telecom construction business is positively explode exposed to multiple attractive growth trends.
Finally, we have one green name on our migration list and operates and a financial services compliance sector. The.
The company has experienced a difficult start to 2020 due to COVID-19 related delays, but after a sponsor equity infusion and improved operating environment. The business has recently shown better financial performance.
Based on current trends, we anticipate that this asset will migrate back towards closing leverage over the course of 2021.
The chart on page 18 tracks the company's overall economic performance since its IPO at.
At the top of the page we show that our net investment income has always cumulatively covered our regular quarterly dividend.
On the lower half of the page we focus on below the line items, where we show that since inception highlighted in the Blue box MFC has experienced 21 million of net realized losses.
And Gray we showed that NMFC has total unrealized portfolio markdowns of $86 million.
Combined these two numbers represent $107 million of cumulative net realized and unrealized losses.
This bottom line number represents a $37 million improvement compared to last quarter, driven by the positive change and our portfolio marks that we discussed in detail earlier in the presentation.
Since the Q1 2020, low point and Nmfc's fair value, we have recovered $146 million of unrealized losses as Rob discussed we continue to believe that most of the remaining cumulative net unrealized loss can be recovered over time, if certain performing positions returned to par.
Historically troubled names continue to recover and the overall value of our equity positions appreciate modestly.
Yes.
Page 19 shows a chart detailing NMFC stock returns since IPO.
While the performance of our shares were impacted by fears around the pandemic.
Recently, we have seen material material improvement and our share price as investors have become comfortable with the trajectory of the U S economy and.
And gain confidence and the stability and attractive yield of our portfolio.
Since our IPO nearly 10 years ago, and MFC has a compounded annual return of nine 5%, which materially exceeds that of the high yield index as well as an index of BDC peers that have been public at least as long as we have.
Page 20 provides a final look and nmfc's cumulative return compared to the individual returns of peers.
As you can see and MFC has been the second best performer among the peer group that we attract since the IPO.
We continue to build on this total return performance with a 30 cent per share dividend, which based on the current stock price represents an annualized dividend yield of approximately nine 8%.
Turning to our investment activity tracker on page 21, this quarter, our net originations were just $32 million, reflecting our fully invested portfolio.
In total we had $184 million of new originations offset by $152 million of sales and repayments.
New originations, primarily consistent of investments and and Mentum and add on investment and benefits the expansion of our net lease portfolio and several SB IC related financings.
Page 22 details a group of new investments that we've made so far this year, which include further expansion of our successful S. L. P program.
A new net lease investment in our REIT subsidiary and.
And several new club deal financings, one of which was eligible for inclusion and the Spic's program.
This represents a good start to the year from an origination perspective, and we believe that the deal volume will continue to accelerate heading into the spring.
On page 23, we show that the average yield and Mfc's portfolio was stable from Q3 to Q4 and approximately eight 6%.
For the quarter, we were able to originate a group of assets with a weighted average yield of nine 7%.
This healthy yield was supported by the had mentioned and benefits financings are net lease real estate purchase and second lien investments.
Going forward based on our current pipeline and overall business and business strategy, we believe that our Mike that our origination mix will revert back to our traditional first lien and heavy orientation.
On page 24, we have several detailed breakouts of Nmfc's industry exposure.
Center Pie chart shows overall industry exposure, where the chart on the right and left and give more insight into the diversity within our services and health care verticals.
As you can see we have successfully avoided nearly all of the most troubled sectors, while maintaining high exposure to the most defensive COVID-19 resistant sectors within the U S economy.
On the lower half on the page we showed on the portfolio continues to and a high degree of first lien exposure with approximately 66% of our portfolio investing is senior oriented assets.
Additionally, we present any breakout of risk ratings that match the heat maps shown in the beginning of our presentation.
Finally, as illustrated on page 25, we have a diversified portfolio with our largest single name investment at three 3% of fair value with the top 15 investments accounting for 37% on fair value.
With that I will now turn it over to our CFO Shiraz <unk> to discuss the financial statements and key financial metrics Trust.
Yeah.
Thank you John.
For more details on our financial results and today's commentary.
Please refer to the form 10-K that was filed last evening with the SEC.
Now I would like to turn your attention to slide 26.
The portfolio had approximately $3 billion and investments at fair value at December 31, 'twenty, and 'twenty and total assets of $3 1 billion.
We had total liabilities of $1 9 billion of which total statutory debt outstanding was $1 5 billion, excluding $300 million of drawn SBA guaranteed debentures.
Net asset value of $1 $2 billion with $12.62 per share.
It was up 38 cents from the prior quarter.
At December 31st our statutory debt to equity ratio was 1.24 to one.
And as mentioned.
Net of available cash on the balance sheet, the pro forma leverage ratio would be 120 to one.
On slide 27, we share our historical leverage ratios and our historical and adjusted.
Adjusted for the cumulative impact of special dividends.
On Slide 28, we show quarterly income statement results.
We believe that our NII is the most appropriate measure of our quarterly performance.
This slide highlights that while 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 December 31, 2020, we on total investment income of $67 $8 million and increase of $2 5 million from the prior quarter, primarily due to higher fee income.
Total net expenses were approximately $38 7 million, a $2 2 million increase from the prior quarter consistent with the increase in investment income.
As in prior quarters, and the investment adviser continues to waive certain management fees.
Effective annualized management fee this quarter was $1 three 5%.
It's important to note that the investment advisor cannot recoup fees previously waived.
This results in fourth quarter NII of 29 point.
$1 million on 30 cents per weighted average share, which covered our Q4 regular dividend of 30 cents per share.
As a result of the net unrealized appreciation and the quota.
For the quarter ended December 31, 'twenty and 'twenty, we had an increase and net assets, resulting from operations of $66 $1 million.
On slide 29, and I'd like to give a brief summary, if all and annual performance for 'twenty and 'twenty.
For the year ended December 31, 2020, with total investment income of approximately $278 million.
And total net expenses of $157 million.
This all results in 'twenty and 'twenty total adjusted net investment income of $121 million or $1.25 per weighted average share.
Which covered about $1.24 regular dividend paid in 'twenty and 'twenty.
And total for the year ended December 31, 'twenty and 'twenty, we had total net.
Total net increase and net assets, resulting from operations of <unk>.
And at least $62 $5 million.
And slide 30 demonstrates our total investment income is recurring in nature and predominantly paid in cash.
As you can see 90% of total investment income and some curtains.
And cash income remains strong at 83% this quarter.
We believe this consistency shows the stability and predictability of our investment income.
Turning to slide 31.
And as briefly discussed earlier, our NII for the fourth quarter covered our Q4 dividend.
Based on preliminary estimates, we anticipate our Q1 'twenty 'twenty, one NII will be approximately 30 cents per share.
Given that our board of directors has declared a Q1 2021 dividend of 30 cents per share, which will be paid on March 31, 2021 to holders of record on March 17th 2021.
On slide 32, we highlight all various financing sources.
Taking into account and SBA guaranteed debentures, we had over $2 $2 billion of total borrowing capacity and with over $400 million available on our revolving lines and subject to borrowing base limitations.
In January we successfully issued $200 million of unsecured notes and an attractive rate of three eight and seven 5% to address our $90 million and near term maturity and.
And to lower our overall cost of capital by calling the entire $52 million and thought about $5 seven and 5% unsecured notes that were due in 'twenty and 'twenty three.
As a reminder, both on Wells Fargo and Deutsche Bank credit facilities covenants are generally tied to the operating performance of the underlying businesses that we lend to rather than the marks of flow investments at any given time.
Finally on slide 33, we show our leverage maturity schedule and.
As we've diversified our debt issuance and had been successful at ladder and how maturities to better manage liquidity.
We had one near term maturity idea and and.
And we have recently repaid with proceeds from the previously mentioned January notes issuance.
With that I would like to turn the call back over to Rob.
Thanks, and straws and.
In closing we are increasingly optimistic about the prospects for MFC in the months and years ahead.
Our long standing focus on lending to defensive growth businesses supported by strong sponsors should continue to serve us well.
All risks are more elevated than in the past and we cannot unequivocally discount more challenging scenarios.
We believe our model is well suited for the current environment. We once again. Thank you for your continuing support and interest and these difficult times and wish you all good health and look forward to maintaining and open and transparent dialogue with all of our stakeholders and the days ahead I will now turn things back to the operator.
To begin Q&A operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys. If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
[noise].
Yes.
Our first question comes from Finian O'shea with Wells Fargo Securities. Please go ahead.
Hi, everyone and good morning.
First question on on the Unitek upgrade.
And Robert John and it felt like that was last quarter that the one major situational name that you were a bit more.
Measured on your ability to recover.
And so for us.
So could you provide and there's also you know.
A significant amount to be recovered they're still so I guess a two part question can you expand a little bit on on what.
What happened, there and and but any change and outlook on on.
Recovery potential.
Yeah, absolutely and I'm going to turn that one over to John as he is he's really done more day to day and on Unitek John.
Sure sure. Thanks, Ben Yeah, and I think as we've articulated in the past 2019 2020, we're both tough years for units hack a we had some bad contracts and we also had a business unit that was on a perpetual state of decline and I think what's really happened in 2020 as we got out of the.
The business that was declining and we've also completely exited the bad contracts are now at Unitech. We have a collection of businesses that are focused on really one end market and that end market is fiber construction.
And <unk>.
Throughout the southeastern and southern states of the U S and those business units that make up unitek right now are all.
We believe and growth industries, they're all healthy and they're all operating.
Reasonably well some some units are operating very well right now so so.
Essentially that's really been the change and the complexion of Unitek. We've had we have had to support the business throughout these changes with a little bit more capital, but we do feel like Oh.
And it's a good investment to make and in and in these markets, which are growing and and the remaining businesses, which are as I said healthy.
Does that help.
Yep.
Yeah, I think the only thing I'd add to that is is is clearly you know unitech was impacted on the good businesses by Covid.
And as if Covid has receded.
To some degree are we that the company has lots of companies just adopted like many companies you know they've been able to run at a much much more full utilization rate then it.
Earlier in 2000 and.
And 'twenty.
For that that's helpful. Thank you and then just a question on outlook for activity.
You know, we're hearing a lot from them.
You know the market analysts and some of your peers that a refi wave is coming.
Do you what's your your take on that and and in addition, do you if you see that as well.
Can you comment on your pipeline today.
Yeah sure. So I think we definitely have you know are in the midst of a refi wave and the in the syndicated market.
You know to what degree that penetrate penetrates the private credit market. It certainly will to a degree we're not we're not seeing it right now, but I think we have to you know all acknowledged that if conditions stay on attractive and and spreads compress our we would expect to see some amount of refi activity it across.
The portfolio.
On the flipside to that is we are seeing you know pretty meaningful M&A activity, so from and from a pipeline perspective, you know it is quite robust right now.
Okay Awesome and then just the final question that came to mind also from your market conditions slide.
And so some of these businesses.
And enterprise software such as a major category of yours, and that's obviously been high.
<unk> become a higher quality part of the market in recent years and and was accentuated by Covid.
Do you see this try and like the strength and business software do you see that impacting your market.
Like you know leveraged price.
And that credit solutions.
For these businesses as as they go up and and become higher quality I think you mentioned that a.
Private equity money certainly still.
Still continues to.
Find its way there are some those businesses, but you know is that necessarily necessarily a good thing for you and <unk>.
And sort of a if that's something you currently see or something down the line you see.
Listen I think we've been seeing it for a number of years right and I think you know the notion of lending to and asset light you know enterprise software business. You know it has changed a lot and 10 years.
And so that's been and you know and ongoing evolutionary.
Thing that that we have seen I agree with you that you know COVID-19 has even further cast a light onto the quality of those business models and why theyre attractive entities to lend to.
But I don't I don't I don't think so.
And we're seeing a you know a step function change and the overall market.
From a lending perspective, I think there's you know for the last number of years, there's been plenty of guys, who like to lend to those businesses.
Good one has always been competitive to lend to we've obviously got you know our our stake and the ground and and have good share on that market and I would not expect that to change and I do think whats good for us and we will continue to see increasing.
Capital flows into the buyouts of those business models. So our our addressable market just continues to expand.
As private equity funds in general become larger and then dedicate lock increasing percentages of their fund sizes to the industries that we like and that we focus on.
Okay, Rob Thanks, so much that's all from me.
Great. Thanks, Dan.
Our next question comes from Ryan Lynch with K B W. Please go ahead.
Yeah.
Hey, good morning, Thanks for taking my questions first.
First one I had.
I don't really anticipate and you guys changing the types of businesses and sectors that you focus on going forward coming out of this downturn, but one question I did have was.
Do you anticipate changing kind of where you would potentially look to investing the capital structures of those businesses being that we are now on kind of the upswing and coming out of a credit cycle versus you know two or three years ago, but he was investing anticipation on the credit cycle hitting.
Just any thoughts on that would be helpful.
Yeah, it's a good it's a good question.
I think what we're going to continue to do is really focus on bottoms up approach.
Our approach to business is you know specific industries and specific companies that we know really well through P. And that we think are great credits and and I think that the place and the capital structure will be more a function of where the opportunity is that risk adjusted opportunities and I wouldn't say, we're gonna say Oh now we're at a different time and the cycle.
We should be 10% more weighted to junior securities that that's really not what we're gonna do I think you know will we want to get exposure is and that's a risk adjusted way possible to what what are the best business models that we know the best and so I would not expect us to target a different.
Our position and the capital structure based on our read of where we may or may not be and and the credit cycle.
Okay I understood.
Yeah.
Congratulations on the advent zone.
And investment that's obviously been investing and you guys with bandwidth for a long period of time.
Thanks, a lot and supported it and and it turned out to be agreed on a really good investment I'm just curious on kind of the outlook in that business and and based on this transaction you guys kind of re committed to that business and recommitted to that business at at and you know kind of bottom of the capital structure and you know the first exposure.
And your equity obviously, you have some preferred and English and that as well. So can you just talk about why you decided to recommit to that business and also felt comfortable committing and some of the you know the the riskier and obviously higher return opportunity portions of that capital structure.
Yeah. So.
So you know Edmonton.
<unk> has been a strong performing performed over the last two or three years, our prior to Covid as we as we really kind of revamped management and particularly you know the CEO, who has just been a superstar and.
And and as we've gone to just you know really get our arms around the business. You know it was a business that had some pretty strong secular trends and then when COVID-19 hit Covid came and it just put virtually all of those trends on on steroids. So so we see you know.
And we see a multiyear outlook forward mountain of you know you never want to say Oh. So you can't say guaranteed gross but when you look at all the factors are that drive the company's prospects and they're all about as green as one can be so so we think you know some of the best growth is really ahead of us.
And despite the fact that it has had incredible growth and the last year and solid growth. The last three years and we just want to you know we've done so much work and you know we we we frankly, if we didn't have a maturing capital structure and had met them in 'twenty and 'twenty. One we just would've weighted on a on a on a transaction generally right but.
But we had we had to do something either refi the debt.
Or bring in new equity and given the valuations and we thought it was a good time to take some chips off the table, but we wanted to recommit the bulk of our exposure because we just believe you know there is you don't want to write you want and Roger winners and and and the investment World. We've had very good success with that as a firm and we think this is one of them you know that that's a potential winter.
Is that we have exposure to so you know and we don't think this is not this is not going to take five years to play out you know I don't want to give a specific timeframe, but we think there's opportunity more on the medium term to show that that that future value.
Sure.
Mhm.
Understood, Yes, obviously and business you have deep knowledge and experience with fundamentals there.
And you sounded you know.
Somewhat what positive on even some of your more distressed business and its ability to recover and you know in 'twenty and 'twenty, one depending on on kind of the.
You know kind of on kind of economic recovery and.
And kind of as the reopening.
If you have any sort of baseline you know that there are.
Baseline.
Reopening and recovery that you guys used to make those those comments and.
And what would that look like.
I think it's really more around that than the narrower issuer around COVID-19 because if you think of some of those remaining stressed assets, whether it's getting to full utilization and dental because because of COVID-19 kind of getting significantly reduced or whether it's a you know and education based business not like it meant and but one that.
And that that is more levered to in person education or whether it's you know a a hotel expose business. Those are a few remaining red and Orange names you know all those things will benefit materially all else equal you know bye bye bye vaccination and by ultimately the.
On the the Covid the final Covid exposed names getting recovered so the handful of things they have their oh, it's more about that vs. Whether it's GDP up to or up five.
So you know the optimism and and we're not smarter than anyone else about epidemiology, but we're just we're just reading the same things that you and everybody else are that you know vaccines are happening and that vaccine that optimism is increasing and so its not crazy to think about a second half of 2021 were those those COVID-19 induced had headwinds reduced.
Materially and that should help those you know those few remaining businesses.
You know that that.
Net or on our heat map, so really Ryan I guess, it's the COVID-19 optimism relative to where we were you know a quarter ago that that's driving that that that tone change.
Okay.
Understood I appreciate that Rob.
And those are all my questions I appreciate the time this morning.
Great that we appreciate your on your interest thank you.
Our next question comes from Art Winston with pilot Advisors. Please go ahead.
Okay. Thank you for your for the excellent results and the amount of transparency and disclosure.
And then.
Thank you from.
It's the originations had a higher level of interest rate and of course overall interest rates are rising and it sounds like because of prepayments and whatever.
On the yield on the portfolio. It is definitely going to go down for the foreseeable future is that is that effect.
I'm not sure that's totally in fact, I think you know where we're originating at similar.
Yields as we have and they've come down somewhat I think the bigger driver is really the leverage coming down right and and where you know we're committed to that.
I think where state you know, where we should be relatively stable from here as a as.
From a leverage perspective, so I think and the question is on the one hand like you say rates are going up now where they're really going up more on the long end of the curve and we're not really exposed to that right. So we're more tied to the short end of the curve where rates are not going up certainly as Jon articulated you know if the short and at some point whether it's this.
Your next year and whenever if the short and does start to go after more historically normalized levels that would be a big tailwind for us.
And then it's you know it really comes down to what's going to happen with credit spreads, which you know have compressed somewhat this this year. So far but you know we've seen that before and then they they've gone back up so I think we're gonna be tracking that very carefully and that will really be the driver and the over the next couple of quarters as to overall asset level yields.
If that if that makes sense.
What why is it that your predilection is on the leverage side, rather than and taking the opportunity to expand a little bit with the bedroom environment, we're supposed to be seen.
Well I you know I think there's a couple of things right. I think you know until we get the true true all clear that Theres no new mutation and that is going to screw things up again or what it may be we still you know we still want to be a.
Somewhat defensively Postured and then I think you know what we're seeing is there is there may be an opportunity if we keep our leverage at a slightly lower level than what we were running at pre COVID-19, there may be an opportunity to materially reduce our borrowing and expensive. So we're you know, we're monitoring that and and trading off those those you know that that that math.
As well so so those are the things kind of driving right now everything and the leverage you know makes sense.
Okay. Thank you.
Yeah Youre welcome.
Again, if you have a question. Please press star then one to be joined into the queue. Our next question comes from Chris Kotowski with Oppenheimer. Please go ahead.
Yeah, good morning, and thank you.
I liked your slides 11 and about the you know the net.
And the recovery process and I was trying to.
Kind of mentally.
Uh huh.
Sure and equivalent map of what our what the path would be for a recovery of.
Your distribution to the to the pre COVID-19 level of 34, and I and the.
And the obvious.
Candidates would be you know rising short rates. So I guess and then also converting equity investments and two.
Yielding investments, but I mean is it is there.
Corresponding map to be drawn and what would be the key elements of that.
Yeah, and you hit on it Dead Center right. Those are the two drivers that get us get us back to wherever you are which as you know LIBOR going from 25 bps to 2% you know not like it needed to go to 6%, but 25 bps is tough and so that that's driver one and and driver to US exactly what you said, it's recycling some of this equity exposure.
And that has no yield, but it's still a compounding are ultimately monetizing that and re plowing that back into into yielding assets and that math is very powerful right. If you took you know just just use a round number if over time, you recycled $100 million of equity exposure and.
Two assets, yielding 8%, that's $8 million that really close to the bottom line right because there's no more extra management fee on that there's no more extra leverage that you need for that so you know that's that's pretty powerful and so it really is a combination of those two things and obviously, making sure there's no future.
Iteration, and and and in earnings on on future default would be offsetting that so that's that that is the rough the rough.
And those are the factors that will drive or and will drive it. So I think you're dead on that.
Okay, Alright, that's it from me thank you.
Youre welcome.
Yeah.
Our next question comes from Bryce Rowe with Hobdy Group. Please go ahead.
Right.
Thanks, Thanks, and good morning, everyone.
Hello.
And how can you hear me okay.
Yeah, Brian we can hear you well.
Okay, sorry, Robert I wanted to just kind of follow up on that on that comment you made about.
Potentially being able to further reduce some of your some of your interest costs and you know and clearly we saw the Oh good.
The issuance here recently it on it.
And a nice rate.
And so I'm curious kind of where where that comment is kind of targeted as it targeted to.
Some of the some of the unsecured debt that is on the balance sheet now or do you see some potential for spreads coming down.
And within the within the revolving facilities with within the capital structure.
Yeah, I think it's predominantly on the former on the unsecured side, but but but we do think there's room on the secured side as well you know as we come out of you know obviously with what was a tough year you know and.
And and and we've seen the.
The dramatic decline in and AAA CLO liabilities and the secured market tends to benchmark off of that market. So yes. We do we do think there's a potential opportunity. There. So it's it's both sides, but I think you know for the long term the more dramatic opt.
Attunity potentially.
Potentially is on the unsecured side.
Okay, and can you remind us what the.
What the opportunity is to refinance some of those unsecured notes and then obviously the next.
Next maturity is July of 'twenty, two and so just trying to think about kind of when and when you might.
Look to you know what look to pay those down and if if there is in fact and opportunity to to prepay.
Yeah, I mean, it's you know and the timing gets into you know call provisions, which are little bit different across the board and and just magnitude right I mean, if it if the GAAP and rate is big enough. You can you can prepay early and make that math work, but you can see you know our big our big maturity a wallet.
And is in 'twenty and 'twenty three.
But you know there may be the ability to pull some of that for like we're doing with the baby bonds for instance.
Now so you know it's a it's the timing would be over the next six to 18 months would be I think the way to think about it.
Okay.
That's all from me I appreciate I appreciate the comment.
Yeah absolutely.
Again, if you have a question. Please press Star then one.
Yeah.
Okay.
As there are no questions. This concludes our question and answer session I would like to turn the conference back to Rob Hanway for any closing remarks.
Yeah, Thank you and and thanks to everyone.
And I appreciate again is always the time and attention and look forward to talking to everybody and a couple of months to talk about Q1 and and in the interim of course of course, you know, we're always available and people know where to find it. So thank you and have a great rest of the day bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.