Q1 2024 New Mountain Finance Corporation Earnings Call
Okay.
Speaker Change: Good day and welcome to the New Mountain Finance Corporation first quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one unattached home 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 John Kline, President and CEO of New Mountain Finance.
John R. Kline: Please go ahead.
John R. Kline: Thank you and good morning, everyone welcome to New Mountain Finance Corporation's first quarter 2024 earnings call.
John R. Kline: On the line with me here today are Steve Cohen ski chairman of NMFC, and CEO of New Mountain capital, Laura Holsten C O M NMFC, and Chris Corbett, CFO and treasurer of NMFC.
Speaker Change: Laura is a little under the weather today. So she will not be making prepared remarks will be available for Q&A.
Kris Corbett: Now Steve is going to make some introductory remarks, but before he does I'd like to ask Chris to make some important statements regarding today's call.
Kris Corbett: Thanks, John 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.
Kris Corbett: On our May 1st earnings press release.
Kris Corbett: I would also like to call your attention to the customary safe Harbor disclosure in our press release and on pages, two and three of our slide presentation regarding forward looking statements.
Kris Corbett: 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.
Kris Corbett: 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'll be referencing throughout this call. Please visit our website at Www Dot New Mountain finance Dot com.
Kris Corbett: At this time I'd like to turn the call over to Steve Glinski, Nmfc's, Chairman, who will give some highlights beginning on page five of the slide presentation Steve.
Steven Bruce Klinsky: Thanks, Chris it's.
Steven Bruce Klinsky: It's great to be able to address you all today, Oh, there's nmfc's chairman.
Steven Bruce Klinsky: And as a major a fellow shareholder.
Steven Bruce Klinsky: Adjusted net investment income for the quarter was 36 cents per share.
Steven Bruce Klinsky: In line with our implied guidance and more than covering our <unk> 32 per share regular dividend that was paid in cash on March 29.
Steven Bruce Klinsky: Our net asset value per share decreased slightly to $12 77.
Steven Bruce Klinsky: A 10% decline compared to last quarter.
Steven Bruce Klinsky: <unk> experienced strong core credit performance.
Steven Bruce Klinsky: Set by a decrease in value of one of our equity positions, which John will discuss later in the presentation.
Steven Bruce Klinsky: Given our earnings up 36 cents per share this quarter, we will make our fifth consecutive variable supplemental dividend payment.
Speaker Change: The variable supplemental dividend for this quarter will be two cents per share.
Speaker Change: Which is equal to half of the amount of our Q1 quarterly earnings in excess of our regular dividend of 32 cents.
Speaker Change: NMFC will pay these distributions on June 28 to holders of record as of June 14th.
Speaker Change: The remainder of the excess earnings will remain on our balance sheet and may be paid out in the future.
Speaker Change: Our dividend at 34 cents represents an annualized current distribution yield of 11%.
Speaker Change: Looking forward to Q2.
Speaker Change: In addition to our 32 cent regular dividend, we expect to again generate a variable supplemental dividend of <unk> <unk> per share or 34 cents in total payable in the third quarter of 'twenty 'twenty four.
Speaker Change: We also continue to keep our dividend protection program in place and are committed to reduce our incentive fee, if and as needed to fully support the 32 cents per share quarterly regular dividend we.
Speaker Change: We do not anticipate utilizing this pledge given our strong credit performance and current earnings power.
Speaker Change: We believe the strength of new mountain and of NMFC is driven by the consistency of our strategy and the quality of our team.
Speaker Change: New mountain overall now numbers over 245 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.
Speaker Change: Software infrastructure services and digital engineering.
Speaker Change: <unk>.
Speaker Change: New mountain's private equity funds have never had a bankruptcy or missed an interest payment and the firm now manages over $50 billion of assets.
Speaker Change: Early NMFC has experienced only five basis points of average annualized net realized losses, and it's 13 years as a public company, while paying out nearly $18 per share of cumulative ordinary supplemental and special dividends.
Speaker Change: We believe our loans today are well positioned overall in defensive growth industries that we think are right at all times, and particularly attractive in less certain economic times.
Speaker Change: Finally, we as management continue as major shareholders of NMFC.
Speaker Change: I and N M sees other senior management employees currently own approximately 12% of Nmfc's total shares personally with that let me turn the call to John.
John R. Kline: Thank you, Steve I would like to begin by offering some more details on our direct lending investment strategy and track record starting on page eight we highlight our exposure to a diversified list of defensive non cyclical sectors. These sectors mapped industries, where new mountain has made successful private equity investments.
John R. Kline: And where our firm's knowledge is the strongest.
Speaker Change: We seek to make investments in companies with durable growth drivers predictable revenue streams margin stability and great free cash flow conversion.
Speaker Change: And you can see from the industry Pie chart on page eight we have virtually no exposure to cyclical volatile and securely challenged industries, which could be.
Speaker Change: Riskier areas to invest in given today's higher rate environment.
Speaker Change: Our strategy has been consistent over our 13 years as a public company and it allows us to operate with confidence in any economic environment.
Speaker Change: Page nine provides a high level snapshot of our business, where we show a long term track record delivering consistent enhance yield to our shareholders by minimizing credit losses, and distributing virtually all of our excess income to shareholders.
Speaker Change: Since our IPO in 2011, and MFC has returned over $1 2 billion to shareholders through our dividend program generating an annualized return of approximately 10%.
Speaker Change: This represents a very strong cash flow oriented return well in excess of the high yield index. Our current portfolio invest in companies within a high quality industries, and they're performing well and where our last dollar of risk is approximately 40% of the purchase price paid for the business we.
Speaker Change: We learned primarily to businesses owned by financial sponsors who are sophisticated and supportive owners with significant capital that is junior to the loans that we make.
Speaker Change: Turning to page 10, the internal risk rating of our portfolio improved quarter over quarter with 96, 5% of our portfolio rated green compared to 94, 5% last quarter. This represents the highest level of green rated assets. Since we began using the heat map rating system during COVID-19.
Speaker Change: Our most challenged names within the Orange and red categories represent less than 1.5% Nmfc's fair value, making them a negligible part of our portfolio.
Speaker Change: We have derisked, our book value by marking a red names suggest 8% of face value in our orange names to 67% of face value.
Speaker Change: Overall, when we consider the very high proportion of green names compared to a non green names our portfolio is as healthy as it has been in recent history.
Speaker Change: The updated heat map has shown in its entirety on page 11, given our portfolio's orientation towards defensive sectors like software business services and health care. We believe our assets are well positioned to continue to perform no matter how long the economic landscape develops.
Speaker Change: We did not have any negative risk rating migration during the quarter. We also received full repayment of our 37 and a half million dollars second lien position in Franklin the energy the yellow rated named market 91 cents as of 12 31.
Speaker Change: As Franklin energy and other material Paydowns in recent quarters demonstrate we continue to believe that many of our non green names have the ability to my migrate back to green and achieve exits at par.
Speaker Change: Turning to page 12, we provide a graphical analysis a N a V changes during the quarter, resulting in a book value of $12 77.
Speaker Change: Overall, the quarter benefited from very good core credit performance and a supportive market environment.
Speaker Change: However, we did reduce the carrying value of our equity stake and then some.
Speaker Change: As a reminder, mentum as a leading provider of K through 12 online learning programs, we had been a minority owner since the restructuring in 2015 and have since recovered our cost basis, while maintaining a residual equity position in the company.
Speaker Change: During COVID-19 and mentor them and certain other players in the education technology market benefited from accelerated shift to virtual learning.
Speaker Change: As the market normalizes post Covid, we have seen a slowdown in performance and therefore burst somebody unrealized gain we had previously recognized.
Speaker Change: We believe the market has stabilized and mental remains well positioned and the value proposition of the companys products remains strong.
Speaker Change: Page 13 addresses M. A c's nonaccrual performance on the left side of the page we show the current state of the portfolio, where we have approximately $3 1 billion of investments at fair value with $49 million or 1.6% of the portfolio currently on non accrual.
Speaker Change: As we mentioned on our Q4 earnings call charismatic brands, a red name with a current fair fair market value of just point 4 million are filed.
Speaker Change: <unk> filed for bankruptcy and was placed on non accrual.
Speaker Change: The other names on nonaccrual offer much older vintages had been written down materially and have a good chance of exiting the portfolio in the medium term.
Speaker Change: On the right side of the page we show our cumulative credit performance since IPO, where NMFC has made $9 5 billion of investments, while realizing losses of only $37 million.
Speaker Change: This represents an annual an annual.
Speaker Change: An annual annualized net realized loss rate of approximately five basis points since IPO.
Speaker Change: This is consistent with our value proposition of preserving principal value and distributing nearly all of our net investment income through predictable quarterly dividends.
Speaker Change: On page 14, we present M. A CS overall economic performance since IPO showing that we have delivered consistent and compelling returns cumulatively NMFC is earned nearly $1 3 billion in net investment income.
Speaker Change: Generating only 37 nine cumulative net realized losses, and only $58 million of net unrealized depreciation, resulting in $1 2 billion of value created for shareholders.
Speaker Change: Moving to general market commentary, we continue to believe the outlook for the remainder of 2024 in the sponsor backed direct lending market is positive.
Speaker Change: Flow is picking up and real time still remains depressed versus historical levels. There are pockets of activity in our defensive growth verticals, where we have the opportunity to make loans at attractive yields while staying very selective.
Speaker Change: Deal structures remain compelling with leverage levels below peak levels and significant sponsor equity contributions representing the vast majority of the capital structures.
Speaker Change: We remain bullish on the medium and long term outlook for M&A activity, given the magnitude of dry powder for private equity and the increasing pressure to return capital to L. PS as well as more attracting financing markets for borrowers.
Speaker Change: Syndicated markets are open and we continue to see modest spread compression related to the increased competition. However.
Speaker Change: However, we expect the supply demand imbalanced and normalize as soon as we see more regular deal flow environment return.
Speaker Change: While the syndicated markets are open the direct lending market remains that the financing market of choice for sponsors as the majority of our sponsors still recognize the benefits of direct lending solutions, including more certain execution more flexibility around creating a smoke capital structures and the ability to handle.
Speaker Change: Select lenders.
Speaker Change: In addition to new activity, we have seen an increased volume of opportunistic refinancing and add on opportunities within our large portfolio of over 100 unique borrowers. This provides an ongoing opportunity set to make incremental loans to existing well performing companies seeking to pursue accretive M&A.
Speaker Change: Page 16 prevention presents an interest rate an analysis that provides insight into the effect of base rates on NMS. These earnings.
Speaker Change: As a reminder, the NMFC loan portfolio is 88% floating rate and 12% fixed rate well a lot of our liabilities are 54% fixed rate and 46% floating rate as of quarter end.
Speaker Change: During Q1, we fully swapped our investment grade bond issuance from fixed to floating rate.
Speaker Change: As we access the investment grade market in the future, we would expect to hedge interest rate risk in this manner again.
Speaker Change: Moving on to page 17 in Q1, we saw continued portfolio velocity, we originated $192 million of assets, partially offset by 140 $45 million of repayments.
Speaker Change: Originations consisted of investments in our core defensive growth power alleys, including niches in enterprise software and business services.
Speaker Change: I'd highlight that three of our repayments during the first quarter were second lien positions and turning to page 18 subsequent to quarter end. We received four additional second lien repayments. We believe this uptick in second lien repayments as a function of credit selection, we generally reserve our second lien capacity for our highest conviction opportunity.
Speaker Change: These companies have largely performed well they have been.
Speaker Change: <unk> able to take advantage of the current market environment to either sell or refinance their capital structures.
Speaker Change: These refinancings combined with our incumbency position often provide a mechanism for us to rotate from second lien first lien and you can see in the case of OE Sea connection and Tri Tech.
Speaker Change: Okay.
Speaker Change: Turning to page 19, we show our asset next were approximately 69% of our investments inclusive of first lien.
Speaker Change: S L PS and net lease are senior in nature.
Speaker Change: As I mentioned is continues to skew more senior over time second lien positions decreased from 18% in Q1 of last year to 14% this quarter and only 10% pro forma for the post quarter end second lien repayments.
Speaker Change: Approximately 8% of the portfolio is compromised of R is comprised of our equity positions the largest which are shown on the right side of the page.
Speaker Change: As mentioned in prior quarters, we hope to monetize certain of these equity positions in the medium term and rotate those dollars into cash yielding assets.
Speaker Change: Page 20 shows the average yield on of Nmfc's portfolio has increased from 10, 9% in Q4 to $11 one 4% for Q1, primarily due to the higher for longer shift in the base rate curve.
Speaker Change: Generally speaking, even though spreads are tighter as evidenced by lower yields on our originations compared to our repayments yields.
Speaker Change: Yields remain attractive and support our net investment income target.
Speaker Change: Page 21 highlights the scale and credit trends of our underlying borrowers as you can see the weighted average EBITDA of our borrowers has increased over the last several quarters to $179 million. This is primarily attributable to our originations of some larger companies as well as growth.
Speaker Change: At individual portfolio portfolio companies that we lend to.
Speaker Change: While we 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.
Speaker Change: We also show the relevant leverage and interest coverage stats across the portfolio portfolio company leverage has decreased slightly over the last several quarters loan to values continue to be quite compelling in the current portfolio has an average loan to value of 43%.
Speaker Change: Interest coverage ratios have stabilized as expected and a weighted average interest coverage on our portfolio actually increased slightly to one seven times this quarter.
Speaker Change: We've seen sponsors continue to proactively support company liquidity and continued M&A activity.
Speaker Change: This is a great indication that our portfolio consists of companies that are performing well and are able to attract additional investments at healthy valuation.
Speaker Change: Finally, as illustrated on page 22, we have a diversified portfolio across 115 portfolio companies. The top 15 investment inclusive of R. S. L. P funds and that lease account for approximately 42% of total fair value and represent our highest conviction names I will now turn the call over to our chief financial.
Speaker Change: Officer, Chris Corbett to discuss our financial results.
Kris Corbett: Thank you John for more details. Please refer to our quarterly report on Form 10-Q that was filed yesterday with the SEC.
Kris Corbett: As shown on slide 23, the portfolio had approximately $3 1 billion in investments at fair value on March 31, and total assets of $3 3 billion with total liabilities of $1 9 billion of which total statutory debt outstanding was $1 5 billion net.
Kris Corbett: Net asset value of $1 4 billion or $12.77 per share was down slightly compared to the prior quarter.
Kris Corbett: At quarter end, our statutory debt to equity ratio was one spot zero eight to one and one spuds zero three to one net of available cash on the balance sheet.
Kris Corbett: This represents the lower end of our target range and is meaningfully lower than Q1 of the prior year.
Kris Corbett: On Slide 24, we show our quarterly income statement results for the current quarter. We earned total investment income of 90, Spud 3, Million% to 2% decrease from prior year total net expenses of approximately $53 million decreased 1% versus prior year.
Kris Corbett: As a reminder, the investment advisor has committed to a management fee of 1.25% for the 'twenty 'twenty four calendar year as mentioned earlier the investment advisor has also pledged to reduce its incentive fee if and as needed. During this period to fully support to 32 cents per share regular quarterly dividend.
Kris Corbett: 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.
Kris Corbett: Our adjusted net investment income for the quarter was 36 cents per weighted average share which has meaningfully exceeded our Q1 regular dividend of <unk> 32 per share.
Kris Corbett: As slide 25 demonstrates 98% of our total investment income is recurring this quarter given the minimal fees earned in Q1, you will see historically that 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.
Kris Corbett: Predictability of our investment income importantly over 99% of our quarterly noncash income is generated from our green rated names.
Kris Corbett: Turning to slide 26, the Red line shows the coverage of our regular dividend this quarter adjusted NII exceeded our Q1 regular dividend by four cents per share for Q1 2024, our board of directors again declared regular dividend of <unk> 32 cents per share as well as a supplemental dividend of <unk> <unk> per share.
Kris Corbett: On slide 27, we highlight our various financing sources and diversified leverage profile taking into account. The SBA guaranteed debentures, we have $2 6 billion of total borrowing capacity was 787 million available on our revolving lines subject to borrowing base limitations.
Kris Corbett: This represents our most significant availability since the inception of our business and highlights our strong liquidity position.
Kris Corbett: As a reminder, covenants under both our Wells Fargo and Deutsche Bank credit facilities 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, which we think is particularly important during more volatile times.
Kris Corbett: Finally on slide 28, we show our leverage maturity schedule during the quarter, we issued a 300 million dollar five year investment grade bond with very strong execution for Nmfc's first issuance of this kind in the future we plan to be repeat issuers in the investment grade debt markets to further ladder, our maturities and the most cost efficient manner.
Kris Corbett: Notably nearly 70% of our debt matures in or after 2027.
Kris Corbett: With that I'd like to turn the call back over to John.
John R. Kline: Thank you Chris as we look forward over the remainder of 2024, we remain confident in our continued strong performance of Nmfc's portfolio and believe we are on track to continue to deliver great risk adjusted returns to our shareholders. We once again, we'd like to thank all of our stakeholders for the ongoing partnership and support and look forward to may.
Kris Corbett: Training our dialogue throughout the year I will now turn things back to the operator to begin Q&A operator.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed you may read try it by pressing Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Our first question comes from Bryce Rowe of B Riley.
Bryce Wells Rowe: Please go ahead.
Bryce Wells Rowe: I appreciate it good morning.
Bryce Wells Rowe: Hey, Bryce how are you.
Bryce Wells Rowe: John maybe just wanted to start on some of the.
Bryce Wells Rowe: Origination versus repayment dynamic in terms of in terms of.
Bryce Wells Rowe: Pricing.
Bryce Wells Rowe: And I think you noted in your prepared remarks, as well just kind of show it on slide 20. So.
Bryce Wells Rowe: Yeah.
Bryce Wells Rowe: It looks like some of the repayment activity is coming off at a higher yield than and the originations are coming on at a lower yield.
Bryce Wells Rowe: Can you talk about that dynamic and kind of what your expectations are especially considering you know maybe.
Bryce Wells Rowe: Maybe increased increased competition and tighter spreads that are that we're starting to see here.
Speaker Change: Sure sure well I think I think that's undoubtedly true when you look at the numbers.
Bryce Wells Rowe: You know we did have a you know, particularly some second lien positions repay and those those definitely had at attractive spreads are now we think that the primarily primarily unit tranche loans that were originating right. Now also a very good spreads, but they are a little lower I think my own view is this is a moment in time and we.
Bryce Wells Rowe: We alluded to this in our prepared remarks, where you know there's not quite enough deal activity, you're satisfied that the demand and the lending community.
Bryce Wells Rowe: But no I think it's our belief that that could normalize over the rest of the year and and we'd expect to see you know spreads at least stabilizing and potentially got a little better.
Bryce Wells Rowe: I think when we look at the originations we've made we really like the risk adjusted returns that are that those new loans, you know afford us and think they're smart loans to make and feel very good about it but it's something we have to watch.
Bryce Wells Rowe: As we consider just a R. R O E M, but you can see that you.
Bryce Wells Rowe: Based on the results and in the earnings power that that portfolio has where we're still in very good shape and feel good throughout the rest of the year.
Bryce Wells Rowe: Okay.
Speaker Change: That's helpful.
Speaker Change: Maybe one question on the on the income statement dividends from the S. L. P is looked to be a little bit larger.
Bryce Wells Rowe: And then you've seen here recently.
Bryce Wells Rowe: Anything specifically going on and just trying to trying to get a feel for how sustainable does dividend levels are.
Speaker Change: Sure. The S. L. P funds have been great for us over the last 10 years and I really think that over the course of the last two.
Bryce Wells Rowe: Two to three years, we've accumulated positions and really well performing loans that have very nice spreads I think where we're reaping the benefits of that right now I think the the Mlps will continue to.
Bryce Wells Rowe: Produce great income for NMFC.
Bryce Wells Rowe:
Bryce Wells Rowe: It's possible that that there'll be a little a little better spread pressure on those those are the those funds, but but we you know as far as I can see over the next few quarters I think the the the distribution yields from from the ASO piece will be very strong.
Bryce Wells Rowe: Okay.
Speaker Change: Last one for me and what not.
Speaker Change: Yeah, just around around the capital capital structure, you've got some SBA debentures that are starting to approach maturity I guess in 25, I'm just curious how youre thinking about.
Speaker Change: The Spic's licenses that you have is there an opportunity to to re up and and apply for a third or or have you guys kind of outrun.
Speaker Change: Outrun outrun those FDIC licenses and expect them just to to level off here.
Speaker Change: Sure.
Speaker Change: B program and a really great program for us for a long period of time S. P. A one is done and done very well, but as you mentioned it is heading towards maturity right now our mindset is to try to replace that with a third license, but but we don't have anything to report with regard to achieving that third license.
Speaker Change: And so that that's sort of where things stand. So we're we're very aware of the March 25.
Speaker Change: The first maturity and and of course, we still have a S. P a to which has a longer maturity. So.
Speaker Change: Generally we feel really good about the SBA program and we've been able to populate it with good good conforming loans.
Speaker Change: I guess I'd also note that we have some other debt that's coming due you know over the next year or so that that is actually at much higher rates. So.
Speaker Change: There could potentially be an opportunity depending on what the the overall rate environment looks like there could be an opportunity to to refinance those at attractive rates.
Speaker Change: Got it alright, thanks, John I appreciate it.
Speaker Change: Thanks.
Speaker Change: Our next question comes from Finian O'shea of Wells Fargo. Please go ahead.
Finian O'shea: Hey, everyone. Good morning.
Finian O'shea: Can we go back to the commentary on the potential incentive fee waivers.
Finian O'shea: I appreciate that of course, but gleaning out.
Finian O'shea: The remarks it sounded like this is for.
Finian O'shea: A specific period or maybe insuring against a specific.
Finian O'shea: ROE headwind factor for a specific period can you outline that again like what.
Speaker Change: Well for you know for how long and against is it for spreads or whatnot.
Speaker Change: Do you anticipate that headwind might be in.
Finian O'shea: And and for how long.
Speaker Change: Sure sure. So thanks for that question. We've had this program for a while the whole intent of the program is to provide our investors with great confidence that if for any reason.
Speaker Change: Our earnings dip below the 32 stack base dividend that that we will support it through a waiving incentive fee in and applying those dollars back to the company such that we meet we make sure that the NII is covering our dividend and I think that's really powerful and and I think it gives a lot of our stakeholders a lot of comfort that even if a N a.
Speaker Change: It does ever get below 32 that they can feel good about their 32 cent dividend yeah. That's a really powerful thing it's been in place for a while we haven't talked about it maybe quite as much because you know the the the the NII has been so high it's still meaningfully above our RNA I still meaningfully above the 30.
Speaker Change: To Oh, we just want to have investors you just continue to keep that in mind. It is set to expire at the end of this year, although my expectation.
Speaker Change: Would be that we will talk to our board in in <unk>.
Speaker Change: Very short short order to extend that it's it's it's a program that we feel very strongly about and again I think a lot of our shareholders really like it.
Speaker Change: Yeah, absolutely and that would include like what's going through my head sort of as if.
Speaker Change: Base rates relapse.
Speaker Change: New mountain and many other Bdcs of course wood.
Speaker Change: Robert really be facing dividend cuts right so would it.
Speaker Change: In that sort of new environment that may eventually come what its still apply that.
Speaker Change: Yeah, well the way we've done it in the past as we've always set the dividend protection program to be.
Speaker Change: Absolute over a certain period of time and so we you know my mindset would be to go.
Speaker Change: Talk to our board about extending it for one to two years in and then if it's in place.
Speaker Change: Yeah, we would we would live up to that that dividend protection program pledge. So that's our mindset I think we show we do in our.
Speaker Change: In our deck, we do show sensitivities around what happens at different base rates and of course, you know.
Speaker Change: There there are different things that that if in a lower base rate environment. There are some positive changes that can occur as well for example, you know the.
Speaker Change: The previous question I mentioned, the fact that we have some some pretty high cost debt maturing in 2025, So if base wage rates for example, where in a plummet in 'twenty five we would lose yield on our assets, but I think we would also have a tremendous opportunity to refinance you know a meaningful amount of debt that's coming due at lower rates. So you know what.
Speaker Change: There are certain hedges that are in place and and the analysis that we provide on page 16 is a dynamic analysis and changes based on the facts and circumstances of our assets and liabilities.
Speaker Change: Yeah.
Speaker Change: That's helpful. Thank you and a follow up.
Speaker Change: On the.
Speaker Change: Equity rotation potential I think it's slide 19 in.
Speaker Change: You all do a great job of presenting all of these.
Speaker Change: Sort of dimensions of the.
Speaker Change: New Mountain story.
Speaker Change: Obviously, a handful of big names here, they've all been here for a little while and.
Speaker Change: So of course, it's been a funky.
Speaker Change: Market, we've all been through in the last handful of years, but just seeing like a check on.
Speaker Change: As a group where these businesses are in there.
Speaker Change:
Speaker Change: Rebound or whatnot.
Speaker Change: And scalability and then.
Speaker Change: More specifically on just a second part on.
Speaker Change: It meant.
Speaker Change: It sounded like.
Speaker Change: It sounded like a sort of rethinking we're not in Covid anymore.
Speaker Change: Is it is it just that or did something more.
Speaker Change: The fundamental operationally happened that caused that that rethink as that one is that one sort of like you know two steps back kind of situation. Thanks.
Speaker Change: Sure sure. Thanks for that question and let me know if we if I don't handle all the all of it but when we think about our our equity positions I think it is fair to say that that they had been around for a little bit.
Speaker Change: The one thing and I don't use this as an excuse but it has been over the last three years, a challenging market for every asset owner to sell to sell.
Speaker Change: Company. So it has not been a great environment I think I think you acknowledged that in your question and and we are eager to to monetize theres no doubt about it that way.
Speaker Change: Regard to the performance of the of the top investments I would say unitek is at very healthy has de Levered a lot.
Speaker Change: And has a pretty nice tailwind and has shown consistent growth over the last three years to four years and I think that that company is performing very well and just as a reminder, that the end markets are telecom fiber construction, which is a really great market right now and mentioned, we'll talk more about Ah benefits I'd say, the slow and steady.
Speaker Change: The recovery.
Speaker Change: In the dental practice management industry, and we have a lot of resources focused on on getting that business too.
Speaker Change: Two to the earnings power that we really think it can get to.
Speaker Change: And then Permian I think has some really nice tailwind as we shift the business mix.
Speaker Change: In that business. So in general we think the businesses are actually doing pretty pretty darn well and in a better M&A environment will have a lot better opportunities to monetize but you know no matter how well your company is doing if the M&A environment is bad it's tough to get a good price.
Speaker Change: On it meant.
Speaker Change: They're there and I think you could double check. This there are a lot of public data points, but there was a big COVID-19 bump a positive bump for a lot of edge education technology businesses.
Speaker Change: That is that is very very clear and and and and that and then mentioned just hasn't had the the market is affecting our momentum the same as a lot of other companies have been affected by that bump up. So I really think it's just a you know waiting as I mentioned for the market to normalize, but theres nothing in the products the.
Speaker Change: Fusion of the business that is causing US concern are we just sort of going to have to fight harder to win business in a market that is not quite as you know not quite as good as it was during COVID-19. When every school system was was rushing towards you know these Ed Tech solutions for remote learning et cetera.
Speaker Change: So I think it is just this it would take a little time for the markets normalize and for us to attack the market even harder and.
Speaker Change: And so I think we'll know a lot more about it meant you know over the next 12 months and we have.
Speaker Change: We have where we're actually very optimistic about how the performance will evolve over the next 12 to 18 months months.
Speaker Change: Great. Thank you Jon Doug Doug everything.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: The next question comes from Erik Zwick of Boenning and Scattergood. Please go ahead.
Erik Edward Zwick: Good morning, everyone now with all of the group.
Erik Edward Zwick: Wanted to start maybe first and just your thoughts on the opportunity for portfolio growth you you noticed the deal flow is picking up.
Erik Edward Zwick: Real time, and I guess, the harder part of the equation is maybe to have more than a couple of months out a strong view on repayment activity, but just thinking with spread compression, maybe putting a little bit of.
Speaker Change: Pressure on investment income dollars. If you were to grow the portfolio to potentially offset that do you see that that kind of pathway or how do you think about the opportunity to grow the portfolio over the next quarter or two.
Speaker Change: Sure. Thanks for that question and I'm glad you asked it acid because net of cash.
Speaker Change: This quarter, we were at one point out of three times.
Speaker Change: Natural debt and so that is the lowest level, we've been at in a little while and so I guess I would say that we're very committed to to our range, which is statutory leverage between one and 1.25, but I think I think there's definitely an opportunity to move the leverage up a little bit.
Speaker Change: To improve the ROE at <unk>.
Speaker Change: That is a lever to offset some of the the spread compression, which you can see and we acknowledge.
Speaker Change: But we don't want to we want to be very disciplined about the way, we do that and we definitely don't want to be as we said in the past we don't want to be at the absolute top end of our range every quarter, but but could we be at the mid high end of the range and are comfortable manner I think that that is possible.
Speaker Change: Okay.
Speaker Change: That makes sense.
Speaker Change: And second one for me it was interesting to note on slide two.
Speaker Change: 'twenty one to see the interest coverage ratio for the portfolio go up Im curious you know what maybe the major drivers of that you know certainly on that on the graph above the average portfolio weighted EBITDA gross so that helps and base rates have been stable.
Speaker Change: Stable now for a for a couple of quarters. So curious if there was anything else driving that increase and whether you think we've maybe seen the bottom of that ratio for the cycle.
Speaker Change: Yeah, I'm glad you asked that question too I mean, I really view it as good performance of its reflective of good performance of our underlying portfolio companies. I think it's also reflective of the new deals that we're originating having better coverage than maybe some of the old deals that we had and that's a function.
Speaker Change: Of just less aggressive gearing in a higher interest rate environment that we're in right now so.
Speaker Change: So the I really see those as the two the two factories good performance and a positive mix from our interest coverage perspective.
Speaker Change: Thanks for taking my questions today.
Speaker Change: Thanks, so much.
Speaker Change: As a reminder, if you have a question. Please press Star then one.
Speaker Change: With no further questions. This will conclude our question and answer session I would like to turn the conference back over to Mr. Klein for any closing remarks.
Steven Bruce Klinsky: Great well, we thank you for your interest in New Mountain Finance Corporation, and we very much look forward to speaking to you on the next earnings call.
Steven Bruce Klinsky: Goodbye.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].