Good morning, and welcome to the New Mountain Finance Corporation Q2 2019 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rob Hamwee, CEO of New Mountain Corporation – sorry -- Finance Corporation. Please go ahead.

Thank you, and good morning, everyone. And welcome to New Mountain Finance Corporation's second quarter earnings call for 2019. On the line with me here today are Steve Klinsky, Chairman of NMFC and 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. But before he does, I'd like to ask Shiraz to make some important statements regarding today's call.

Thanks, Rob. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that, they are the property of New Mountain Finance Corporation, and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our August 7th 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?

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 June 30, 2019, was $0.35 per share, once again, at 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 generally unchanged to $13.41 per share, reflecting stable financial market condition and no material idiosyncratic credit changes. We are also able to announce our regular dividend, which for the 30th straight quarter will again be $0.34 per share, an annualized yield of approximately 10% based on last Friday's close. The Company had another productive quarter of deal generation, investing $183 million in gross originations versus moderate repayments of $68 million. This continue balance sheet growth, was in part funded by our early July equity issuance and keeps us fully leveraged in our target range. Credit quality remains strong with once again no new non-accruals. I and other members of New Mountain continue to be very large owners of our stock with aggregate ownership of 10.1 million shares, approximately 12% of total shares outstanding. Finally, the broader New Mountain platform that supports NMFC continues to grow with over $20 billion of assets under management and over 150 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 our 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 the 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 through August 2, 2019. Over eight years since our IPO, we have generated a compounded annual return to our initial public investors of nearly 11%, meaningfully higher than our peers and the high yield index, and approximately 1,000 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 has been more than 100% covered by net investment income. As the bar on the far right illustrates, over the eight years we have been…

Thanks, Rob. As outlined on page 14, middle market deal flow increase throughout the quarter after a slow start to the year in Q1. Loan spreads in the financing markets continue to be stable, at levels that are supportive of our lending strategy. Over the last couple of quarters, we have seen material increases in enterprise value multiples in our core sectors. The highest quality businesses in the private market currently trade for multiples as high as 15 to 22 times EBITDA. Against this backdrop, we have seen some pressure on debt structures. But generally speaking, the sizes of sponsor equity contributions have increased far more than required debt commitments. Overall, there continues to be heavy competition for loans to high quality businesses. Although lenders have shown more caution towards businesses, that have exposure to uncertain end-markets. Looking forward, new deal flow continues to be very strong, as we benefit from both the active financing market and continued momentum, with our sponsor clients. Turning to page 15, this year we have seen LIBOR switch from being a tailwind to a headwind. Thus far in 2019, LIBOR is declined from 2.8% in early January to 2.2% today. The forward LIBOR currently suggests that three months LIBOR could decline by 50 to 100 basis points in the coming quarters. As shown on page 15. If this does occur, NII per share could be pressured by approximately $1.5 to $0.3 per quarter. However, we believe, that the current spread environment and increased balance sheet leverage, will enable us to successfully address this potential downward trend, in the base rate. Turning to portfolio activity on pages 16, 17, a NMC had a good quarter with total originations of $183 million offset by $68 million of portfolio repayments, representing a $115 million expansion of our…

Thanks John. For more details on our financial results and today's commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Now, I'd like to turn your attention to Slide 24. The portfolio had approximately $2.7 billion in investments at fair value at June 30th, 2019 and total assets of $2.8 billion. We had total liabilities of $1.7 billion, of which total statutory debt outstanding was $1.4 billion, excluding $165 million of drawn SBA-guaranteed debentures. Net asset value of $1.1 billion, or $13.41 per share was down $0.04 from the prior quarter. Our statutory debt-to-equity ratio was 1.22 to 1, pro forma for the equity ratio had in early July. On slide 25, we show our historical leverage ratios. The step-up in leverage over the past five quarters is in line with our current target statutory debt-to-equity ratio. On the slide, we also show 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 June 30th, 2019, we earned total investment income of $66.5 million, an increase of $2.3 million from the prior quarter, primarily due to higher interest income from the increased asset base. Total net expenses of $38.6 million, a $1.9 million increase from the prior quarter, primarily due to additional borrowing cost from our increased debt balance. As in prior quarters, the investment advisor continues to waive certain management fees. The effective annualized management…

Thanks, Shiraz. It continues to remain our intention to consistently pay $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 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?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Chris Kotecki, Oppenheimer. Go ahead, please.

Hi, Chris. Good morning.

Hey, good morning. I was just curious -- looking at page 20 of your slide deck, the originations are primarily first lien and prepayments are second lien, and it just seems like every BDC we cover says that they are shifting their portfolio mix more towards first lien. And I'm just wondering, are the seconds just not getting done or is it a different structure or are the seconds just migrating to a different kind of vehicle, it’s a mez funds or what is happening in the market there that lets all the BDCs kind of seem to be shifting in the same direction?

Yeah, so it's a good question. It's a combination of a number of things, and we are still doing second liens right. It's just -- we're doing less relative to what we were doing in the past and we're sort of matching repayments from second lien to the extent we're doing new second liens and that could continue to evolve over time. But more fundamentally, I think number one as unit tranche has become more popular in the mid-market, upper mid-market that's just taking share from first lien, second lien. So that decreases the supply to second lien. Two, you have other significant participants particularly, but we're seeing a lot more of now are private equity investors in funds, limited partners in funds are taking pieces of second lien. And three, you are just seeing other non-traditional players participate in the market as well. So there's still a pretty robust second lien market, but it's a combination of those things that's kind of balancing supply and demand there.

Okay. And I noticed also just for you specifically, I think in the subsequent events section you said you had roughly $240 million in commitments. Does that pretty much speak for the whole amount of equity that you just raised? Or do you anticipate taking leverage up a little bit more from the 122 pro forma that you have here?

So it certainly does speak for the equity that we raised. We do have pretty good visibility of some repayments coming in. So we actually have six of our portfolio companies in the last maybe five or six weeks have announced fine M&A that will result in take out. So we're also going to be using that in the coming weeks and months as a source of capital to fund the pipeline. So as always it remains with -- we retain our current target at 1.2 to 1.3 that we've talked about in the past. Obviously a moment in time we may be at 1.1 8 and maybe at 1.36. But we're always moving towards that based on balancing, originations, repayments and any equity offerings with it. I think we always drive and I think we've been very successful in never having a significant lag from an equity offering that had any impact on our earnings that's immaterial.

Okay, great. That's it for me. Thank you.

Yeah, thank you.

Thank you. Your next question comes from Finian O'Shea, Wells Fargo. Go ahead please.

Hi, guys. Good morning. Sorry, I was on mute there for a second.

Yeah.

I was excited that someone actually, it's a rare -- rarely pronounces my name correctly, the traditional way. This first question on allocation, does the advisor ever retain any form of upfront economics before allocation to New Mountain and other funds?

No. That's a hard and very simple no.

Do you have a split in terms of how you record or account for upfront fees in terms of below the line yield enhancements and bottom line meaning all idea accrued and top line fee income.

Yeah. So again, so to be super clear right, all the economics flow to the underlying vehicles, whether it's for BDC or any of our privately managed funds none accrued in any way shape or form to the management company or any affiliate of the management company. In terms of how we split any of those upfront economics from an accounting perspective between in-quarter or in-year recognized income, and OID that is obviously created over the life of the loan. It really depends frankly on the type of origination and it can range from in fully syndicated, but if it all goes into the OID towards true bilateral it can all be upfront fee to most of the time in some kind of club format is going to be some split between some OID and some upfront fee. So it ties a little bit to the activity that we used to originate. So in the end the economics are the same, but from an accounting perspective obviously it moves around a little bit, not -- it's not material frankly.

Sure. That's helpful. And tying that in with the commentary on less second lien, would we expect to see more of the direct and club formats or should more income trend into OID sort of smoothing out income versus syndication?

At the margin and what you've seen that in the last couple of quarters, right. We've had less one-time fee income. But I would say, it's, a, small; and b, any one quarter there could be some volatility, because you have a couple of big bilateral originations that generate significant fees.

Thank you. And just one UniTek seem to have been a driver this quarter unrealized markdowns, is there any key shift I know you've been -- this has been obviously a longstanding name that has required attention. And I know you guys have -- we've talked about it many times on earnings calls, but is there any anything breakthrough here that led to this downdraft or was it more something with the market or an equity round, anything -- any color you could possibly give us?

Yeah. I mean, the high level color is it's nothing that we think has any impact on the long-term realizable value of UniTek. There was a couple of operating hiccups at the company in the last quarter. And we try to be sort of real time from a valuation perspective, and in fact as a percentage of the overall position, even the change wasn't bad meaningful. But we don't think anything that's happened there as any impact on our long term ability to recognize and create value there as one of our kind of key equity portfolio companies. Obviously update everybody and as that evolves.

Thanks for the color, that's all for me.

Thanks.

[Operator Instructions] Your next question comes from Ryan Lynch, KBW. Go ahead please.

Hey Ryan.

Hey good morning guys. And a question on, slide number 14 where you're talking about the purchase price multiples in the 55 to 22 range but that increased valuation typically been bridged by larger sponsor equity check. So my question is, are you saying that maybe a couple of years ago, a 15 times buyout multiple would be at about 7.5 terms of an equity check back then 7.5 terms of leverage might be 50/50 split. And now that same company is going for a 20 times buyout are you saying that the loan to value is still staying the same, meaning the equity sponsors putting in kind of 10 times and -- putting in 10 times and there's 10 times leverage on that business? Are you saying that the leverage is staying at that 7 times leverage in the equity sponsors putting in more like 13 plus times of….

The latter, the latter I mean -- maybe you know 2 years ago it was 7 and that 7 equity – excuse 7 debt, 8 equity for the 15 purchase and today it's 20 times purchase, the 7 may have crept up to 7.5 or 8. But the balance the other 4 to 4.5 terms is cash equity. I mean it's really quite interesting…

Hey would do that business has been even actually more safer than it was a couple of years ago. If your leverage is flat or maybe up slightly, but there's now a much larger valuation equity check behind you?

It's an interesting question, right. At the end of the day the business is still the same business, if everything else in the world hasn't changed the projection of cash flows etcetera, it hasn't changed. So in that sense, it's still the same credit it has been. However with all that incremental capital beneath you, that does have an impact on sponsor behavior. And so to the extent there are issues, but the propensity of the sponsor to inject incremental capital is modified. And I would argue that given the magnitude of the changes, I do think it's a safer credit on an all system wide basis.

Okay that's interesting. You guys have always been very efficient with capital deployment particularly around any sort of capital raising activity. My question was, if I look at and this is pretty consistent from prior quarters, but I also look at your originations on the slide 16, 17, 18 and 19 for the second and third quarter. You guys always take kind of a smaller investment, bite size of a much larger debt trash, you know, anywhere from 10%, 20%, 30%, 40% of kind of the overall tranche. And so, I'm wondering, does -- does that help out your ability to deploy capital more efficiently. Meaning if you do raise equity capital any one time, if you guys have a list of investments that you guys are looking to make, can you just increase your allocation size because you guys have so much capacity on that debt tranche and that allows you to put capital to work so much more efficiently than others or am I thinking about that the wrong way?

I would say there's some of that and that is a piece of the puzzle, but I would say more importantly is the thing that allows us frankly to be so efficient is the fact that unlike most of our peers, our BDC relative to our total credit platform is the preponderance of our assets, right. So the vast majority of our allocations are going into the BDC as opposed to many other instances, not every other instance, but many other instances, the BDC is a much smaller piece of the total platform. So it's getting a smaller percentage, so it's hard to move the needle by dialing up allocations or doing one or two extra deals and then that also frankly intersects with the fact that our footprint been relative to our total credit platform is actually quite meaningful. I mean we were able to frankly get what we want in most instances because of our footprint. And then finally, the market has come to us in terms of our industries, right. There's more and more deals that sponsor capital, I think you’re not getting a lot of credit to New Mountain for being ahead of the curve in areas like healthcare IT, enterprise software, technology enabled and business services. That's where the sponsor money is going. So, the share of our addressable market of the total buyout market, A, the total buyout market is growing. But the industries we target as a share of that market is increasing quite substantively frankly, allowing us I think to see greater and greater flow. So it's really all those things coming together. Does that make any sense?

Yeah, yeah that makes sense and that's good and helpful commentary. Those are all my questions. I appreciate the time today.

Great. Thank you.

Thank you. We have a follow-up question Finian O'Shea of Wells Fargo. Go ahead please.

Hi guys. Thanks. Just a small follow-on came to mind, given your expertise on healthcare are you seeing any pockets of stress or perhaps therefore interest to you guys on the services side understanding a popular private equity strategy in recent years has been roll ups of certain healthcare services. And we're seeing some of those flare up a bit and BDC portfolios. Do you have any high level commentary on that area of the market?

So, yes, obviously that is an area we spend an incredible amount of time in, and we've been very successful then on the private equity side. It is a sector where you have winners and losers for sure, and that's really been sure for decades. And I think that will continue to be the case. And I think that's where the value of not just being picking a good sector, but being able to go down two or three levels into niches at the micro level and pick the better healthcare service companies versus worse healthcare service companies is a critical important. So yes, there clearly are pockets of stress. We currently don't have any in our portfolio material one. There's lot of things that are underperforming a little bit here or there, but nothing that we are particularly worried about, and we actually continue to think there's great opportunity given the research capabilities of the broader mountain platform in that sector. But it is not for the uneducated. Frankly, it's not for the dabbler. It's tough. It's a tough sector to know what's going to happen without having really deep expertise and connectivity in the marketplace.

Got it. Appreciate the color. Thank you again.

Yeah, very welcome.

[Operator Instructions] Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Rob Hamwee for closing remarks.

Great. Thank you very much, and thank you everyone for your interest and support. And we look forward to speaking with everyone again next quarter. And as always, in the interim any calls -- any questions, don't hesitate to call us directly. Have a great day. Bye-bye.