New Mountain Finance Corporation (NMFC) Q3 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the New Mountain Finance Corporation Third Quarter 2019 Earnings Call and Webcast. [Operator Instructions]. Please note this event is being recorded. I would now like to introduce Mr. Robert Hamwee, Chief Executive Officer. Please go ahead.

Thank you. And good morning, everyone, and welcome to New Mountain Finance Corporation's Third Quarter Earnings Call for 2019. On the line with me here today are Steve Klinsky, Chairman of NMFC and the CEO of New Mountain Capital; John Kline, President and COO of NMFC; and Shiraz Kajee, CFO of NMFC. Steve Klinsky is going to make some introductory remarks. 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 a 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 in our November 6 earnings press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release and on Page 2 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 call, please visit our website at www.newmountainfinance.com. At this time, I'd like to turn the call over to Steve Klinsky, NMFC's Chairman who will give some highlights beginning on Page 4 of the slide presentation. Steve?

The team will go through the details in a moment, but let me start by presenting the highlights of another strong quarter for New Mountain Finance. New Mountain Finance's net investment income for the quarter ended September 30, 2019, was $0.36 per share, above the high end of our guidance of $0.33 to $0.35 per share and more than covering our quarterly dividend of $0.34 per share. New Mountain Finance's book value was down $0.06 to $13.35 per share, reflecting generally stable financial market conditions and limited portfolio company valuation changes. We are also able to announce our regular dividend, which for the 31st straight quarter will again be $0.34 per share, an annualized yield of approximately 10% based on last Friday's close. The company had a record quarter of net deal generation, investing $452 million in gross originations versus moderate repayments of $67 million. This continued significant balance sheet growth was in part funded by our recent equity issuance and keeps us fully levered in our target range. Credit quality remains strong with no new nonaccruals for the fifth consecutive quarter. I and other members of New Mountain continue to be very large owners of our stock, with aggregate ownership of 10.5 million shares today, inclusive of the 400,000 shares purchased in our most recent equity issuance. Finally, the broader New Mountain platform that supports NMFC continues to grow, with over $20 billion of assets under management and approximately 160 team members. In summary, we are pleased with NMFC's continued performance and progress overall. With that, let me turn the call back over to Rob Hamwee, NMFC's CEO.

Thank you, Steve. Before diving into the details of the quarter, as always, I'd like to give everyone a brief review of NMFC and our strategy. As outlined on Page 6 of the presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm. Since the inception of our debt investment program in 2008, we have taken New Mountain's approach to private equity and applied it to corporate credit with a consistent focus on defensive growth business models and extensive fundamental research within industries that are already well-known to New Mountain. Or more simply put, we invest in recession-resistant businesses that we really know and that we really like. We believe this approach results in a differentiated and sustainable model that allows us to generate attractive risk-adjusted rates of return across changing cycles and market conditions. To achieve our mandate, we utilize the existing New Mountain investment team as our primary underwriting resource. Turning to Page 7. You can see our total return performance from our IPO in May 2011 to November 1, 2019. In the 8.5 years, since our IPO, we have generated a compounded annual return to our initial public investors of 10.6%, meaningfully higher than our peers in the High Yield Index, and approximately 900 basis points per annum above relevant risk-free benchmarks. Page 8 goes into a little more detail around relative performance against our peer set, benchmarking against the 10 largest externally managed BDCs that have been public at least as long as we have. Page 9 shows return attribution. Total cumulative return continues to be largely driven by our cash dividend, which in turn is a more than 100% covered by net investment income. As the bar on the far right illustrates, over the 8-plus years we have been public, we have effectively maintained a stable book value, inclusive of special dividends, while generating a 10.3% cash-on-cash return for our shareholders. We attribute our success to: one, our differentiated underwriting platform; two, our ability to consistently generate the vast majority of our NII from stable cash interest income in an amount that covers our dividend; three, our focus on running the business with an efficient balance sheet and always fully utilizing inexpensive, appropriately structured leverage before accessing more expensive equity; and four, our alignment of shareholder and management interest. Our highest priority continues to be our focus on risk control and credit performance, which we believe over time is a single biggest differentiator of total return in the BDC space. Credit performance continues to be strong, with material quarter-over-quarter credit deterioration in only one significant name, PPVA, which has effectively been an ongoing liquidating trust under Cayman law for a number of years, and which has been added to our internal watch list as A3. As our one significantly troubled asset, we continue to spend a lot of time attempting to maximize our recoveries from the PPVA entity to state. Given the complex mix of underlying assets and litigation claims, while we believe our valuation of $0.74 currently fairly reflects the midpoint of likely scenarios, significant volatility exists around the midpoint. For the fifth consecutive quarter and 10 of the last 11 quarters, we have had no new nonaccruals. If you refer to Page 10, we once again lay out the cost basis of our investments, both the current portfolio and our cumulative investments since the inception of our credit business in 2008, and then show what has migrated down the performance ladder. Since inception, we have made investments of approximately $7.4 billion in 282 portfolio companies, of which only 8 representing just $125 million of cost have migrated to nonaccrual, of which only 4 representing $43 million of cost have thus far resulted in realized default losses. Furthermore, over 99% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale. Page 11 shows leverage multiples for all of our holdings, over $7.5 million when we entered an investment, and leverage levels for the same investment as of the end of the most recent reporting period. While not a perfect metric, the asset-by-asset trend and leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical, fundamental support for our internal ratings and marks. As you can see by looking at the table, leverage multiples are roughly flat or trending in the right direction with only a few exceptions. There are currently three names that have had negative migration of 2.5 turns or more. Two are names we have discussed for many previous quarters, the previously restructured Edmentum, where operating results and enterprise value continue to meaningfully improve; and Company CO where the combination of improving operating results and ongoing sponsor support through equity capital contribution make us confident about the future prospects of our loan. The new name on the list is the previously restructured Unitek representing 2 different securities, CL and CN, for a few operational missteps led to weaker financial results in 2019, but where secular trends continue to be strong in the company's key operating division, providing us with optimism for improvement in 2020. The chart on Page 12 helps track the company's overall economic performance since its IPO. At the top of the page, we show how the regular quarterly dividend is being covered out of net investment income. As you can see, we continue to more than cover 100% of our cumulative regular dividend out of NII. On the bottom of the page, we focus on below the line items. First, we look at realized gains and realized credit and other losses. As you can see looking at the row, highlighted in green, we've had success generating real economic gains every year through a combination of equity gains, portfolio company dividends and trading profits. Conversely, realized losses, including default losses, highlighted in orange, have generally been smaller and less frequent, and show that we are typically not avoiding nonaccruals by selling poor credits at a material loss prior to actual default. As highlighted in blue, we continue to have a net cumulative realized gains, which currently stands at $18 million. Looking further down the page, we can see that cumulative net unrealized depreciation, highlighted in gray, stands at $58 million, and cumulative net realized and unrealized loss, highlighted in yellow, is at $40 million. The net result of all this is that in our over 8 years as a public company, we have earned net investment income of $674 million against total cumulative net losses, including unrealized, of only $40 million. Turning to Page 13. We have seen significant growth in the portfolio over the last year as we've increased our statutory leverage from 0.81 to 1.20, inclusive of our October equity offering. Consistent with this strategy, we articulated when we received shareholder authorization to increase leverage. More than 100% of the growth in assets has come from senior securities as through repayments and sales, non-first liens have actually shrunk on an absolute basis by $91 million, while first lien assets have grown by $1.1 billion. I will now turn the call over to John Kline, NMFC's President, to discuss market conditions and portfolio activity. John?

Thanks, Rob. As outlined on Page 14, after a slow start in Q1, direct lending deal flow in our core sectors has been exceptionally strong throughout the summer and into the fall. New issued loans are priced at attractive levels, which support NMFC's investment income targets. We have observed that the enterprise value multiples for the best quality businesses are in the mid-teens, with some deals trading for over 20x EBITDA. Overall, there continues to be heavy competition for loans to high quality businesses, although recently lenders have shown increased discipline on structure and pricing. Additionally, there is more caution around financing businesses that have exposure to uncertain end markets. Looking forward, we expect transaction flow to be very steady from now until the end of the year, and we remain well positioned to select and access the best deals available in the marketplace. Turning to Page 15. Given our current asset liability mix, LIBOR has been a headwind in our business. Thus far in 2019, we have seen LIBOR move from 2.8% in early January to 1.9% today. The forward LIBOR curve currently suggests that 3-month LIBOR could decline by 30 basis points in the coming quarters. Based on the sensitivity shown on Page 15, if this does occur, decline in LIBOR would represent a modest $0.01 per quarter headwind. We believe that the current spread environment and our improved debt-to-equity mix, inclusive of the ongoing ramp of our SBIC investing program, will enable us to successfully address this potential downward trend in the base rate. Turning to portfolio activity on Page 16, 17 and 18, NMFC had a very strong quarter with total originations of $452 million, offset by $111 million of sales and repayments, representing a $341 million increase in our portfolio. Our new investments were highlighted by a number of middle market club deals and the expansion of our third senior lending program. Consistent with market trends that I discussed in my opening remarks, most of our new deals are fresh buyouts, trading at very healthy enterprise value multiples that are supported with historically high amounts of equity as a percentage of the total purchase price. These purchase price multiples, which have steadily increased over the past year, enhance the loan-to-value ratios on our loans, indicate strong sponsor support and validate the attractiveness of the defensive growth niches that we target. Our average loan-to-value on new originations in Q3 was 38%. Page 19 shows our continued origination momentum since the end of the quarter, where we have invested $122 million in new transactions, with $89 million of sales and repayments. Notable post quarter end transactions included a new net lease deal originated in our REIT subsidiary and 2 new loans purchased in our SBIC investing program, which we continue to expand. Looking forward, we have a solid pipeline of new investment opportunities in our core defensive growth verticals. Turning to Page 20. Our mix of originations continues to skew meaningfully towards first lien loans, accounting for 73% of total new originations this quarter. Our sales and repayments were balanced evenly between first and second lien assets. Overall, our Q3 mix showed a continued shift towards first lien assets, consistent with our stated plan to avoid increased portfolio level leverage with a more senior-oriented asset mix. As shown on Page 21, NMFC's asset level portfolio yield has declined by about 10 basis points since the end -- since Q2, from approximately 9.4% to 9.3%. The decline is primarily due to the decrease in LIBOR from the end of Q2. While we are very mindful of the potential continued decrease in the base rate, we remain comfortable with our portfolio yield, which solidly supports our quarterly dividend. The top of Page 22 shows a balanced portfolio across our defensive growth-oriented sectors. In the services section of the pie chart, we break out subsectors to give better insight into the significant diversity within our larger sector. The chart on the bottom left of the page presents our portfolio by asset type, where you can see the shift towards first lien oriented assets that we discussed earlier in the call. Currently, only 1/3 of our investments are junior in the capital structure. The chart on the lower right shows that the vast majority of our portfolio is performing broadly in line with expectations. Finally, as illustrated on Page 23, we have a diversified portfolio with our largest investment at 3.3% of fair value, and top 15 investments accounting for 33% of fair value. As you can see on the lower right side of the page, we have added more position diversity in each of the last 4 quarters to decrease our risk to any one borrower. We expect this trend to continue going forward. With that, I'll now turn it over to our CFO, Shiraz Kajee, to discuss financial statements and key financial metrics. Shiraz?

Thank you. 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. Portfolio had approximately $3 billion in investments at fair value at September 30, 2019, and total assets of $3.1 billion, with total liabilities of $2 billion, of which total statutory debt outstanding was $1.6 billion, excluding $184 million of drawn SBA-guaranteed debentures. Net asset value of $1.2 billion or $13.35 per share was down $0.06 from the prior year. Our statutory debt-to-equity ratio was 1.2 to 1 pro forma for the equity raise we had in October. In this offering, NMFC issued 9.2 million shares, raising $125 million in proceeds, inclusive of a $6.8 million cash payment to the company by the investment manager. NMFC netted $13.60 per share, which was above book value and accretive to all shareholders. Since our IPO, we have had 13 follow-on offerings, in which the adviser had over $23.7 million in subsidies, such that NMFC always netted proceeds above book value. On Slide 25, we show our historical leverage ratios. Step-up in leverage over the past 6 quarters is in line with our current target statutory debt-to-equity ratio. On this slide, we also show our historical NAV adjusted for the cumulative impact of special dividends, which shows the stability of our book value since our IPO. On Slide 26, we show our quarterly income statement results. We believe that our 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 continue to generate stable net investment income above the line. Focusing on the quarter ended September 30, 2019, we earned total investment income of $72.6 million, an increase of $6.1 million from the prior quarter due to higher interest income from the increased asset base and a stronger fee quarter. Total net expenses were approximately $41.4 million, a $2.8 million increase from the prior quarter due to higher borrowing cost and fees. As in prior quarters, the investment adviser continues to waive certain management fees. The effective annualized management fee this quarter was 1.28%. It is important to note that the investment adviser cannot recoup fees previously waived. This results in third quarter NII of $31.2 million or $0.36 per weighted average share, which is above our guidance and more than covered our Q3 regular dividend of $0.34 per share. As a result of the net unrealized depreciation in the quarter, for the quarter ended September 30, 2019, with an increase in net assets resulting from operations of $23.4 million. Slide 27 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see, 95% of total investment income is recurrent and cash income remains strong at 87% this quarter. We believe this consistency shows the stability and predictability of our investment income. Turning to Slide 28. As briefly discussed earlier, our NII for the third quarter more than covered our Q3 dividend. Given our belief that our Q4 2019 NII will fall within our guidance of $0.33 to $0.35 per share, our Board of Directors has declared a Q4 2019 dividend of $0.34 per share, which will be paid on December 27, 2019, to holders of record on December 13, 2019. On Slide 29, we highlight our various financing sources. Taking into account SBA-guaranteed debentures, we had over $2 billion of total borrowing capacity at quarter end. During Q3, we successfully upsized both our Wells Fargo and Deutsche Bank credit facilities by $80 million and $60 million, respectively. As a reminder, both our Wells Fargo 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 30, we show our leverage maturity schedule. As we've diversified our debt issuance, we have been successful at laddering our maturities to better manage liquidity. We currently have no near-term maturities. With that, I would like to turn the call back over to Rob.

Thanks, Shiraz. It continues to remain our intention to consistently pay the $0.34 per share on a quarterly basis for future quarters so long as NII covers the dividend in line with our current expectations. In closing, I would just like to say that we continue to be pleased with our performance to date. Most importantly, from a credit perspective, our portfolio overall continues to be quite healthy. Once again, we'd like to thank you for your support and interest. And at this point, turn things back to the operator to begin Q&A. Operator?

[Operator Instructions]. Your first question comes from Ryan Lynch with KBW.

First one, I wanted to discuss was, looking at some of your originations this quarter, particularly in the health care industry. As I look through some investments, PhyNet Dermatology, Affinity Dental, MyEyeDr., center for sight , there are several investments that look to kind of fit the traditional sort of health care roll-up strategy. We've seen several of those businesses in other parts of the market, have some pretty meaningful issues. So can you maybe just speak to some of your health care investments this quarter? Particularly maybe someone that I commented on. Are these kind of the traditional health care roll up? And if so, how you guys get comfortable, particularly in the light of some weakness in some other companies in the broader market?

Yes, absolutely. So I mean health care is arguably our strongest vertical at the firm overall. We've had incredible success over 20 years in private equity and health care, and great success on the credit side there as well. Now health care is clearly an area where you have winners and losers. And I think having the intellectual capital to distinguish between those two is absolutely critical. And so it is an area where, I think, leveraging the platform is of particular importance. In terms of some of those specific platform companies, you mentioned, there are definitely historically winners and losers, and will prospectively be winners and losers in that space. I think we are focused on sectors within that, whether it's derm or dental or eye care that have, what we believe, the high level of conviction, have the best possible macro trends, have the best underlying micro elements around reimbursement around all the other issues that are important. Obviously, execution is critical. So it's a management team that we know and believe in. So we're -- but definitely, obviously, we like them, we invest in them, but we're very, very comfortable. And I think our track record, we've done many of these over the years. And to date, knock on wood, they worked out well. And I think we have every reason to believe these ones prospectively well. And I think we say that with a lot of conviction because it is a space we know incredibly well.

Okay, that's helpful commentary. Can you maybe talk about the really robust portfolio growth that you had this quarter? You guys have been very efficient in capital deployment, particularly after a raise and deploying that capital in a very efficient manner. Can you talk about why there is such a robust growth this quarter? And then also, if I look at your slide deck which shows the amount you invested and into the tranche size, you guys are typically investing in less than 50% of the tranche size of investments. So is one strategy that when you guys have additional capital to deploy, you guys can just increase your hold size in some of these deals that you guys were planning on closing, if the capital is there?

So yes, a couple of things on that. So in terms of the pace of deployment, I think, in any 3-month period, there's some idiosyncratic element to it. Although, as I think I've said in the past, it's certainly over a rolling 6 or 12-month period, our deployment pace is expanding. And part of that is due to the overall growth in the platform, and we now have within our core verticals incremental sub-verticals to address as New Mountain overall has gotten bigger and, frankly, better at what we're doing. And part of it is, the market is coming to us. And I think I've said before, when you look at private equity capital formation, and we're fundamentally a sponsor finance provider, the amount of capital flowing into funds that focus in our space has grown significantly. And frankly, that's where the economy is going, right, into services away, basic manufacturing and particularly into things like enterprise, software and certain areas of health care and business technology-enabled business services. So I think, overall, private equity capital formation is getting bigger. That drives deal flow to us. I'd say, overall direct lending continues to take share generally, and the verticals that we focus on are growing faster than the already growing private equity industry. So I think all those things continue to lead when coupled again with the overall growth of the New Mountain private equity platform that drives our credit business. All of those things lead to continued growth. And then in any quarter, you can have a little bit more or less just depending on that relatively short time period. In terms of the percent of tranche issues and how we think about follow-on investments? I'll make a couple of observations. One is that, oftentimes, the percent of tranche just at the BDC is a little bit misleading. As you know, we have a few other, other funds here, private funds that co-invest with the BDC. So institutionally, we will typically have a larger percent of the tranche than just the piece that shows up on the BDC side. And then secondly, you are right in that, many of the businesses that we lend to are themselves growing platforms of need for incremental capital over time, and we certainly like to put additional capital behind the businesses that we know and like and for a period of time. Does that answer the question, Ryan?

Yes. Yes. That answers it and that's good commentary. One last question, maybe somewhat of a philosophical question. It's interesting you talked about, on Slide 14, high-quality businesses operate for 15 to 22x EBITDA, but there's a larger equity checks written for some of those that kind of bridge the gap. I wanted to get your thoughts on how you guys view risk in a business that maybe has higher leverage, the leverage in a business it's higher than where it was 3 or 4 years ago. But because there's larger equity checks, there's a lower loan-to-value on those businesses. Now these aren't ABL lending businesses. These are businesses that are lent on cash flow. So how do you view the amount of leverage in a business which is higher versus a lower loan-to-value because of a larger equity check? Do you view those businesses as safer or more risky?

And I think there's a couple of items wrapped up in that question. I think, listen, by definition, a business relative to itself has the same amount of value intrinsic cash flow, et cetera, whether it's levered 4x or 8x, whether the loan-to-value is 30% or 70%. But that said, in the real world, I think one of the reasons, and there are a lot of reasons, but one of the reasons these multiples have gone up for the businesses is that these are businesses that are actually growing and generating cash at a higher rate, I think, than businesses we've seen in the past. So I actually think it's not just pure multiple inflation for the same exact types of businesses that were purchased at a lower multiple five years ago. That same business now commands a 5x higher multiple. There is clearly some multiple inflation on a like-for-like basis, but the mix has shifted. So when we talk about businesses that trade at 18x, that has sponsors putting in 11.5 turns of equity, that is a different business than I think we've seen in the past just from my pure academic financial analysis perspective in terms of the growth profile, the margin profile, the free cash profile. So we do feel that these are businesses that can support a modestly higher level of debt. And I think we're talking probably about half a turn or so relative to 3 or 4 years ago, relative to 4 or 5 extra turns of equity capital. So I think a little bit, you're comparing apples to oranges there. And then I would say, even if it was pure apples to apples, there is value in having a sponsor have, again, 4 or 5 more turns of equity. That will absolutely impact behavior in the event that incremental capital is needed to help out down the road. People do look at money in the ground. And no one in the end is going to throw good money after that. These are at the margin in a significant way is impacted by the magnitude of the equity check. So I do think that is a truly helpful piece, even on an apples-to-apples basis. Is that all makes sense?

Yes, yes. And that makes sense. And yes, I was comparing an apples-to-apples, the same business that now has more leverage, but the multiple has grown even more than that. Is it a more risky business today versus five years ago? So -- but all that commentary makes sense, and I appreciate it.

[Operator Instructions]. Your next question comes from Owen Lau with Oppenheimer.

So I have a modeling question. Your originations since the end of the quarter was very strong, over $120 million. So given your conversation with your clients, how should we think about the pace of the originations for the rest of this quarter? Should we expect this will slow down a little bit going into the holiday seasons? Additionally, subsequent to the quarter end, about 40% of the originations were second lien compared to about 26% of the total portfolio. And I know you have been shifting towards first lien. Is there anything we should look into this?

Yes, absolutely. So on the first question, for Q4 pace of originations for the balance of the quarter, we wouldn't expect Q4 to be as heavily -- origination Q3. I think that was an idiosyncratically very strong quarter. But we do have a robust pipeline, as John mentioned, and we'd certainly expect to see significant addition to the portfolio through the end of the year. The market remains robust. And I think what we typically see is a push into the second, third week of December. And then clearly, things shut down for the holiday and into early January. In terms of the second question, no, I would not read anything into that. It's obviously a very tiny sample size. I think that's 5 deals. And in fact, when you look at our forward pipeline, we see significant percentage back to first lien. So I think that our mix will continue to be consistent with what we've seen over the course of the last 12 or so months. Does that answer the question?

Yes, that's perfect. And then on Slide 15 -- and I think some investors are still concerned about the downside scenario. If interest rates continue to go down, could you please elaborate more about what levers you can potentially pull to maintain the dividend coverage?

Yes, absolutely. I mean I think, obviously, one leverage is -- one lever is the leverage which we modulate within a band. I think the second lever is the mix, which again we modulate within a band. I think not a lever, but certainly something we continue to see is there is an inverse correlation between base rate and spread. So as the base rate goes down, we continue to expect to see, maybe not a one-to-one offset, but a material offset in the spreads environment. So I think all of that continues to give us confidence that irrespective of the base rate environment, we have high confidence in our ability to continue to earn the dividend.

[Operator Instructions]. Your next question comes from Fin O'Shea with Wells Fargo Securities. .

I just want to expand on a couple of Ryan's earlier questions, not the philosophical one, but the earlier ones. On the health care services companies. I want to tie this into your focus on new [indiscernible] deals, which tend to be higher quality. But I think these days, from market observation, often entail looser documentation to accommodate a roll-up strategy. So can you give some context on where you're coming in in these stories? And what sort of EBITDA -- or, let's say, how much higher is the adjusted EBITDA down the road? And what does that entail for a new LBO these days?

Sure. So I guess, two questions. One, in terms of timing, we're typically coming in when there's enough scale and critical mass such that we're dealing with enterprise values typically well north of $100 million. I think on average, it's probably $300 million to $400 million. So we're not necessarily doing the very early stage financing for a roll-up. We think there's less execution risk once the platform itself has critical mass. In terms of adjustments, look, we all know that there is a -- oftentimes a chasm between GAAP EBITDA and financing EBITDA. One of our big, big elements of our job is to underwrite what we actually think is real-world earnings and cash flow, and we're really good at it because we do it all the time on the PE side. And so we are seeing a lot of the things thrown in there, and we sort of come up with our own view and definition, and that's what we presented in investment committee and that's what we focus on. We're not that interested in a headline number. We're interested in the real number, and that's what we factor into our investment decisions. And we obviously strive to have the credit agreement be as constrained around those types of things as is reasonable. And we do walk away from things where either we're unable to get comfortable with an earnings level that makes sense, or we have a document that allows for effectively infinite add-backs as we think about go forward draws on facilities to allow for the roll-up to continue.

That is helpful. And then sort of another question on new investment. Obviously, you're continuing to grow at a consistent pace and looking at the new originations, pretty much consistent in terms of the amount you invest, some of the tranche sizes are mid-sized, some are larger, $400 million, $500 million. This quarter, there was one, looked like European syndicated gems that was a much larger facility. Like -- as we're all seeing now today where the markets pushing towards the private side on a lot of these $600 million, $700 million, $800 million tranches going private. What are you -- how are you viewing those even in the context of your normal $30 million, $40 million, $50 million bite size? Do you see those deals, your connect wise and so forth, as an attractive opportunity compared to the more core $300 million, $400 million facility size that you've been sticking to?

Yes, look, it's a good question, but I think we've always said that first principle is industry and business quality. And that is really what we focus on kind of first, second and third. And if there's a great company in a great industry that we know intimately, we're less concerned whether the enterprise value is $250 million or $1 billion. So there are pros and cons as you think about different sizes, but it is a much further down the list of what we're focusing on. We've never wanted to pigeonhole ourselves as we're upper middle market, lower middle market, middle-middle market. It's always been from the beginning that great defensive growth businesses that we know intimately through PE, and then we can be flexible around that. So we continue to reemphasize that. And yes, as we've seen, the direct lending sort of take share from the syndicated market increase its scale and ability to provide sponsors -- solutions that sponsors want. We're going to participate in that when that intersects with the great business that we know incredibly well.

[Operator Instructions]. Your next question is a follow-up question from Ryan Lynch with KBW.

Just had one follow-up question. We have heard and read about some, a little bit of early on, a little bit of softening in some of the liquid markets. But that seems to be particularly around some -- maybe some perceived riskier credits or some credit that are rated B minus or B3. You guys focus on noncyclical, very strong dural businesses that are viewed as some of the highest quality. So it's a little bit of a different market than what seems to be having a little bit of softness. I'm just wondering, is that the case? Are you guys seeing any bit of softness or increasing or better terms or structures in your market? Or is it as competitive as it has been over the last year.

Look, it's certainly competitive, but you touch on an important thing that we absolutely are seeing and I think to our benefit, which is the B3 market is -- this is for mostly technical, yes, it's late cycle, et cetera, but mostly technical, CLOs are very worried about their CCC buckets. How do you get to be a CCC? What typically first year would B3. And so the CLO buyers of classic syndicated first liens are definitely shying away from B3 paper, and our view, there are business that deserve to be B3 in capital structures and there are businesses that probably don't deserve to be B3. And there is some knock-on effect. Our market ultimately benchmarks off of the bigger illiquid market. In occasionally, they're actually actionable things for us in the more liquid markets. So yes, it is a CLO-driven. It's not really that the numbers are getting worse. There are always areas of the economy or certain industries that are doing worse. But that hasn't fundamentally changed. What's changed is that we're seeing just over time, as the cycle lengthens, CLOs are piling up things in their CCC buckets, and they're starting to get pretty full, which means there is a desire at the margin if you're a CLO manager to avoid B3 exposure because that means you're one step away. And that is having a bit of a knock-on effect into the overall market, which in general is helpful to us from a spread and turns perspective. And John, anything you'd add to that?

I mean the only thing I would add is when you look at some of the press around the syndicated market, it's clear, there have been pockets of weakness in the syndicated market. I think there's an article in Bloomberg that 4.2% of the loan market is trading below 80. And the observation I would make about those loans are typically there in the energy sector, retail, restaurants, industrials. It's fair to say there are a couple of health care loans in there in sectors, in areas that we have proactively avoided. So when I think about the real stress in the syndicated loan market, I think it's just challenged industries that have -- where the underlying companies have struggled and the loans are going to trade down, and there will be problems in those pockets of the economy.

[Operator Instructions]. We are showing no further questions at this time. And this does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Hamwee for any closing remarks. .

Yes. As always, just want to thank everybody for their time and attention. And obviously, we're here for any follow-up. But otherwise, look forward to speaking to people on our next call. So thanks very much. Bye-bye now.

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