Good morning and welcome to the New Mountain Finance Corporation Fourth Quarter and Full Year 2022 Earnings Call. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to John Kline, President and Chief Executive Officer. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to New Mountain Finance Corporation’s fourth quarter 2022 earnings call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Robert Hamwee, Vice Chairman of NMFC; and Shiraz Kajee, CFO of NMFC. Laura Holson, our COO, is on maternity leave and will return on next quarter’s earnings call. 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, 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 available in our February 27 earnings press release. I would 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 this 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?

Thanks, Shiraz. 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 of recent months. Adjusted net investment income for the third quarter was $0.35 per share, more than covering our $0.32 dividend per share that was paid in cash on December 30. Our annualized dividend yield at the $0.32 core dividend rate is approximately 10%. Our net asset value was $13.02 per share, just an $0.18 or a 1.4% decrease. As we will discuss in more detail, most of the fair value change reflects widening market spreads in Q4, which caused a markdown on our existing book of loans despite continued good credit performance. 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 of today. New Mountain’s private equity funds have never had a bankruptcy or missed an interest payment and the firm now manages $37 billion of assets. Similarly, NMFC has experienced just 6 basis points of net default loss per year since our IPO in 2011. Looking forward, the rising rate environment continues to be a substantial positive for our quarterly earnings since we cheerfully lend on floating rates. As Page 12 of the presentation shows, there is also the potential to significantly out-earn this $0.32 per share dividend at current interest rates, if all other factors hold constant. With this in mind, we are now announcing a formal supplemental dividend program. It will begin in Q1 2023, the payables starting in Q2 and we intend to continue it into future quarters. Specifically, we pledged to pay a variable supplemental dividend each quarter to…

Thank you, Steve. On Page 7, we highlight our leading credit metrics and our strong return track record over our 14-year history. Additionally, we have included the detailed breakout of NMFC’s industry exposure. 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. On Slide 8, I will highlight three competitive advantages that set New Mountain Finance apart from other direct lenders. First, we focus on businesses that are quality defensive growth companies in acyclical industries that have been targeted, researched and invested in by New Mountain over the course of two decades. We believe this process results in deep expertise and a broad executive network that allows New Mountain, the first-mover advantage in these attractive sectors. Second, NMFC benefits from the unique connectivity between credit and private equity. We find this enables a deeper level of due diligence and stronger conviction in our investments. Simply stated, New Mountain’s integrated approach results in a bigger, more robust credit selection engine. Third is shareholder alignment, which Steve touched on already. As fellow shareholders, New Mountain team members own over 11 million shares, creating strong accountability that ensures decision-making will always be aligned with our stakeholders. Turning to Page 9, we believe our portfolio continues to be well positioned overall, particularly for periods of uncertainty. The updated heat map shows the relatively flat risk migration this quarter with one position representing $4 million of fair value, improving in rating and two positions, representing just $25 million worsening in rating. We are pleased that over 91% 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 2.4% of the portfolio. The updated heat map is shown on Page 10. Given our portfolio’s strong bias towards defensive sectors like software, business services and healthcare, we believe the vast majority of our assets are well-positioned to continue to perform no matter how the economic landscape develops. Specifically, these industries, along with our other core verticals benefit from predictable revenue models, margin stability and great free cash flow generation. We continue to spend significant time and energy on our remaining red and orange names with the goal of either exiting individual positions or finding ways to improve the performance of the underlying businesses as we have, for example, at Permian, which was a red name at the beginning of 2022, but is now yellow due to operational improvements and new customer wins. With that, I will turn it back to John to discuss market conditions and other important performance metrics.

Thanks, Rob. It’s a pleasure to address my fellow shareholders for the first time as CEO. I am proud of the business that our team has built over the course of the last 12 years as a public company. We believe that our best days are ahead of us due to the competitive advantages that Rob outlined in his opening remarks. We have industry discipline, a superior underwriting model and proprietary sourcing channels that provide access to many of the best deals in the direct lending market. The outlook for 2023 in the sponsor-focused direct lending market looks positive. While deal flow is down overall, there are pockets of activity where we have the opportunity to make loans at very attractive spreads. Our sponsor clients are particularly active in software, business services and infrastructure services. Additionally, we continue to see good opportunities to make incremental loans to existing well-performing portfolio companies seeking to pursue accretive M&A. Overall, direct lending has continued to increase its share of the financing market as sponsors seek ease of execution, single debt tranches and committed capital for future acquisitions. Deal structures have become more lender-friendly across the board, characterized by attractive spreads, higher fees, lower leverage and more robust documentation. In general, sponsor equity contributions have remained generous, consistently representing 60% to 80% of the enterprise value of the company. Page 12 presents an interest rate analysis that provides insight into the positive effect of increasing base rates on NMFC’s earnings. We have updated this page to provide more clarity into the impact of increasing base rates on our portfolio as well as the timing of that impact. As a reminder, the NMFC loan portfolio is 89% floating rate and 11% fixed rate, while our liabilities are 58% fixed rate and 42% floating rate. Given…

Thank you, John. For more details on our financial results and today’s commentary, please refer to the Form 10-K that was filed last evening with the SEC. Moving to the financial results on Slide 22. The portfolio had over $3.2 billion in investments at fair value at December 31 and total assets of $3.4 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 or $13.02 per share was down $0.18 or 1.4% from the prior quarter. At quarter end, our statutory debt-to-equity ratio was 1.29:1. However, net of available cash on the balance sheet, net leverage is 1.25:1 within our target leverage range. On Slide 23, we show our quarterly income statement results. We believe that our adjusted 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. For the current quarter, we earned total investment income of $86.7 million, an $8.6 million increase from the prior quarter. This increase was primarily driven by higher interest income from base rate resets, offset by lower fee income this quarter. Total net expenses were approximately $51.2 million, a $5.6 million increase quarter-over-quarter due primarily to higher base rates on our floating rate debt. As a reminder, the investment adviser has committed to a management fee of 1.25% 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 the $0.32 per share quarterly dividend. Based on a forward view of the earnings power of the business, we do not…

Thank you, Shiraz. As we look out over the course of 2023, we are confident New Mountain is well positioned to execute our defensive growth strategy and to maintain superior risk-adjusted returns while driving long-term value for our shareholders. We once again thank you for your support and look forward to maintaining an open and transparent dialogue with all of our stakeholders in the days ahead. I will now turn things back to the operator to begin Q&A. Operator?

[Operator Instructions] Our first question here will come from Ryan Lynch with KBW. Please go ahead, sir.

Hey, good morning. First, I just wanted to say, I appreciate you while HME was probably not an outcome that you guys are happy about our shareholders. I do appreciate you guys making the reverse of pick income and the incentive fee rebate, which is, I think, the right way to account for that ensure that the incentive fee is not getting paid on income that you guys will probably never collect in cash. So I appreciate that. Moving to the – my first question, though, with the dividend – new dividend supplemental policy. Can you just talk about why you guys decided on a 50% payout ratio? Different BDCs have set that ratio at different levels. I’m not sure if there is necessarily a right or wrong answer would probably depend on you ask 10 different investors, you may get 10 different answers, but just love to hear your thoughts on why it was set at that 50% ratio?

Sure, Ryan, this is John, and thanks for the complement on HME even though it was not our best investment. But just in terms of the variable special, I mean, essentially, the mindset is we want to continue our track record of returning capital in an efficient and pretty high manner to our shareholders. And when we look out, we basically see the opportunity to have a lot more income and a lot of that income is be associated with these higher base rates. It’s difficult for us to figure out how long those base rates are going to be in existence. And so we just think the variable special is, overall, the best way to deliver that income while not getting out over our skis too much and raising the dividend too high where we can’t cover in all scenarios. So we feel like we uncover the $0.32 in all scenarios. We think we have the opportunity to really out earn over the next couple of quarters just given everything we see in the environment. And I think 50% was just rough justice. We want to both return capital but also provide good cushion and be able to keep some of the excess dividend on the balance sheet while still, as I mentioned, be relatively aggressive in delivering capital back to our shareholders. So it’s 50% was just rough justice.

Okay. That makes sense and help – helpful explanation. I like the slide you guys provided on the weighted average interest coverage and EBITDA and net leverage multiple. But you talked about looking forward to the forward SOFR curve of 5.5% would equate to 1.6x weighted average interest coverage, which is kind of helpful to just see kind of directionally how interest coverage is moving. But obviously, you guys aren’t managing your portfolio on an average basis. I mean the real risk is going to be in the tails of kind of being able to pay – make interest payments in a stressed – or a more uncertain economic environment with higher rates. And so I would love to hear, did you guys – as part of this analysis, did you guys look with rates at 5.5%, what percentage of your portfolio would potentially be below 1x interest coverage?

I mean we do look at every name, we monitor every name very intently and interest coverage is just one metric. I mean here is the way I think about the current environment we are in. The number one things we focused on when looking at our portfolio companies and really coming up with our heat map which is almost 92% green is we focus on great businesses that operate in businesses that have really good secular tailwinds. And we really focus on revenue growth, margin stability and free cash flow. And really, if you have those things in place, which the vast majority of our companies do, interest coverage is just not going to be the thing that kills these businesses. And on top of that, if you layer on backing businesses that are essentially equitized with twice as much equity as debt, we are just in a position where volatility and interest is really the sponsor’s problem even more than our problem. So, the way I think about that is our portfolio is just very well positioned in this environment. We are in the right industries. We have companies that produce free cash flow, and we have companies that are still growing even though the economy is spotty in certain sectors. And so it’s a metric that we feel comfortable about. And really – I really think about that $1.6 billion as being an accurate metric for the vast majority of our portfolio and really all of our green names.

Okay. That’s helpful. And then the last question I had was you mentioned the $90 million of unsecured notes repaid in January. You guys have about $257 million of total maturities coming due in 2023. I believe you said you guys have the available liquidity when I look on the availability on your credit facilities, there is enough to cover that. But it does start to get – it feels like a little tighter from after that point on available capital, remaining under credit facilities. Is the – are you guys anticipating repaying these unsecured notes by just drawing on the credit facilities throughout the year? And do you feel that you would draw on the credit facilities to repay these unsecured notes. Do you feel like you guys have to – not you guys would be forced to expand the credit facility, but would you like to expand the commitments on the credit facility to give you guys more buffer going forward?

Yes. I think we – so for the rest of the year, we have about $160 million, $170 million coming due. We have sufficient availability under the credit facilities currently to deal with that. So, we feel good, at least we are not rushed to do something unnatural from a financing perspective. But we are still looking at unsecured debt. We might potentially do something else there to replace that debt, we could back leverage draw down on the facilities, pay down the debt when they come due and lever up again when the environment is better. So, I think we are continuously looking at both the secured and unsecured market to see what’s available to us. But we feel comfortable at least we have enough availability currently on the revolvers to take care of what we need to this year.

I also might add one other thing, which is that while it’s obviously not the most robust environment for repayments, we do expect to have some repayments come through. And we are – given the earnings profile that we are demonstrating now, we feel we can use some of those repayments to just modestly de-lever a little bit, and that’s another source of funds to address near-term repayments as well as to address this overall liquidity position. So, I don’t want to lose sight of that as another important arrow in the quiver.

Okay. Understood. I appreciate the time today.

Thanks Ryan. Appreciate the questions.

[Operator Instructions] This will conclude our question-and-answer session. Pardon me. Our next question comes from Art Winston with Bank of America – pardon me, Derek Hewett with Bank of America. Please go ahead.

Good morning everyone. Could you talk a little bit more about the supplemental dividend? Is there any sort of governor so that if you were in a situation where you had some unrealized losses and book value went lower, would that impact the calculation for the supplemental dividend?

Hi Derek, this is John. Thanks for the question. So, we chose to enact our variable supplemental dividend using effectively just one prong where we take, as Steve mentioned, 50% of the over earnings, and we pay that 50% out in terms of – in the special in the supplement variable – supplemental dividend. And then the other 50% would go to stay within the company and increase book value. And so we did not have a second prong to that test. And the reason that we didn’t do that is, I guess two-fold. One, is we wanted this dividend to be easily modeled by our shareholders and the analysts that follow us. And we also feel like mark-to-market changes don’t necessarily affect our dividend policy or our ability to pay the dividend. The ability to pay the dividend is more affected by real non-accruals and losses, which is a little bit separate. So, we have confidence in our book, and we want to keep it very simple.

Okay. Thank you.

Our next question will come from Erik Zwick with Hovde Group. Please go ahead. Erik Zwick, your line is open for questions.

Thank you. Good morning. Wondering if I could just maybe expand on some of the earlier discussions about the capital allocation and optionality you mentioned in the press release and some of the uses of liquidity to pay-down some notes in the remainder of the year. I am curious of how you are thinking about the opportunity to buy back shares in this environment, or does the economic uncertainty maybe keep you on the sidelines with regard to that option today?

Yes. Hey Erik, this is Rob. Thanks for the question. We have historically talked about buying back shares when the stock was certainly below 80% of NAV and thinking about it between 80% and 90% of NAV. I think that remains our guideline for that. So, it’s not really operational in this moment in time. Obviously, if the market became further dislocated, and we had that incremental liquidity, it’s something we would consider like we have done in the past. But it’s really got to be the intersection of us having material excess liquidity as well as having the stock be dislocated. Obviously, our number one priority is to maintain our liquidity and our leverage in such a way as to maintain the investment-grade rating. So, we are obviously super – hyper conscious of that as well. So, I don’t see that as a near to medium-term likelihood. But of course, the markets can change at any moment. So, it is something that’s always on the long-term radar, if you will.

Thanks. That’s helpful. And just one more for me. When you repaid the notes in January, I am curious if you went out to the market all to see, what the opportunity would be there to raise additional unsecured debt and chose not to either because of the rate environment or demand still just not there, curious kind of the tenor of the market today, if you are able to gauge that.

So, the market continues to be open for companies that the market perceives to be good credit risk. I think we are in that camp. We are constantly evaluating the market. We are very confident that we have access to multiple different segments of the market, and it’s just an ongoing discussion. So, we feel very good that when we look at our liquidity and we look at our capital structure, we have a lot of different options to choose from. And when we think about the convert that we did, it really, I think really allowed – addressed a really big chunk of the upcoming maturities and lessened the overall magnitude of debt that we have to think about in 2023 and as Shiraz said, we can just go in a lot of different directions, whether it’s the secured market, unsecured market, convert market, etcetera.

Thanks for taking my questions.

Our next question will be a follow-up from Ryan Lynch with KBW. Please go ahead.

I just had one follow-up on Slide #12. This is the slide you guys provided last quarter as well. And I am just curious as far as the resets from your assets versus liabilities, are your liabilities being reset on a daily basis as I kind of look at that line chart on the top right of the slide, are your liabilities being reset on a daily basis? And then are your assets been being reset on a three-month to six-month basis? Is that how it’s working?

Sure. I can take a shot at that. Assets are being reset on a three-month to six-month basis. In some cases, one-month, but it’s a mix. And so you are right there. On our liabilities, the biggest facility that we have is with Wells Fargo, and that is reset to one-month LIBOR on a daily basis. So, that is I’d say, the number one driver of this mismatch that we see. Now, when rates go the other way, it will be good for us. But as rates continuously go up, it has been a headwind as we show on Page 12.

Do most of your borrowers have the ability to switch to resetting on a monthly basis so that if rates do go the other way, you will still have a nice positive spread if your largest facility is resetting on a daily basis, but the spread won’t be quite as big if all your borrowers then switch to a monthly reset?

Yes. So, borrowers in most credit agreements have the ability to do one-month, three-month or six-month. And so that’s a decision that CFOs at all of our borrowers are constantly making. And they don’t make this – they don’t all make the same decision at once. So, it’s a mix. But in the context of our main credit facility re-pricing daily in sort of a deflationary base rate environment regardless of whether the CFOs choose one, three or six, it will be a tailwind. Hopefully, that makes sense.

Yes, that makes sense. Alright. Thanks for the clarification.

And our next question will come from Bryce Rowe with B. Riley. Please go ahead.

Good morning guys. I wanted to maybe ask about the senior loan funds. You had kind of a nice uptick in dividends from the senior loan funds or programs. John or Rob, just curious if that same kind of lag exists within those funds that you see kind of with your on-balance sheet assets.

It’s actually a lot less pronounced, namely because the leverage in the SLP or the LF [ph], the senior loan funds that invest in syndicated loans is much more matched. So, when you think about just the overall, I guess the leverage in the funds it’s really 3:1 on average or a little bit less than 3:1. And so generally, just the – we are just less sensitive to that dynamic. And the only one of our SLPs does re-price on a daily basis.

Okay. And then maybe one more for me. You had some nice realized activity here in the fourth quarter. I think last quarter, in November – in November’s call, you talked about being able to monetize. There were some highlights of that here as we look out over the next couple of quarters. Can you kind of talk about what’s – maybe what’s driving that? Is that kind of from the sponsor side of things, or are you actively looking to help to monetize some of these equity investments. Thanks.

Sure. So, the equity investments that we have the ability to monetize and where we have a control or at least a lot of influence are really listed on Page 18. And so the names that you see on Page 18 are the names that were over the medium-term focused on selling and then using those proceeds to reinvest in cash yielding loans. So, it is an opportunity. The first of those assets that will be monetized should be Haven, and you can see the value of that. And then when you look at these other names, we think that over the next 12 months to 18 months, there could be another monetization, which could I think really drive a positive evolution of our book from either non-yielding or PIK yielding assets to cash-yielding assets.

Got it. Okay. Thank you guys much. Take care.

This will conclude our question-and-answer session. I would like to turn the conference back over to John Kline for closing remarks.

Great. Thank you very much for your time and joining our call, and we look forward to speaking with you next quarter.

The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect your lines.