Q4 2021 New Mountain Finance Corp Earnings Call
Good morning, and welcome to the New Mountain Finance Corporation fourth quarter, 2021 earnings call.
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Please note. This event is being recorded I would now like to turn the conference over to Robert <unk> CEO . Please go ahead.
Thank you and good morning, everyone and welcome to New Mountain Finance Corporation's fourth quarter earnings call for 2021 on.
On the line with me here today are Steve <unk>, Chairman of NMFC, and CEO of New Mountain capital John .
John Kline President of NMFC, Shiraz Apache C F O of NMFC, and Laura Wholesome C O O of NMFC.
Laura was promoted to C. O O February 15th and has been a core member of the credit team for over 10 years, 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.
Everyone before we get into the presentation I would like to advise everyone that today's call and webcast are being recorded please.
Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited.
Information about the audio replay of this call is available on February 28 earnings press release.
I would also like to call your attention to the customary safe Harbor disclosure in our press release and on page to slide presentation regarding forward looking statements.
Today's conference call and webcast may include forward looking statements and projections and we ask you to 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.
We do not undertake to update our forward looking statements or projections unless required to by law.
To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call.
Visit our website at Www Dot New Mountain Finance dotcom.
At this time I'd like to turn the call over to Steve Klitzke, Nmfc's, Chairman, who will give some highlights beginning on page five slide presentation Steve.
Thanks Shiraz.
It's great to be able to address all of you today as both the chairman of NMFC.
And as a major fellow shareholder.
I'll start by covering the highlights of the fourth quarter.
Net investment income for the quarter was approximately 31 cents per share.
Fully covering our dividend of <unk> 30 cents per share that was paid in cash on December 30th and above our prior guidance.
Our net asset value was $13 49 per share.
A 1.7% increase from last quarter's net asset value.
Primarily driven by continued appreciation in our Ed Mentum and Ari I T equity positions.
The regular dividend for Q1 2022 was again set at <unk> 30 per share based on estimated net II of 30 cents per share.
As we discussed on our previous earnings calls risk controlling downside protection have always been part of New mountains founding mission.
Our firm as a whole now manages over $35 billion in total assets with a team of over 190 people.
We have never had a bankruptcy or missed an interest payment in the history of our private equity work.
We have applied that same team strength and focus on downside protection.
NMFC and our credit efforts.
The great bulk of Nmfc's loans are in a cyclical sectors with secular tailwind such as enterprise software Tech enabled business services and health care services and technology.
These are the types of defensive growth industries that we think are the right ones in all times and particularly attractive in difficult times. We believe our portfolio continues to be well positioned due to this defensive growth investment strategy and as evidenced by an average net default loss of only.
<unk> seven basis points a year since we began our credit operation in 2008.
Our portfolio of company risk ratings have remained generally unchanged since our last earnings call and we had no new non accruals this quarter.
The fourth quarter represented a record origination quarter for our credit business overall, given the active market and increasing market share of direct lending more broadly.
Combined with the strength of our sourcing capabilities.
Lastly, I would like to provide a quick update on the several initiatives discussed last quarter.
Given our strong earnings profile, we have not needed our dividend protection program, but we wanted to remind shareholders of its existence and our support of the 30 cents per share dividend. Additionally.
Additionally, our at the market or ATM stock program is off to a nice start with approximately $18 million of net proceeds since it launched in November .
Together, the new mountain professionals have invested over $600 million personally.
NMFC and new mountain's credit activities.
I and management remain as Nmfc's largest shareholders. We have continued to add to our personal positions in the last 12 months and Rob John and I have never sold a share.
With that let me turn the call back to Rob.
Thank you Steve.
As we have throughout the Covid crisis, we continue to update each portfolio company scores on our heat map using the same criteria discussed in the past and as outlined on page eight.
We believe our portfolio continues to be very well positioned overall, the updated heat maps show the slightly net negative risk migration this quarter as summarized on pages nine and 10.
$49 million of negative migration from one issuer in the insurance services space.
Certain segments of this business has faced some COVID-19 headwind and the company has had some FX challenges more broadly.
Given these performance challenges combined with an upcoming revolver maturity, we migrated the risk to orange from yellow on our heat map. We are in active discussions with the sponsor and hope to have an update regarding a potential solution in the near term.
The updated heat map as shown on page 11.
You can see given our portfolio's strong bias towards defensive sectors like software business services and health care. We believe the vast majority of our assets are very well positioned to continue to perform no matter, how the public health and economic landscape develops.
We continue to spend significant time and energy on our remaining red and orange needs, which represent just 8% of our portfolio at fair value.
We have seen some positive momentum in several of these names and are optimistic that as the impact of the pandemic hopefully continues to recede in the months ahead. These credits will benefit and migrate positively on our heat map.
Page 12 is a view of our credit performance based on underlying portfolio company leverage relative to LTM, EBITDA and shaded to the corresponding color of the heat map.
As you can see the vast majority of our green rated positions have shown results that are very consistent with our underwriting projections exhibiting either very minor leverage increases or in many cases leverage decreases.
On the lower right side of the page we show a group of seven companies that have more than two and a half turn of negative leverage drift most of which correspond to a yellow orange and red rated names. These.
These companies represent a small portion of our portfolio that have underperformed.
[noise], partially due to adverse conditions caused by the well documented volatility in certain parts of the economy from a liquidity perspective, we believe that all seven companies have adequate resources to pursue their post COVID-19 business plans and have a reasonable prospects for improved performance in 2022.
With that I will turn it over to John to discuss market conditions and other important performance metrics.
Thanks, Rob so far this year, we have seen volatility in many parts of the equity and fixed income markets driven by interest rate concerns supply chain disruptions and geopolitical instability. However, direct lending remains healthy, giving float given floating interest rates.
And secured debt structure structures that are inherent to the asset class.
While the direct lending market has experienced a normal seasonal lull in the first part of Q1 in recent weeks, we have seen increased activity as sponsors seek to deploy a significant amount of dry powder in 2022.
Over the course of the last few years, we believe that direct lending has increased its share of the overall financing market and we expect this trend to continue in 2022 as sponsors seek ease of execution single debt tranches and committed capital for future acquisitions.
Operating performance trends across our core defensive growth industries remained strong which has created a backdrop for healthy sponsor purchase prices, resulting in very attractive loan to value ratios for lenders.
As we reported last quarter, there was a tight pricing range for direct lending solutions as most deals that we evaluate have very similar spreads regardless of credit quality.
Given this dynamic there is little incentive to stretch on credit quality, which plays very well to our strategy of a financing best in class companies in defensive industries.
Page 14 presents an interest rate analysis, where we show how potential changes in the base rate could impact nmfc's future earnings.
Given the expectation for base rate increases this analysis has become more relevant than any time in recent memory.
As shown the vast majority of our assets are floating rate loans, while our liabilities are 53% fixed rate and 47% floating rate.
Given this balance sheet mix NMFC offers its shareholders consistent and stable earnings in all scenarios, where LIBOR or sofa remain under 1%.
If base rates rise above, 1%, which is expected to happen in the near future. There is meaningful upside to Nmfc's net investment income.
All things being equal if base rates rise to 2%, which could occur within the next 12 months.
Annual earnings per share will increase by 10 cents or 9%.
This positive interest rate Optionality offers material potential return enhancement to our shareholders and provides an attractive hedge against higher rates across the U S economy.
Turning to page 15, we present, our book value performance since the Covid pandemic began where we showed that the portfolio recovered nicely over the course of the last two years.
In fact today, our book value is nearly 2% higher than it was in the quarter preceding the health crisis.
This recovery has been driven by an increase in the fair value of our core debt portfolio and appreciation of certain equity positions.
The largest of which are shown on the right side of the page.
Going forward, assuming assuming solid operating performance and a supportive valuation environment. These equity positions could continue to increase in value.
Page 16 addresses nmfc's long term credit performance since its inception.
On the left side of the page we show the current state of the portfolio.
We have $3 1 billion of investments at fair value.
With $29 million or less than 1% of our portfolio currently 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 9.2 billion of total investments only 276 million had been placed on nonaccrual.
Of the non accruals.
Only 79 million had become realized losses over the course of our 13 plus year history.
Limiting losses over a long period of time is perhaps the most important metric for a credit manager.
We remain committed to transparently disclosing these metrics to our investors.
The chart on page 17 tracks the company's overall economic performance since its IPO in 2011.
As you can see at the top of the page since our initial listing NMFC has paid $933 million of regular dividends to our shareholders, which have been fully supported by 939 million of net investment income.
On the lower half of the page we focus on below the line items, where we show that since inception, we have cumulative net realized and unrealized losses of just $24 million, which is a $22 million improvement from last quarter.
It is important to highlight that this aggregate loss remains a tiny fraction of total dividend payouts to date and as we look forward. We remain very focused on reversing these losses, primarily through potential gains on our equity positions.
Page 18 shows a stock chart detailing nmfc's equity returns since its IPO nearly 11 years ago.
Over this period NMFC has generated a compound annual return of 10, 4%, which represents a very strong fixed income return and then in an environment, where risk free rates have averaged less than 1%.
Nmfc's performance has materially exceeded 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.
Additionally, in recent months during a challenging environment for risk assets NMFC and its BDC peers have performed very well compared to the equity and fixed income markets that we track.
I will now turn the call over to our C O O Laura Holsten to discuss more details on our recent originations and current portfolio construction.
Thanks, John and Steve Previewed Q4 was a record origination quarter for our direct lending platform with aggregate deployment of $1.5 billion.
Pages, 19, and 20 outlines a strong and diverse origination with N and M. A C, which were well balanced with the portfolio and that's keeping us fully invested and within our target leverage range.
Our originations included lead and co lead mandates club deal flow and add on investments to existing portfolio companies. We continue to have great success targeting and sourcing high quality deals with our niches of the economy, we have the highest conviction.
Since quarter end as shown on page 21, we continued our sourcing momentum with five new financings during the months of January and February .
Net of repayments, we expanded our book by $105 million and we remain within our target leverage range.
Looking ahead, we expect our deal flow to fully absorb any proceeds from ordinary course loan repayments as well as any incremental capital raised or ATM program.
Turning to page 22, we show that in Q4, our portfolio continued to migrate up the capital structure.
Our originations were heavily weighted towards first lien loans and increasing sponsor interest in the unitranche product well, our sales and repayments were evenly split between first lien and non first lien assets.
We plan to maintain an asset mix that is consistent with our quarter end portfolio, where approximately two thirds of our investments inclusive of first lien S. M P's and net lease are senior in nature.
Page 23 shows that the average yield of Nmfc's portfolio increased slightly from eight 8% in Q3, the nine 1% for Q4.
While the environment is competitive the market spreads for high quality deals remain supportive of our net investment income target.
Turning to page 24, we show a detailed breakout of Nmfc's industry exposure.
The Center Pie chart shows overall industry exposure, while the surrounding pie charts give more insight into the significant diversity within our software services and health care sectors.
We believe these sectors are well positioned in an inflationary environment, given the pricing power and margin profile that comes along with the largely tech and services nature of this industry.
And you can see we have successfully avoided nearly all of the most troubled industries, while maintaining high exposure to the most defensive sectors within the U S economy.
Finally, as illustrated on page 25, we have a diversified portfolio.
Our largest single obligor Edmonton now represents four 1% of fair value as the company continues to appreciate in value. It has.
Strong underlying business performance and secular tailwind and the education technology space.
As a reminder, advent them as a model case study of a business that restructured many years ago, and we employed our business building capabilities to drive to a great recovery and realized significant equity upside.
The top 15 investments inclusive of our S. L. P funds account for 36% of total fair value.
With that I will now turn it over to our CFO Shiraz Cadgy to discuss the financial statements drive.
Thank you Laura.
More details on our financial results in today's commentary. Please refer to the Form 10-K that was filed last evening with the SEC.
Now I'd like to turn your attention to slide 26.
Portfolio had approximately $3 $2 billion in investments at fair value at December 31, 2021, and total assets of $3 3 billion pounds.
We had total liabilities of 2 billion out of which total statutory debt outstanding of $1 6 billion, excluding $300 million of drawn SBA guaranteed debentures.
Net asset value of $1 3 billion ounce were $13 49 per share.
<unk> was up 23 cents from the prior quarter.
At December 31st our statutory debt to equity ratio.
123 to one and net of available cash on the balance sheet. The pro forma leverage ratio would be 120 to one.
On slide 27, Michelle our historical leverage ratios.
Historical NV adjusted for the cumulative impact of special dividends.
Consistent with our goal of minimizing credit losses, you're maintaining a stable book value over the long term.
You'll see that current nev adjusted for special dividends has recovered from the depths of Covid and has surpassed nev from our IPO almost 11 years ago.
On Slide 28, we show our 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 2021.
Total investment income of $67 $8 million, a slight decrease from the prior quarter.
Total net expenses were approximately $38 2 million, a slight increase quarter over quarter.
As discussed investment advisor has committed to a management fee of $1 two 5% for the 2021 2022 and 2023 calendar years.
We have also pledged to reduce how incentive fee if and as needed. During this period to fully support the 30 cents per share quarterly dividend.
It is important to note that the investment advisor cannot recoup fees previously waived.
This results in fourth quarter, NII of $29 $6 million or <unk> 31 cents per weighted average share.
Which exceeded our Q4 regular dividend 30 cents per share.
As a result of the net unrealized depreciation in the quarter for the quarter ended December 31, 2021, with an increase in net assets, resulting from operations of $52 2 million homes.
On slide 29 relate to give a brief summary of our annual performance for 2021.
For the year ended December 31, 2021, with total investment income of approximately 270 million ounce and total net expenses of $151 million.
This results in 2021 total adjusted net investment income was $118 million or $1 22 per weighted average share which more than covered our dollar 20 regular dividend paid in 2021.
In total for the year ended December 31, 2020 . One we had a total net increase in net assets, resulting from operations of approximately $202 million.
Slide 30 demonstrates our total investment income is recurring in nature and predominantly paid in cash.
As you can see 91% of total investment income is recurring and cash income remains strong at 81% in this quarter.
We believe this consistency shows the stability and predictability of our investment income.
Turning to slide 31, as briefly discussed earlier our N.
For the fourth quarter exceeded our Q4 dividend.
Based on preliminary estimates, we expect our Q1 2022 NII will be approximately 30 cents per share.
Given that our board of directors has declared a Q1 2022 dividend 30 cents per share, which will be paid on March 31, 2022 to holders of record on March 17th 2022.
On slide 32, we highlight our various financing sources.
Going into account SBA guaranteed debentures, we had over $2 $3 billion of total borrowing capacity at quarter end with over $360 million available on our revolving lines subject to borrowing base limitations.
During the fourth quarter, we closed on a 10 million dollar upsizing, our NMFC credit facility.
And amended and extended our management company revolver pushing out the maturity to 2024, while decreasing our applicable spread materially by 300 basis points.
As a reminder, both our 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 our investments at any given time.
Finally on slide 33, we show our leverage maturity schedule.
As we've diversified our debt issuance, we've been successful at ladder, our maturities to better manage liquidity and over 75% of our debt matures after 2025.
We have a $55 million unsecured notes maturing in July that we can comfortably retire with the current capacity in our revolving credit facilities.
Furthermore, our multiple investment grade credit ratings provide us access to various unsecured debt markets that we continue to explore to further ladder out maturities and the most cost efficient manner.
With that I would like to turn the call back over to Ron.
Thanks, Shiraz in closing we are optimistic about the prospects for NMFC 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.
We once again, thank you for your continuing support and interest wish you all good health and look forward to maintaining an open and transparent dialogue with all of our stakeholders in the days ahead.
I'll now turn things back to the operator to begin Q&A operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Paul Johnson with K B W.
You May now go ahead.
Good morning, guys. Thanks for taking my questions.
Instead of G. Today so.
In the last couple of quarters I know you discussed slightly I was just about on the private equity co investments you've been making me thinking about an adviser.
Is there any developments there have you guys made.
Investments.
Alongside <unk>.
Mountains in the last quarter or year to date.
Yeah, so nothing so far in the last quarter year to date, we did make one early on we were obviously going to be quite selective.
And to some degree it's also going to be a function of our available capital and we've been you know our R. R.
Our traditional debt origination has been so strong we just havent had a lot of available capital, but I I would expect to see you know them.
Multiple investments over the course of 2022, but no no promises.
Sure Thanks for that.
And then.
I'm just I'm just wondering if you could talk a little bit about net lease program and just kind of the return profile from that asset class and I'm sort of curious how rising rates affect the asset class.
Your rates going higher that would benefit the yield from the investment and then also just what are your I guess growth intentions there.
Any color on that would be.
Yeah.
Yeah. It's a good question. So I mean, you know that the net lease program has been really incredibly attractive source of a return for us as as we've gotten both double digit current income out of it as well as very significant capital appreciation as cap rates in this space.
Go go down and the cap rates are a function of two things right base rates, which has until very recently been been very low and two risks risks risk premia are obviously as rates start to turn around we have some risk of increasing cap rates are decreasing the.
<unk> of the assets, although we continue to see risk premia decline because of the value of our real estate as an investment hedged as an inflation hedge excuse me. So we are though you know exploring the possibility of monetizing.
It's a material portion of the portfolio.
So we are not exposed to the extent that there are we were at a new rate cycle to the extent, we're not so we're not exposed to that so I think there'll be more to say about that over the course of 2022.
But the total returns have been well north of 20% across the portfolio. If you factor in both current income and appreciation of our equity investment. So it's been a very very good good performer for us.
Thanks, I appreciate that.
And then your portfolio.
Is it a service oriented in nature.
So I'm just curious for companies like that how does inflation generally flow through those types of companies and kind of what could we expect to see I guess, maybe more what youre seeing.
Okay.
Yeah.
Sure. Paul This is John I mean, I think you hit on it we finance a lot of technology enabled business services software lifespan.
Life Sciences specialty materials. So these are all businesses that I think have really good pricing power, they're growth oriented businesses and so you know I really think they're there last to suffer when we think about inflation I'm not saying, there's no impact but in general, yes, we really like our businesses.
On an inflationary environment, and and and I think you know if you look across our competitors I just think our portfolio stacks up very well with regard to to protection against inflation, given the characteristics that I that I mentioned.
Okay, Thanks, and I appreciate that and last one for me I.
I was just curious I don't know if this is something that you've talked about in the past but.
For your portfolio you guys have an average EBITDA of the portfolio that you have today and has that changed over time.
Well over the course of the last several years or so.
Yeah.
Yes.
So I would say we can we have some data.
But I'm just I'm just flipping to.
Just wanted to make sure you know.
We.
Uh huh.
We can dig that up but.
On balance I would say the businesses have gotten modestly larger.
I think we you know all else equal we take comfort in larger businesses.
And I think as we talked about on the call a little bit today, we've seen.
The private unit tranche penetrate deeper into the upper middle market and a lot of those deals are in are our sweet spots and so we've been participating there and so that that will modestly increase the average EBITDA of our our borrower, but we still cover.
The waterfront from you know call it 20, or so million of EBITDA 100, plus million of revenue on the low end all the way up to multi hundred million dollar EBITDA borrowers on the higher end.
Okay. Thanks, I appreciate that that's all for me.
Yeah, you're welcome thank you.
Our next question comes from Bryce Rowe with tough Degroup you May now go ahead.
Great. Thanks, good morning.
Just wanted to ask about it.
Hey, good morning.
Ask about the comment that Shiraz made.
Obviously, just a small $55 million tranche of unsecured notes.
Due here in 'twenty two there there are a couple more.
They're there in 'twenty three.
And it sounds like you've obviously been keeping an eye on the unsecured notes market.
When they get a feel for.
How do you feel about your shifting possibly from that unsecured positioning too.
One of the secured facilities, given maybe where rates are looking today spreads on those on that on that type of instrument.
They have moved up a little bit or at least the base rate may have moved up a little bit. So just any any thoughts around how you think about these upcoming maturities.
And whether you're comfortable going with a higher level of secured versus unsecured.
Yeah.
I mean, I'll take a crack at a I don't I don't think we would expect to materially change the mix, we really do like the flexibility provided by the unsecured capital. So that roughly 50 50 mix that we have you know it may move by plus or minus 5%, but we're not going to wake up in the 70% secured one day and 30% unsecured.
So we're constantly evaluating the tradeoffs between flexibility and cost and we think both markets are very open to US right now and it's just you know marginal cost versus marginal flexibility, but but unless the cost got incredibly prohibitive.
I think we will maintain roughly.
Roughly the ratios, where we're running with today.
Okay, that's great Robin and then maybe just a question about.
The competitive environment you all have stayed active than you typically do in terms of.
New activity and being offset by some of the some of the repayments in the sales.
Have you seen any shift in pricing, whether tighter or wider.
Didn't didn't necessarily sound like it but just curious what you've kind of seen here in the early part of 'twenty two if there's if there's been any shift.
And and spreads are or pricing.
Yeah.
No we haven't seen any material changes I would say it feels kind of largely in equilibrium at the moment you know John talked about just the general market environment environment, where were seeing really high quality deals in the sector that we know and like and those you know those deals they have definitely do remain competitive.
But we've we've seen largely pretty consult a consistent spreads you know in the last couple of quarters I think largely due to just the equilibrium kind of more broadly in the market.
Yeah, the only thing I would add to that I think the interesting question will be over the course of the year, if and as LIBOR. So far you know gets materially above one one and a half it starts getting to two you know maybe even low twos early next year.
Our people ultimately absolute return or are they spread and it's a mix I think so my guess is you'll see some of that total return, giving back and spread compression, but not nearly all of it.
But again, that's that I think is an interesting dynamic and one we haven't really lived through in a in a long time. So we will have to say.
Yes for sure it will be it will be interesting to see how rates.
Especially the shorter shorter end plays out this year I appreciate the comments.
Okay awesome. Thanks.
Yeah, great. Thank you.
Okay.
Again, if you have a question. Please press Star then one.
Yes.
Yeah.
There are no further questions. This concludes our question and answer session I would like to turn the conference back over to Rob Hamlin for any closing remarks.
Great. Thank you and thanks, everyone as always appreciate the time and attention and the support as you know we're always here to answer questions directly.
And look forward to speaking to everyone again, if not over the course of the quarter next quarter. Thank you and have a great day.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.