Q3 2022 New Mountain Finance Corp Earnings Call

Okay.

Hello, and welcome to today's New Mountain Finance Corporation third quarter 2022.

What are you.

[laughter].

Yeah.

My apologies welcome to today's earnings call all lines will be muted during the presentation portion of the cool with an opportunity for questions and answers.

If you would like to ask a question. Please press star followed by one or the telephone keypads I would now like to pass the call principally to our hoist Bob Humphreys CEO of New Mountain Finance Corporation. Please go ahead.

Thank you and good morning, everyone and welcome to New Mountain Finance Corporation's third quarter earnings call for 2022.

On the line with me here today are Steve <unk>, Chairman of NMFC, and CEO of New Mountain capital, John Kline, President of NMFC, Laura Holsten C O O of NMFC and Shiraz catchy CFO of NMFC Steve.

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.

Good morning, everyone before we get into the presentation I would like to advise everyone that today's call and webcast are being recorded.

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 you know one of them eight earnings press release.

I would also like to call your attention to the customary safe Harbor disclosure in our press release and 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 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.

Please visit our website at Www Dot New Mountain finance Dot com.

At this time I'd like to turn the call over to Steve Kalinsky Nmfc's Chairman will give some highlights beginning on page four of the slide presentation Steve.

Thanks Suraj.

It's great to be able to address you all today, both as Nmfc's chairman and as a major fellow shareholder.

I believe we have good news to report despite the difficult U S economic conditions in recent months.

Net investment income for the third quarter was 32 per share more than covering our <unk> 30 dividend per share that was paid in cash on September 30.

Our net asset value was $13 20 per share.

Just a 20, a zero point to two or one 6% decrease despite the rising interest rate environment.

As some gains on individual positions such as Haven helped to offset the impact of rising interest rates on existing loans.

We believe our loans are well positioned overall in defensive growth industries that we think are right in all times and particularly attractive in the challenging macro conditions up today.

New mountain's private equity funds have never had a bankruptcy or missed an interest payment.

And the firm overall now manages $37 billion of assets. Similarly.

Similarly, our credit funds, including NMFC have experienced just six basis points of net default loss per year. Since we began our efforts in 2008.

Looking forward the rise in interest rates can be a substantial positive for our quarterly earnings going forward since we chiefly land on floating rates, which have been rising.

Accordingly, we are pleased to announce that we are increasing our dividend to <unk> 32 per share up from the current 30 per share for the fourth quarter.

New mountain as the manager will give dividend protection and in other words waive incentive fees if needed to maintain this level through at least the end of calendar year 2023.

As page 13 of the presentation shows there is also the potential to significantly out earn this 32 cents per share level at current interest rates if all other factors hold constant.

This extra earnings could appear as special dividends or as deleveraging of our balance sheet.

We believe the strength of new mountain and of NMFC are driven by the strength of our team.

New Mountain overall now numbers 215 team members and the firm has developed specialties and attractive defensive growth that is a cyclical growth sectors, such as life science supplies health care information technology software infrastructure services and digital engineering.

Talent has also been rising within this team.

And to this end we are pleased to announce a key promotion.

John Kline, who has helped lead NMFC and our credit efforts since 2008 will be named CEO of NMFC effectively January one 2023, Rob.

Rob Ham we will continue as a key leader of the effort as Vice chairman of NMFC and its investment Committee, where I continue as chairman Rob.

Rob John and I also continue as managing directors up New mountain overall, working as we have before.

Finally, we continue as major shareholders of NMFC owning over 12% of Nmfc's total shares personally.

Rob John and I have never sold a share of NMFC, even as we have been buying.

With that let me turn the call back to Rob.

Thank you Steve.

We have included a few new pages this quarter at a high level summary of NMFC, our priorities and our differentiated approach.

On page seven we show NMC at a glance highlighting our best in class quality metrics strong return track record over our 14 year history and detailed disclosure of the ace cyclical sectors, we have exposure to through our portfolio companies.

On the following page, we highlight nmfc's differentiated approach to lending.

Our defensive growth strategy enables us to focus on investing in strong businesses and a cyclical sectors, which provides insulation from macroeconomic headwinds as Steve described earlier.

We're not buying the market and proactively avoid the sectors of the economy, where we think there is the most volatility and cyclicality.

In addition, our credit business was founded with the idea of leveraging the intellectual capital of the full new mountain platform, we have real sector expertise in these defensive growth sectors. Thanks to a team of 89 investment professionals, who focus day in and day out on these sectors.

It is important to note our senior advisors operating executives and portfolio company Ceos actually run similar businesses, which allows us to identify the most attractive opportunities in the market.

This breadth of resources at our disposal allows us to go far deeper on diligence and the Standalone credit firm ever could and ultimately allows us to make better credit decisions and avoid mistakes.

Steve spoke earlier about our shareholder alignment, we believe that these three elements are defensive growth strategy, our integrated research and underwriting model and shareholder alignment have resulted in a proven track record of execution.

As demonstrated by our total return performance consistent coverage of our dividend and strong credit performance.

Turning to page nine.

We believe our portfolio continues to be very well positioned overall, particularly for periods of volatility.

The updated heat map shows the positive risk migration this quarter with two positions representing $93 million of fair value improving in rating and two positions, representing just $34 million worsening in rating.

We are pleased that over 92% of our portfolio is rated green on our risk rating scale, Conversely, our red and Orange names, which represent our most challenged positions now represent just two 3% of the portfolio.

Starting with the positive movers on page 10, Hayden, formerly known as tenant law, which as a reminder ceased operations at its plant on April 14th to due to a fire.

I graded from yellow to green as the insurance carrier team the plant or total loss and confirmed a full pay out of the insurance policy.

The company has now received the full proceeds from the insurance carriers, which enabled them to repay our $46 million debt position at par post quarter end and left meaningful residual equity value, which we expect to monetize over the next several months.

The education business improved from Red to Orange is the impact of Covid on the industry further receipts.

The two negative movers are both relatively small positions and include a business services company, which we placed on nonaccrual this quarter due to continued topline and execution challenges and a health care business.

Which has experienced some idiosyncratic headwinds combined with the staffing issues.

The updated heat map as shown on page 11, as 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 economic landscape develops.

We continue to spend significant time and energy on our remaining red and Orange games. We also wanted to highlight that we moved the page detailing leverage migration on the underlying portfolio companies to the appendix. We are committed to a best in class disclosure. So we will continue to share this information going forward, but believe our heat map.

Largely captures the impact of leverage migration.

With that I will turn it over to John to discuss market conditions and other important performance metrics.

Thanks, Rob Good morning, everyone since our last call in August the overall investing environment across most asset classes has continued to be difficult.

The challenges associated with higher interest rates inflation geopolitical instability and pockets of economic softness have not received it.

However, through this period corporate direct lending continues to be one of the most resilient asset classes across all financial markets.

Floating base rates attractive spreads secured debt structures and low loan to value ratios have provided investors with valuable stability in an otherwise volatile investing environment.

Additionally, our strategy of making loans to non cyclical defensive businesses provide added margin of safety compared to that of the overall lending market, which generally has much higher exposure to inflation sensitive cyclical and capital intensive businesses within sectors that we avoid.

While new deal activity remains materially lower than last year, we continue to see good opportunities to make add on investments into existing portfolio companies and to finance selected sponsored back purchases in the upper middle market.

In general sponsor equity contributions remain very attractive consistently ranging from 60% to 80% of enterprise value.

While pricing is at a very wide and historical ranges.

Finally, it is important to highlight that the overall direct lending market continues to take meaningful share from them.

Syndicated loan and high yield bond asset classes.

Our private financing solutions offer and ease of execution.

This clarity and capital certainty that it's still not available and these other markets.

Page 13 presents an interest rate analysis that provide insight into the positive effect of increasing base rates on air Max These earnings.

We have updated this page to get more clarity into the impact of increasing base rates on our portfolio as well as the timing of that impact.

As a reminder, the NFC loan portfolio is 88% floating rate and 12% fixed rate.

Our liabilities are 52% fixed rate and 48% floating rate.

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

As we reported last quarter, we have experienced a lag our assets reset at a slower cadence than our liabilities.

On the upper right side of the page we show how this timing lag played out during the third quarter.

Where rate increases on asset occurred at a slower pace compared with that of our liabilities, resulting in a negative drag of 30 basis points.

As shown on the lower Bar chart. This mismatch caused a <unk> <unk> headwind during the quarter compared to a hypothetical scenario where base wage rates were two 5% on both assets and liabilities.

To the extent rates stabilize at three 5% or four 5%, we would expect a material uplift in earnings to approximately 36 to 38 per share all else being equal.

Turning to page 14, we present more detail behind the 22 cent decline in our book value this quarter.

<unk> on the left side of the page, we show that credit driven fair value changes resulted in a net decrease of <unk> <unk> per share from Q2 to Q3.

This minor decrease was driven by performance related valuation decreases for seven names, including Mentum, which can meet continues to have a strong outlook, but modestly took down expectations for the year.

These valuation declines were offset by a material right off of Haven.

Which was unrealized at the end of Q3, but will be mostly realized by the end of Q4.

Our remaining portfolio experienced 14 cents per share of depreciation associated with general spread widening in the overall credit market.

In the context of the broader financial markets Mfa's book value is very stable and reflective of a portfolio with strong credit quality and increasing future income potential.

Page 15 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, where we have $3 2 billion of investments at fair value.

$59 million or one 8% of the portfolio currently on non accrual.

As mentioned earlier, we did put a business services company on non accrual, which represents 20 million or 6% of our current portfolio.

And unless these cumulative performance shown on the right side of the page remains strong.

Since our inception in 2008, we have made $9 7 billion of total investments of which only 347 million had been placed on non accrual.

The non accruals only $79 million have become realized losses over the course of our 14 year history.

As shown on the next page default losses had been more than offset by realized gains elsewhere in the portfolio.

The chart on page 16 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 and MFC has paid approximately $1 billion of regular dividends to our shareholders, which had been fully supported by over $1 billion of net investment income.

On the lower half of the page we focus on below the line items, where we show that since inception highlighted in Blue we had a cumulative net realized gain of $16 $8 million.

Which is basically flat with last quarter.

This cumulative realized gain is offset by $73 $9 million of cumulative unrealized depreciation on our portfolio, which increased this quarter by about $24 million, which was largely driven by valuation changes related to widening risk grant and the general market.

On the bottom of the page in yellow, we show how cumulative net realized and unrealized loss stands at just $57 million.

Which remains a tiny fraction of the $1 billion of net net in net investment income that we've generated since our IPO.

As we look forward team remains very focused on reversing this small cumulative loss and maintaining best in class credit quality throughout the portfolio.

Page 17 shows the stock chart detailing NMFC equity returns since its IPO over 11 years ago.

Over this period NMFC has generated a compound annual return of nine 6%.

Which represents a very strong cash flow oriented return and in an environment, where risk free rates have been historically low.

This year Nmfc's performance has compared favorable favorably to most equity indexes and 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.

I will now turn the call over to our CMO, Laura Hoffman to discuss more details on our recent originations and current portfolio construction.

Thanks, John as shown on page 18, we originated almost $125 million in Q3.

Core defensive growth verticals, including software business services and consumer services.

And primarily funded these originations with repayments and a modest amount of sales keeping us fully invested and at the high end of our target leverage range.

We continue to have great success targeting in sourcing high quality deals within niches of the economy, where we have the highest conviction and expertise.

Since quarter end overall deal activity has been consistent but more borrowers continue to migrate to the direct lending market as the syndicated market remains somewhat close to new issue.

As always we remain extremely selective on credit and are focusing on the highest quality opportunities.

A widening opportunity set.

We expect to remain fully invested in our target leverage range as our deal flow absorbs any proceeds from ordinary course loan repayments.

Turning to page 19, we show that our asset mix is consistent with prior quarters were slightly more than two thirds of our investments inclusive of first lien S. L Ts and that lease our senior in nature.

Approximately 8% of the portfolio is comprised of our equity positions the largest of which are shown on the right side of the page.

Assuming solid operating performance and a supportive valuation environment. We believe these equity positions could continue to increase in value and drive book value appreciation.

We hope to monetize certain of these equity positions and the medium term and rotate those dollars into yielding assets.

As discussed earlier, we expect haven to be a near term example of this as we realize the equity proceeds over Q4 and Q1.

Page 20 shows that the average yield of Nmfc's portfolio increased from 10, 3% in Q2 to 11, 3% for Q3.

Largely due to the benefit of the increasing forward LIBOR curve.

Spreads remain wider and the supply demand imbalance continues to favor lenders, which helps support our net investment income target.

Turning to page 21, we show a detailed breakouts of Nmfc's industry exposure.

We have further enhanced our industry disclosure this quarter to provide more insight into the significant diversity within our software business services and healthcare sectors.

As we have stated 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 these industries.

In our view the chart demonstrates the differentiated domain expertise our team has developed and shows why we operate with confidence in any economic cycle.

The sectors, we focus on having neatly attractive cash flow characteristics, such as high EBITDA margins minimal capex and working capital needs and flexible cost structures.

As a result as interest rates rise, we believe most of our borrowers have sufficient free cash flow to cover the increasing interest burden, which I will touch on more in the following page.

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 that we believe can perform well and more volatile macro environment.

We added page 22, this quarter to highlight the trends and the scale and credit statistics of our underlying borrowers.

As you can see the weighted average EBITDA of our borrowers has increased over the last several quarters to over $130 million.

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

We also show the relevant leverage and interest coverage stats across the portfolio.

Leverage has been largely consistent.

Loan to values continue to be quite compelling in the current portfolio has an average loan to value of just 41%.

From an interest coverage perspective, we've seen modest compression is bates base rates rise, but as I mentioned earlier, we think the free cash flow characteristics and growth profiles of the industry's focus on lend themselves to decent cushion the weighted average interest coverage on the portfolio is still north of two times today.

Finally, as illustrated on page 23, we have a diversified portfolio crossover 100 portfolio companies.

The top 15 investments inclusive of our F. L. P funds account for 38% of total fair value and represents our highest conviction names.

With that I'll now turn it over to our Chief Financial Officer, Shiraz <unk> to discuss the financial statements Trust.

Thank you Laura for.

For more details on our financial results in today's commentary. Please refer to the Form 10-Q that was filed last evening with the SEC.

Now I'd like to turn your attention to slide 24, the portfolio had over $3 2 billion in investments at fair value at September 30th and total assets of $3 3 billion with total liabilities of $2 billion of which total statutory debt outstanding was $1 7 billion, excluding $300 million of drawn SBA guaranteed debentures.

Net asset value of $1 3 billion ounce or $13 20 per share. It was down 22 tenths of one 6% from the prior quarter.

At quarter end, our statutory debt to equity ratio was 126 to one however, net of available cash on the balance sheet net leverage is 123 to one.

Within our target leverage range.

On slide 25, we show historical leverage ratios and away historical NAV adjusted for the cumulative impact of special dividends.

Consistent with our goal of minimizing credit losses, and maintaining a stable book value over the long term.

Youll see that current <unk> adjusted for special dividends is not far off from.

Back to our IPO over 11 years ago.

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

We believe that our NII is the most appropriate measure of how 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.

For the current quarter, we earned total investment income of $78 1 million, a $5 $3 million increase from the prior quarter.

This was due to higher interest income from base rate resets offset by lower fee income in the quarter.

Total net expenses were approximately $45 6 million, a $4 2 million dollar increase quarter over quarter, due primarily to higher base rates and I'm quoting floating rate debt.

As discussed the investment advisor has committed to a management fee of $1 two 5% for the 2022 and 2023 calendar years.

We have also pledged to reduce our incentive fee if and as needed. During this period to fully support our new 32 cents per share quarterly dividend.

Based on our forward view of the earnings power of the business, we do not expect to use this pledge.

It is important to note that the investment advisor cannot recoup fees previously waived.

This results in quarterly NII of $32 5 million or 32 cents per weighted average share, which exceeded our Q3 regular dividend of <unk> 30 per share.

As a result of the net unrealized depreciation in the quarter, but an increase in net assets, resulting from operations of $7 7 million.

Slide 27 demonstrates 95% of our total investment income is recurring this quarter.

You will see historically on average over 90% of our quarterly income is recurring in nature and on average over 80% of our income is regularly paid in cash.

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

Turning to slide 28, the Red line shows our dividend coverage.

While NII exceeded our Q3 dividend the dividend protection program could have provided additional coverage if needed.

As previously mentioned based on our preliminary estimates we expect our Q4 NII will be in excess of 32 cents per share.

Given that our board of directors has declared a <unk> 10 per share or 7% increase in our Q4 dividend to <unk> 32 per share which.

Which will be paid on December 30 to holders of record on December 16th.

On slide 29, we highlight our various financing sources taken into town SBA guaranteed debentures, we had almost $2 $3 billion of total borrowing capacity at quarter end with over $315 million available on our revolving lines subject to borrowing base limitations.

As a reminder, both our wells Fargo and Deutsche Bank credit facilities covenants.

Generally tied to the operating performance of the underlying businesses that we lend to rather than the marks of foreign investments at any given time.

Finally on slide 30, we show a leverage maturity schedule as we've diversified our debt issuance. We've been successful at lateral no maturities to better manage liquidity and over 75% of our debt matures onno after 2025.

Post quarter end, we issued a $200 million three year convertible note at a fixed rate of seven 5%.

Proceeds of the successful private placement will be used to tender for all of 2018 convertible note due in 2023 and any residual proceeds will be used to repay outstanding indebtedness.

Furthermore, our multiple multiple investment grade credit ratings proved.

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 Rob.

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

Long standing focus on lending to defensive growth businesses supported by strong sponsors should continue to serve us well 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'd like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to repeat that question. Please press star followed by two again to ask a question. Please press star followed by one.

As a reminder, if you all using a speaker phone. Please remember to pick up your handset before asking your question.

The first question today comes from the line of Bryce Rowe from B. Riley. Please go ahead. Your line is now open.

Thanks, Thanks for taking the question good morning.

Hey, good morning.

Wanted to maybe start here on the on the dividend.

Nice to see the.

The uptick here to 32 cents.

Maybe maybe you could comment a little bit on.

How how youre thinking about the dividend the dividend from a future perspective, especially given.

The rise in rates and the favorable impact it might have.

On the earnings stream will you seek to.

Maybe put in place some level of cushion so that that dividend coverage.

In fact be in excess of the dividend paid.

Yeah, Yeah. It's a good question and we certainly want to operate the business prospectively with a material coverage to the dividend and I think that slide on page 13 shows you a little gives you a little bit of sense of where we think.

The NII is is going to so long as you know rates.

Set up the stay all the way to where they are but you know stay elevated for some material period of time.

So yes, it's certainly our intention to to run the business with a.

Paul cushion to the the dividend from NII.

Okay.

And then maybe maybe a follow up on that Rob in terms of.

Maybe terms and conditions right now with with newer originations are you you all seeing.

Any you know any higher type of type of floors.

Within within the transactions.

With the thought that maybe rates are going up now, but perhaps they go back down at some point in the future. So are you seeing higher higher interest rate floors within your within your transaction.

No the Florida's haven't really modified now the spreads are higher.

The market overall is dislocated so we're getting the benefit on new deals not just of the higher base rate, but also a higher spread and call protection and just better terms generally.

But one term that hasnt changed materially is is the floors.

Okay.

Alright. Thank you so much I'll get back in queue, and let somebody else ask some questions.

Great. Thank you.

Thank you.

The next question today comes from the line of Ryan Lynch from K B W. Please go ahead. Your line is now open.

Hey, good morning Angie.

John Congratulations on the promotion well deserved.

The other.

I also I just wanted to congratulate you guys went out on a really nice slide deck I Love you guys have always had a great slide deck, but I really loved the improvements you guys have had made recently.

My first question is kind of a complicated clients. So I wanted to see if you can hopefully follow me through this.

I was just kind of trying to do some back of the envelope math on slide 13, and slide 22 kind of using those in combination.

I assume that.

LIBOR in Q2, your effective LIBOR rate was kind of around your floor rates of around 1%.

Went from 1% ish on in Q2.

At two 2% effective.

Uh huh.

Great that you guys show on slide 13.

It looks like your interest coverage that you have on slide 22 went down from two four times to one so excuse me to four times. The 2.1 times. So that's like a round 120 basis point increase in rates.

Kris your interest coverage by about <unk> three turns and so that's roughly 100 basis point increase reduces that interest coverage by about two.

<unk> five turns if I look at the forward curve today at 5% versus where your effective rate was at the end of the third quarter, 5% versus the two 2% just talking about almost 300 basis points of potential rising rates, which my back of the envelope math would would equate to about <unk>.

<unk> seven <unk>.

Eight turns of lower interest coverage from your 2.1 today, so youre getting down closer to that that about one times interest coverage level of course, that's just the average there's guys who have interest coverage significantly above that and guys who have interest coverage probably meaningfully below that and so this is the kind of math that I think investors.

<unk> are thinking about of.

How credit quality not just in your portfolio, but across the BDC space and were talking about your portfolio specifically.

It's positioned to hold up for a pretty substantial increase in interest rates over the coming year or so I'd love to hear your commentary on on my quick back of the envelope sort of math as well as how should investors be thinking about the impact from rising rates and how do you feel about that in your portfolio.

Yeah, Hey, Ryan it's a great question, we've been spending an inordinate amount of time focusing on exactly that question I'm going to actually let Laura Hudson.

I'll get into some of the details there that Laura.

Yeah, no. It's a good question and as Rob said, it's something that we spend a lot of time sensitizing kind of across the portfolio I would say the math isn't quite as draconian as what you laid out.

I think theres a couple of reasons for that the first is the analysis on page 22 is kind of a point in time estimate right. So it's using EBITDA for the LTM period, and so the math youre doing doesn't incorporate the growth of our underlying portfolio companies, which as we've talked about these are pretty growth for all industries.

So I think one one key benefit is that you just have some natural cushion quarter to quarter over the fact that these companies are growing nicely.

And I think beyond that again.

Again, we do this as he said this is kind of an aggregate average.

Across the portfolio.

We've actually done the kind of name by name build up at least for them kind of all of our sizable positions in and when we do sensitize base rates up to 5% or north of 5%, we're still showing an excess of one one and a half times interest coverage ratio again for our material that positions X.

Clothing things like a R N or recur.

Revenue loans, so hopefully it gives you a sense.

Of why we think we're comfortable as well all of the other items that I mentioned around just the characteristics of the portfolio and the fact that there is within the underlying portfolio companies. There's a lot of levers companies can pull.

In the event that rates continue to migrate in this direction.

So again the analysis on page 22, while helpful is kind of a point in time and static and doesn't reflect I think a lot of levers both on the growth side as well as on the on the cost structure side, and we think provide additional cushion in coverage and then you overlay that with something we've talked about not in this call, but on prior calls which is just the loan to value.

Is here.

And we do think that sponsors again, given the sizable equity cushions that are junior to our debt and the capital structures that sponsors would step up and help defending if everything else stays.

So hopefully that gives you some sense for how we're thinking about it. It gives you some sense of I'm glad you brought up sort of the growth profile I'm just curious you know.

What are the current trends that you guys are seeing from a from a growth perspective in your portfolio Im not sure what sort of data you guys have I know some companies report kind of on a quarter lag. Some some companies gave you a monthly financial statements. We've seen other Ah Theres. Another index out there that shows private middle market businesses.

On a month to month revenue and EBITDA growth basis and for the first two months of the third quarter. So.

July and August the overall index had 2.1% decline in earnings and in particularly software or excuse me technology had a 3% decline in healthcare had a 5% decline in earnings.

Year over year from the first two months and so I'd love to hear what sort of trends you guys are seeing in your portfolio.

The most recent data and I'd love to hear what.

What sort of data.

Sort of timeframe were talking about are we talking about the prior quarter or are you talking about any sort of current monthly information.

Yeah, I would say most of our borrowers and provide us with quarterly financial info. So we have full Q2 numbers from all of our portfolio companies and then within the next week to two weeks, we're going to start seeing a material portion of companies report Q3.

So, but I can talk a little bit about the Q2 numbers that we saw and then the handful of Q3 numbers that have come in so far which is great.

We're still seeing very.

Strong top line growth trends and it's a mix of price and volume rate again, given the pricing power.

Of the borrowers within industries that we focus on.

We are seeing the ability to get meaningful price even to the extent that you know volumes have I have flattened off a little bit.

But in aggregate still seeing him you know.

Nice top line growth I would say the area that we're that we're continuing to watch is just on the margin side for you know for obvious reasons, but I think the good news is that again, given the sectors, which are largely tack in services in nature. We don't have a lot of supply chain costs freight costs raw material costs anything like that on the inflation.

<unk> side, it's really more around just labor and wage inflation and staffing.

Which actually we are starting to see maybe a little bit of improvement on if anything so and the fact that we're starting from relatively high EBITDA margins to begin with again gives us the ability to withstand a little bit of margin pressure, but if I had to summarize I would say, it's still very strong topline growth and a little bit of margin pressure, but nothing that we're concerned about.

Forget.

Okay.

That's helpful. So we cover sort of the interest coverage and EBITDA and revenue growth trends I just wanted to hear.

What does it mean, so what has been so if I look at the public.

Equity indexes for software related companies and I understand your book is not complete.

The software, but that's the largest sector that's down by 40% year to date.

That index, and so I'd love to hear what have software multiples than doing.

How much have they compressed.

In private middle market businesses.

Year to date, and what does that mean if anything.

For your current portfolio companies.

Hey, John you want to handle that one.

Sure I'd be happy to handle that thanks, Rob and thanks for all the questions Ryan when we think about software and I'm just going to use revenue multiple snake. It really easy when we think about where where salt where good software businesses traded in the public market last year.

We saw multiples of in many cases on great businesses 20 to 30 times revenue. So this year, we've seen a lot of those revenue multiples come down to as low for <unk>.

A really good businesses to the six to 10 times level in the public markets. So when we see our sponsor clients buying great software businesses.

They are generally still paying six to 10 times revenue and in some cases that looks like a bargain to them relative to where a lot of these world class businesses were trading last year and on average our attachment points through a typical unit tranche loan would be maximum two to three times revenue.

So still worst case, a 50% loan to value in many cases, a whole lot better than that so.

Summarize I think that the the decrease in multiples in software is a public markets problem much more than it is a problem for a unit a unit tranche lender right at the top of the capital structure, earning really good yield.

Okay.

That's helpful.

Again I appreciate the updated slide deck, you guys always have a great slide I put up great, but I appreciate the upgraded slide deck and slide 13 Super helpful to kind of show your earnings trajectory both from kind of the.

The kind of the mismatch in rate research for the third quarter and also just longer term, but with LIBOR.

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

Great. Thanks, Ryan and thanks for the comments we appreciate it.

Thank you that's.

As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.

We have a follow up question.

Follow up question from Bryce Rowe from B Riley. Please go ahead. Your line is now open.

Hey, guys, sorry to belabor the call here that did have a couple more in thought thought they might get asked.

Let's see in terms of kind of upcoming debt maturities, obviously, if you've kind of tackled the larger one with the convertible notes offering here whats it.

At this point Al can you talk a little bit about how you're thinking about the unsecured notes that are coming due here in 2023 do you feel comfortable just drawing down.

On the credit facilities to repay those or.

Or are you truly kind of exploring the.

The unsecured market.

Yeah go ahead Sean.

But I think on the unsecured side, where we're always looking at the markets.

It's not very attractive right now.

The bond market is closed right now.

<unk> market is open but you know rates are what they are I think we feel confident we've got the we got to convert done we've tackled the sort of the major item thats coming due next year.

In terms of the maturity that's coming up earlier earlier part of the up we feel confident we have availability on our revolving lines to take care of those and also we touched on it briefly earlier, we potentially could delever the business as we get repayments coming in on some of our positions. So that's on the table as well for us to consider but we.

Feel like we have enough levers right now to take care of our maturities without having to do something unnatural.

Great. Okay. That's helpful and then maybe one more for me.

You guys have had a good year in terms of realizing some gains.

And to just kind of curious where you stand right now from a kind of an estimated spillover position is that or are we or are we talking about.

Some level of distributable event here.

Late 'twenty, two or early 'twenty, three or can you can you carry a bit of that over into 'twenty three.

Yeah, no not much right now I mean.

So we did have some of the games earlier this year from our real estate portfolio. We had we had losses from prior years to offset that so there was nothing really that created any sort of spillover going into next year. We think if some of the equity positions at Laura touched on earlier do materialize.

Medium term next year potentially we could be in that position, but right now we feel like we're where we're not flat, but we are just a few.

A little bit about flat, but not a big spillover.

Okay, Great I appreciate it thanks for taking the follow up.

Thanks, Brad I appreciate it.

Thank you.

No additional questions waiting at this time, so I'd like to pass the conference back over to Rob Henry for any closing remarks. Please go ahead.

Great. Thank you and once again, thanks, everybody for their time, we really do appreciate it and you have to know where to find us for any any potential follow up and otherwise look forward to speaking to everybody in the weeks and months ahead. Thanks have a great day.

This concludes today's conference call. Thank you all feel participation you may now disconnect your lines.

Yeah.

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