New Mountain Finance Corporation 8.250% Notes due 2028 (NMFCZ) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the New Mountain Finance Corporation First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rob Hamwee, CEO. Please go ahead.

Thank you and good morning, everyone, and welcome to New Mountain Finance Corporation's First Quarter Earnings Call for 2020. 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. Before diving into the business update, we do want to recognize that we are living in a public health crisis that is taking a significant human toll on our community across our country and around the globe. We hope that everyone is staying safe, and that you and your families remain in good health. Turning to business, 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 any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our May 6, 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 slide presentation. Steve?

Thanks, Shiraz. It's great to be able speak to all of you today as both The Manager of NMFC and as a fellow shareholder. The COVID pandemic has caused a great crisis for the nation both in human and economic terms. I want to first express all of our hopes that you and your own families are safe. Second, I want to summarize the overview charts on Page 4, Page 5 and Page 6 to explain how NMFC itself is working to stay safe and secure throughout this period. As a bit of personal background, my own career began at Goldman Sachs in 1981 and has included the 1987 crash, the recession of 1988, the 1990 fall of Drexel and the junk bond crash, the Russian nation crashes of the 1990s, the first internet crash in 2000, the 2007 to 2008 great recession and now this COVID crisis. Given these experiences, New Mountain as an organization has always sought to explicitly emphasize downside safety and risk control as well as upside returns and therefore has explicitly emphasized defensive growth industries that can best survive unexpected market downturns. New Mountain started with private equity 20 years ago and now manages over $20 billion of assets including both private equity and credit. Risk control was part of our founding mission. Happily, we have never had a PE portfolio company bankruptcy or missed an interest payment in the history of our private equity effort. Similarly, as of December 31, 2019 we had only 43 million of realized default losses or just a 0.4% loss rate and the more than $8 billion of total debt, we have bought since beginning our credit arm in 2008. Meanwhile, we have had significant gains both in private equity and credit. NMFC has paid 752 million of total cash dividends since NMFC went public in 2011 or about $12.67 dividends per share in all. As investment managers, our general belief is that the greatest mistakes in private equity or credit come when the industry melts beneath you. For example, a loan to a toy store in the mall fighting with Amazon may not be salvageable. However, a loan to a company that provides a necessary service in a high-quality which is a top quality optometry or dental practice is in a position to recover. It is even better position, if a top quality PE sponsor has tens of millions or even hundreds of millions of equity dollars in the capital structure beneath this. I believe NMFC was built with defensive growth industries and risk-controlled in mind, long before COVID hit. As Page 4 states, only about 1% of our total loan portfolio is exposed to restaurants, gyms, hospitality, leisure, commercial aviation, automotive manufacturing, home building and discretionary consumer products. About 12% of the portfolio is currently heavily impacted by COVID in sheltered home closed downs. However, these cheaply consists of dental, dermatology and eye care practices which we believe are ultimately necessary services position to recover as the country reopens. The great bulk of NMFC’s loans are in areas that might best be described as repetitive tech-enabled business services such as enterprise software. Our companies often have large installed client bases of repeat users who depend on their service day-in and day-out. These are the types of defensive growth industries that we think are the right ones in all times and particularly attractive in difficult times. With that background, let me turn to Slide 5 and the specifics of this earning report. Net investment income for the first quarter of 2020 ending March 31, 2020 was $0.35 per share exceeding our dividend of $0.34 per share and at the high-end of our guidance of $0.33 to $0.35 per share. Every one of our borrowers paid their cash interest for Q1 2020. Only two assets have been placed on non-accrual, both of which are junior tranches of previously restructured positions. Only one additional asset is currently anticipated to be placed on non-accrual for Q2 2020. The regular Q1 2020 dividend of $0.34 per share was paid in cash on March 27, 2020. Our March 31, 2020 net asset value is $11.14 per share, a decrease of $2.12 per share from the December, 2019 NAV of $13.26 per share. Notably, the change in book value was primarily driven by interest rate movements and company valuations in the economy overall and not by underlying credit problems in the portfolio itself. The regular dividend for Q2 2020 was set at $0.30 per share based on estimated net investment income of $0.27 to $0.31 per share and will be payable on June 30 2020 to holders of record as of June 16, 2020. The majority of the change in quarterly income is expected to be driven by the deleveraging of NMFC's own balance sheet by lower transaction fee income and by lower base interest rates for the economy generally, rather than by significant non-accruals. NMFC’s liquidity position remains strong as we currently have approximately $130 million of cash and immediately available liquidity to handle future needs. New Mountain as The Manager has been highly supportive of NMFC. We have provided a $50 million unsecured revolving credit facility to NMFC and we have purchased approximately $11 million of NMFC’s common stock in the REIT at a premium to NMFC’s original cost. We have also deferred both Q4 2019 and Q1 2020 management and incentive fee payments. New Mountain has significant resources to further support NMFC including a strong balance sheet at New Mountain, The Manager itself. I and NMFCs management team continue to be the largest shareholder of the company with ownership of approximately 11%. I feel a very deep personal commitment to NMFC’s long-term success as a Founder, Manager, and Shareholder. In conclusion, I in no way want to minimize the COVID crisis, along with its tragic medical issues. COVID maybe the worst financial crisis I've seen in my career because the return to traditional day-to-day life is still so unpredictable. With that said, I remain proud of the work that our credit team did in carefully building a portfolio to withstand the crisis. I remain hopeful about NMFC’s own competitive advantages and future prospects. With that, let me turn the call back to Rob Hamwee, CEO of NMFC.

Thank you, Steve. While our key quarterly highlights and our standard review of NMFC are detailed on pages seven and eight respectively, this quarter, I would like to focus my time on getting into more detail on the crisis’s impact on asset quality, net asset value and leverage migration, liquidity and net investment income. As detailed in Page 9, in order to assess how the crisis is impacting our borrowers in the last eight weeks, we have had extensive conversations with both company management and sponsors. Based on those discussions, we have assigned each portfolio company scores on two metrics to generate an overall risk rating. The first metric, COVID exposure, rank from one to four, the degree to which a company has been directly impacted by COVID. The second metric overall company’s strength is a combination of three sub metrics, pre-COVID business performance, liquidity and balance sheet strength, and sponsor support, which we rank on a scale of A to C. Based on our ranking for the two metrics and the resulting risk rating for each company, we then plotted the overall portfolio accordingly to create the risk rating heat maps you can find on Pages 10 and 11. The heat maps chart out the COVID exposure on the X-axis, ranging from least impacted on the left to the most impacted on the right against the overall company’s strength on the Y-axis, ranging from highest quality at the bottom to the lowest quality at the top. The circles represent the size of the exposure in that quadrant, which are color coded to reflect the overall risk rating. With green being the least risk, followed by yellow, orange and then red. Both heat maps are for the 331 portfolio with the only difference being Page 10 utilizes 12/31 pricing to show our exposure pre-crisis, while Page 11 use 3/31 prices to show our current exposures. As you can see on Page 11 over 90% of the portfolio is rated green or yellow and only 6% of the portfolio is red. I'd like to give a little more detail on a few of the yellow, orange and red quadrants. Starting with 3C, you can see four of our previously restructured companies we have discussed in the past Edmentum, UniTek, National HME and PPVA, while each is only modestly impacted by COVID given the prior restructuring they by definition have weaker balance sheets and no remaining third-party sponsorship. The other major yellow quadrant 1A is almost exclusively comprised of retail healthcare, specifically dental care, eye care and dermatology practices. These businesses are heavily impacted by COVID in the short and medium term as many of their office locations are closed, but they all have solid balance sheets, significant liquidity to fund operating losses and debt service even in a very lengthy virus driven shutdown and well-capitalized sponsors behind them with very significant cash equity investments, comprising over 50% of total capitalization. Moving on to the more significant orange quadrant 1B, we find a similar story to 1A in terms of primary retail healthcare exposure with the only significant difference being modestly less liquidity and balance sheet strength, but still enough to get through all but the most draconian scenarios and still with a strong sponsorship behind that. Finally, in Tier 1C, in the upper right hand corner, we have our most impacted companies. Once again, retail healthcare with the largest exposure, with two material dental businesses representing $96 million of the $99 million total. We expect one of these two borrowers to go on partial non-accrual in Q2 and restructure. Despite that, given New Mountain's expertise as a sponsor in dental and our access to top tier operating and managerial talent and the expectation that even in a severe recession following the pandemic people will still want and need to get proper dental care. We believe there is reasonable potential for a full-recovery in this investment. Beyond retail health care, the other two names in red are our legacy previously restructured energy service name, Permian and Sierra Hamilton. The collapse in energy prices and oil patch activity has significantly impacted these business models and we have decreased valuations accordingly. One final point, of the $239 million with current risk-ratings of orange and red, all but $15 million are in first lien loans. Page 12 attempts to describe what we believe is to a significant degree a temporary decline in net asset value, driven largely by market spread movement and comparable company valuation, not underlying credit problems, $99 million or roughly half of the quarter’s net asset value decline is yield driven price movement in our green and yellow rated loans, which if our risk assessment is correct should recover over some period of time as the world normalizes. Even in our orange and red current securities representing another $30 million of potential NAV recovery. While risks are clearly elevated, we would expect the significant majority of those to continue to pay full interest in principle. Finally, of the remaining roughly $75 million value change in previously and prospectively restructured securities. The bulk of the value change is an Edmentum, UniTek and Company Q, while results remain – while risk remain for these businesses in this environment there's also ample opportunity for value recovery. Page 13 shows, how the decline in NAV this quarter somewhat offset by a modest reduction in statutory debt as we took initial asset sale action beginning in March translate into what we believe to be a temporarily elevated leverage ratio. While, future asset values are difficult to predict given market driven inputs into our evaluation process, we are taking and will continue to take meaningful steps to get back down to our target leverage ratio of 1.2 to 1.3 as soon as practical. In terms of liquidity, as you can see on Pages 14 and 15, we currently have approximately $130 million of cash in the immediately available liquidity and based on visible repayments and net interest income, less are expected Q2 to dividend, that balance is expected to grow to approximately $150 million by early July. This liquidity is available to support the needs of the business going forward, which primarily include one, further unfunded revolver in delayed draw term loan draws, which have largely abated in recent weeks. Two, incremental needs to support portfolio companies. And three, any need to support the borrowing base of our credit facility. If needed, we have multiple ways to generate incremental liquidity in the weeks to come. We maintain a healthy and transparent dialogue with the credit rating agencies and our leverage providers who continue to be supportive partners. Page 16 compares the debt outstanding on our three credit facilities with the fair market value of the assets that support these facilities, giving a sense of the credit enhancement embedded in each facility. It further shows the risk rating percentages for the asset pools, and as you can see the underlying collateral is largely composed of loans to what we believe to be strong companies that are expected to be only modestly impacted by Code. While our first priority in this crisis has been to focus on our assets, liquidity and leverage, we also want to continue to maximize net investment income, while preserving enterprise safety throughout the current prices however long it may last. Page 17 gives a bridge from our Q1 net investment income of $34 million or $0.35 per share to our current Q2 preliminary estimate of $26 million to $30 million or $0.27 to $0.31 per share. You can see the largest decrease in NII is from prepayments and asset sales, which we believe are prudent in this period of uncertainty, followed by lower projected fee income in an environment characterized by de minimis origination and repayment activity. Lower base rates also modestly decreased NII as the current and anticipated non-accrual. While the first three factors are likely to remain earnings headwinds during the length of the crisis, we should moderate and ultimately reverse and become tailwind whenever the environment begins to normalize. With that, I will turn it over to John Kline to discuss market conditions and other elements of the business. John?

Thanks Rob. COVID-19 has dramatically changed the sub-investment grade leveraged lending market. After years of steady deal volume, we have experienced a virtual shutdown of sponsor back buyouts. Secondary trading levels have also declined reflecting an increase in stressed borrowers and higher risk premiums across the board. While government stimulus, optimism around lower infection rates and line of sight towards partial reopening have caused material improvements in the market from the lowest levels in March, many loans still trade at meaningful discounts to their new issue prices. In fact, over 35% of the loan market is currently quoted below $0.90 on the dollar. Notably for our portfolio, loans to mission critical recurring technology enabled businesses have performed materially better than the broader market. The timing of new sponsored back deals remains highly uncertain and is predicated on decreases in infection rates and resumption of more normal business activity across the nation. Turning to Page 19, we show how potential changes in the base rate could impact NMFCs future earnings. As you can see, the vast majority of our assets are floating rate loans with our liabilities evenly split between fixed and floating rate instruments. At 3/31 LIBOR was artificially high given the market dislocation. Since then, three months LIBOR has declined from 1.45% to 0.54% as of last Friday, which we expect to resolve in annual earnings headwind approximately $0.03. Given the presence of 1% LIBOR floors on 73% of our floating rate assets, as well as our unfloored floating rate borrowings, we don't expect earnings to be materially impacted with LIBOR between zero and 1% limiting further downside exposure to lower rates. To the extent, LIBOR increases above one, we are well positioned to benefit from rising rates. Page 20 addresses historical credit performance. On the left side of the page we show the current state of the portfolio where we have about $3 billion of investments at fair value, $44 million of which are on non-accrual. This quarter we had two additions to our non-accruals including a single tranche of UniTek junior PIK preferred stock representing $19.5 million of fair value. Well most of UniTek's capital structure continues to perform, the valuation of the company and no longer support future accrual of quarterly dividends on this specific security. Additionally, our investment in Permian PIK notes worth $2.8 million at fair value was also placed on non-accrual. On the right side of the page, we show NMFC’s cumulative credit performance, which notably shows total realized default losses since inception of $74 million, which is a $31 million increase since last quarter and reflective of the impact of COVID, which has caused permanent impairment on the value of Sierra – Permian and Sierra Hamilton by recognizing these default losses as realized we have reclassified unrealized losses to realize losses. Page 21 is a view of our credit performance based on underlying portfolio company leverage relative to LTM EBITDA. While we feel this slide has been and will continue to be very useful for our investor, it is to backward looking to give real time insights into the effects of COVID-19 on our underlying portfolio companies. What it does show is that the majority of our portfolio entered the health crisis either around or below closing leverage with a couple of notable exceptions. The three names that have more than 2.5 turns of negative leverage drift are the aforementioned Permian as well as UniTek and Edmentum. Both UniTek and Edmentum have been discussed on prior calls and have reasonably solid business models in the current COVID environment. The chart on Page 22 tracks the company's overall economic performance since its IPO. At the top of the page, we show that our net investment income has always covered our regular quarterly dividend. On the lower half 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 have had success generating real economic gains every year through a combination of equity gains, portfolio company dividends and trading profits. Moving down the page, the orange section of the chart shows an increase in realized losses of $32.3 million, which relates to permanent real life losses on Permian and Sierra. As a result of these new realized losses, we now have cumulative realized losses highlighted in blue of $13 million. This is the first time since our IPO where we have more cumulative realized losses than cumulative realized gains. It is worth noting that over the long-term we do expect to incur realized credit losses on our investment portfolio. Our goal as a management team is to limit realized losses, such that these losses only represent a small fraction of our cumulative net investment income. Looking further down the page, we show a material impact from unrealized portfolio markdowns of $172 million in Q1 and cumulative unrealized losses of $240 million. We believe that most of the Q1 mark-to-market loss is reflective of temporary market conditions and will recover in time. Page 23 shows a stock chart detailing NMFCs performance since IPO. While the performance of our stock inclusive of our quarterly dividend has historically been very strong compared to relevant benchmarks. Over the past two months NMFC has experienced an outside downward move relative to the various index comparables as well as the spoke index of BDC peer that have been public at least as long as we have. We break down this under performance on Page 24. We're on the right side of the page. We show the largest component of our underperformance has been the $4 per share decline driven by the contraction of our book value multiple since our IPO. Additionally, as noted earlier, we have experienced a decline in the mark-to-market value of our investments of $2.94 per share, most of which relates to the impact from COVID-19. On the positive side, the chart shows that cumulatively NMFC has generated $12.67 per share in cash dividend payments supported by interest payments from our defensive growth oriented lending portfolio. Page 25 provide a final look at the stock price performance compared to the individual stocks of our peers that have been public at least as long as we have. Turning into our origination tracker on Page 26, we highlight that before the COVID related shutdowns, NMFC experienced a relatively normal quarter with club deals origination, roll-out expansion and portfolio company add-ons modestly outpacing sales and repayments representing a $23 million portfolio expansion. On Page 27 we showed that when the magnitude of the COVID-19 crisis became apparent, we pivoted from expansion of our investment book to a strategy of selling assets to generate increased liquidity and address fund funding commitments. To that end, from March 12th to present we have raised $120 million of cash through asset sales and repayments, which has more than covered all pre-COVID deal commitments, revolver draws and delayed draw term loan funding. Additionally, I would like to highlight that our non-first liens book of investments has been a particularly good source of liquidity as we have been able to exit several investments at or around par during the height of the crisis. On Page 28, we have enhanced our disclosure to provide even more clarity on industry exposure. In addition to breaking out the services segment of the pie chart, we have also added more disclosure around our healthcare investments. We now include retail healthcare, general healthcare services, and tech enabled healthcare as sub-sectors to give our investors better clarity into specific healthcare exposure. On the lower right on the page, we show that the portfolio continues to have a high degree of first liens exposure with 70% of our book invested in senior oriented assets, and we now show a breakout of risk ratings that match the heat map shown at the beginning of the presentation. Finally, as illustrated on Page 29, we have a diversified portfolio with our largest single name investment at 2.4% of fair value and the Top 15 investments accounting for 32% of fair value. With that, I will now turn it over to our CFO, Shiraz Kajee to discuss the financial statements and key financial metrics trust. Shiraz?

Thank you, 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 30. Portfolio had approximately $3 billion in investments at fair value at March 31, 2020 and total assets of $3.1 billion. With total liabilities of $2 billion, which total statutory debt outstanding was $1.7 billion, excluding $300 million of drawn SBA guaranteed debentures. Net asset value of $1.1 billion or $11.14 per share was down $1.12 from the prior quarter. As of March 31st, our statutory debt to equity ratio was 1.56 to 1. And as Rob mentioned earlier, we are committed to getting that ratio back within our target range of 1.2 times to 1.3 times as soon as possible. On Slide 31, we show our historical leverage ratios and our historical NAV adjusted for the cumulative impact of special dividends. On Slide 32, 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 December 31, 2019, we earned total investment income of $77.9 million, in-line with the prior quarter, and total net expenses were approximately $43.5 million. As in prior quarters, the investment adviser continues to waive certain management fees. The effective annualized management fee this quarter was 1.29%. It is important to note that the investment adviser cannot recoup fees previously waived. This results in first quarter adjusted NII of $34 million or $0.35 per weighted average share, which is at the high end of our guidance and more than covered our Q1 regular dividend of $0.34 per share. As Rob and John both touched on earlier, due to the negative COVID impact to the energy services company, Permian, we took a $3.4 million PIK interest write off for income accrued in prior years. This was offset by a $0.7 million incentive fee rebate, bringing our GAAP NII per weighted average share for the quarter to $0.32 per share. As a result of the net unrealized appreciation in the quarter, for the quarter ended March 31, 2020 we had a decrease in net assets resulting from operations of $169.6 million. A Slide 33 demonstrates our total investment income is recurring in HAM predominantly paid in cash. As you can see 94% of total investment income is recurring, cash income remains strong at 87% this quarter. Turning to Slide 34, as briefly discussed earlier, our adjusted NII for the first quarter covered our Q1 dividend. Based on preliminary estimates previously discussed, we expect our Q2 2020 NII will fall within our updated guidance of $0.27 to $0.31 per share. Given that, our Board of Directors has declared a Q2 2020 dividend of $0.30 per share, which will be paid on June 30, 2020, to holders of record on June 16, 2020. On Slide 35, we highlighted our various financing sources. Taking into account SBA guaranteed debentures, we had over $2.3 billion of total borrowing capacity at quarter end. As mentioned earlier, in Q1 we entered into a new $30 million unsecured revolving credit facility with our manager to added liquidity. That facility has been recently up-sized to $50 million. 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 36, we show a leverage maturity schedule. As we've diversified our debt issuance, we've been successful at laddering our maturities and we currently have no near-term maturities. With that, I would like to turn the call back over to Rob.

Thanks Shiraz. In closing, we remain cautiously optimistic about the prospect for NMFC in the months and years ahead. A longstanding focus on lending to defensive growth businesses supported by strong sponsors should serve us well in the uncertainty and recessionary environment, likely to characterize upcoming quarters. Our risks are more elevated than in the past and we cannot unequivocally discount more challenging scenarios. We believe our model is well suited for the current environment. We once again thank you for your continuing support and interest in these difficult times. Wish you all good health and look forward to maintaining an open and transparent dialogue with all of our stakeholders in the days ahead. I will now turn things back to the operator to begin Q&A. Operator?

[Operator Instructions] The first question comes from Finian O'Shea of Wells Fargo Securities. Please go ahead.

Hey, Finian.

Hi. Good morning. How are you?

Hanging in there?

Good. Good. Just first question on the dividend, appreciating the color on the earnings impact you gave with leverage and LIBOR. These are of course transitory impacts and you want to pay out your taxable income over time. So how do we think about what might change fundamentally? Is there a degree of more permanent analysis into this, such as principal impairment and a leverage contraction incorporated into this number? Or should we view it as a more transitory earning parameter?

Yes. I think it's a good question, Fin. And I think you're right, I think the core elements that the, if you're looking at Page 17 is probably the best way to think about it. The de-leveraging, the lower fee income, the lower rates those are probably transitory, although who knows maybe rates will be low for the next five years. But you certainly expect activity to pick up and generate fee income and the de-leveraging is in many ways a function of the price movement and the assets. Excuse me; the leveraging is effectively pricing the asset that comes back. So I think a lot of that is transitory. And then the quarter-on-quarter permanencies [ph] is the degree to which the NAV is permanently shrunken by losses. And I think right now we think that's, it's some number is greater than zero, but it's not dramatic. But I feel like you'll have a lot more clarity on all of these issues over the next one or two quarters, and then we can have better transparency on to exactly what the long-term earnings power and dividend of the business should be. But I mean, right now we're cautiously optimistic that there's a path towards a – towards a continuing strong dividends. Does that make sense, Fin?

Yes. I appreciate the color. On your capital position, you touched on a couple potential re-orgs. I think you have – you highlighted 12% of the portfolio severely impacted. Question is as you prepare for more loan modifications, amendments, deferrals, et cetera. How do you feel about the flexibility of your capital structure, appreciating that it's mark – not mark-to-market, but when you rework parts of the loan portfolio, do you think you have adequate flexibility in terms of what's going on within your borrowers?

Yes. It's a good question. The answer is yes. We do believe we do and when we think about some of the things that are going to move around even in that severely impacted area, if you look at Page 11, a lot of that is in the A Category where you're dealing with businesses that have very significant liquidity. And so we'd expect that the ability to maintain the necessary – the necessary borrowing base that you're referring to is available to us. And while there may be some tweak around the edges and that's where we have liquidity for, where we believe our counterparties are very interested in working with us and we've already had some pretty good and helpful dialogue around how that’s likely to play out.

Okay. Appreciate that. And just one more if I may. In the event where more equity is ultimately necessary to support the business, can you give us any high level thoughts on what would be the ways to go about this? You have a pretty good Petri dish, right now in the BDC market. We've seen a lot of different creative ways for managers to support the capitalization of the business. Any color you would offer, any dos and don'ts or just high level thoughts on what you're thinking would be the best ways to ultimately provide equity to the new mountain BDC?

Yes, I mean I think you're right, there are a lot of different tools out there and you see new and creative ones every couple of days. And I don't want to, I think a, whether we're going to need that or not is not obvious to us at this point. I think we feel we've got a pretty good path, but obviously the world can change and the world can get worse from here. So we're certainly keeping ourselves informed as to all the different tools. And while I wouldn't specifically say this is the right tool – this is the right tool, our guide – our guiding our North star is going to be what's the most effective way given whatever the needs might be at that time, if those needs come to pass. What the most supportive of preserving shareholder value, but then for the, both the short and the long-term. In terms of card, you know what tool on the jackknife is going to be the best one for every conceivable set of circumstances.

Okay. I'll hop back in the queue. Thanks for taking my questions.

Great. Thanks Fin.

The next question comes from Chris Kotowski of Oppenheimer. Please go ahead.

Hi, yes. I guess, just to follow-up on Fin’s question. I mean, can you – under what circumstances would you raise equity, a meaningful discount and that, is that a scenario you can envision or?

Listen, we don't see that as necessary at this time or based on the current state of the world and reasonable future states of the world, we just don't see that as necessary. The world can change and we have to be aware of again all these ways to access different forms of capital. But right now, Chris, we just don't – we don't, it's not something we're focused on, but we're certainly aware of the tool and again the world would've changed radically in a negative way. We have to be – we have to be prepared for every possible potentiality.

Yes. Okay. And then on your chart on Page 17, the drags add up to around $11 million, and I'm wondering if you can kind of deconstruct how you came up with a $5 million benefit. I guess your 20% incentive fee of the 11 would account for $2 million of that. What accounts for the remaining three?

Yes. So, there's the slightly lower asset base that roll through the management stage is close to another $1 million. There's the less lower SG&A in terms of some of the allocations that we likely wouldn't put through. And then there, a little bit of a fudge factor that we're going to – we're going to, we certainly have the capability of waiting some incremental incentive fees, is that the right thing to do.

Okay. All right. And then I thought Pages 11 and 12 were really interesting. And I guess, excuse me, 10 and 11. And if you look at sort of the box, a, on the lower right Tier 1 is the main thing you are relying on there is it the strength of the private equity sponsor in most cases?

It's actually, that's the second thing. The main thing is that these businesses while obviously you're severely impacted in terms of being broadly shutdown, but not entirely shutdown. The main thing is that we're talking about companies with liquidity in terms of actual cash sitting on their balance sheet of one to $250 million relative to burns – quarterly burns in the single digit to maybe low-teens. So you're talking about businesses that have 18, 24 months of liquidity, if they're shutdown and we don't anticipate that, right? We're actually already starting to see a handful of things open up. But let's say we assume things are going to be broadly closed for six months and these businesses start opening up in December, January. You've got multiple periods of coverage just on liquidity without the sponsor having to do anything. And then on top of that, you have sponsor support. Again, these are the big name sponsors with $5 billion, $10 billion funds who have put up equity for the majority of the capital structure. So it's a combination of all of that, but it starts with the significant liquidity relative to a burn even in a full shutdown scenario.

Okay. All right. That's it for me. Thank you.

Yes. Thanks Chris.

[Operator Instructions] The next question comes from Ryan Lynch of KBW. Please go ahead.

Hey Ryan.

Hey Rob and team. Thanks for taking my questions and hope you guys are all doing well.

Yes. Thank you. You too.

First, I just wanted to say, I think your guys' presentation that you guys put out was excellent. I thought you guys provide a lot of great detail on several of these slides particularly Slides 10 and 11, as well as some others that provided some real insights into the business. So I really appreciate the level of granular detail you guys provided, number one. Number two, can you maybe decompose your liquidity position, if you guys provide $130 million as of early May. I was just a little bit confused by that because when I look at the 3/31 numbers, it looked like you guys had about $22 million of cash on the balance sheet, $130 million of capacity on your wealth facility, about 10 million on your Deutsche Bank facility. And then you guys had your $30 million New Mountain revolver that was outsized to the 50 million post-quarter end and you had net repayments, it looked like through mid-March, through early May. So I felt like the liquidity position based on the 3/31 numbers that I was looking at would have been a larger than the 130 million. So can you just break down what is the composition of that 130 million in early May?

So the 130 million is – the composition of that is going to be largely cash, the 50 million undrawn manager facility. And then Shiraz, keep me honest here, but there's a little bit on the Goldman facility and that those are going to be the main components. On 3/31, we shut down the cash, we pay well and we drawn that to have the cash that we currently have. So those are the main components of that. And then we have a significant repayment, one of our portfolio companies was sold in March and that deal is closing next week. And that's a $30 million repayment, which steps out of the main driver that gets us in the near-term to the 150 million. And remember that excludes obviously the difference between what's drawn on the facilities and the total size of the facility, but there's a couple of hundred million there and to the extent we have new assets, we can put those into those borrowing basis and develop incremental liquidity.

Do you guys, I would assume the answer is no, but are there any additional unencumbered assets given the level of unsecured debt on your balance sheet that you can put into those facilities to increase that borrowing base at all? Or would you guys have already done that?

We've largely done that. There are some things that are unencumbered – there are some things that are – there are clearly some things that are unencumbered, we haven't put those into facilities to the extent they don't fit. There are some ways to – there are some things that could be made to fit. So we have that potential flexibility, but right now I think the working assumption is most of the things that properly sit or that easily fit are in facilities. Again to the extent, we need to make any follow-on investments that create an asset that presumably will fit and that creates its own incremental liquidity. So there are definitely unencumbered assets, but they don't easily fit into the existing facilities at this point.

Okay. In the past you guys, the advisor has made a lot of supportive actions to the BDC and including waiving fees regarding leverage associated with some of those first line assets that were going to fit your original senior first line facility, you guys have bought the stock up higher to increase the price when you guys are doing secondary offering, so there's been a lot of actions you guys have taken in the past to be sure, [indiscernible]. I'm just wondering in the current environment that we're in, given the write-downs we've had, given liquidity I think being pretty tight, this quarter you guys received the full incentive fee, despite big markdowns in the portfolio and negative net income. Had there been any discussions or have you considered an incentive fee waiver, given the unprecedented times and obviously the negative results that you put up in this quarter?

Yes. So, I mean – I guess we haven't technically received anything, because we've left that all that fee in the company and not just the Q1, but also the Q4. And I think we're considering a lot of things as the crisis continue to unfold than we're. It feels like we've been kind of stuck in our houses for a year, but I guess for seven or eight weeks into it. And I think we have a demonstrated history of eight or nine years, like you said doing a lot of things to be supportive of the company and to be generally perceived as shareholder friendly. And I think we still have a lot of tools on the table, depending on how the overall economic proposition works out where I think over the coming quarters and we'll continue to do the right thing vis-à-vis the shareholders depending on how – what may now be transient diminishes the value to the extent they become more permanent. I think we'll certainly going to look at that in terms of our share of the overall economic pie.

Okay. Yes. Because, yes, I would know that you have moved the deferral of the incentive fee. I mean, it's helpful from liquidity standpoint, no doubt and liquidity is tight, so that is important. But at the end of the day, it's still a payment that's going to be made and earned by the advisor during the quarter with very negative performance with New Mountain, not all BDCs are having negative performance in this quarter, but it's still incentive you paid on I would say poor performance in a quarter, eventually. And then I just have one more, going back to Slide 11, which again was a very helpful slide. Can you talk about particularly the Tier 1 columns of the companies and really within that column needed some of the retail healthcare? Can you talk about the conversations that you've had with the caveat that we know that we're early on, this is a very fluid situation but can you talk about the conversations you're having with the private equity sponsors willingness and ability to support some of these retail healthcare businesses knowing that potentially some of these are good businesses, that may need capital in the coming quarters or months but eventually those businesses should return. So any conversations early on would be helpful for you to provide?

Yes, absolutely. So just maybe working up the column, on the four retail healthcare companies in the Tier 1A, the yellow circle, again two things just as I mentioned with Chris, one, there's a very, very significant liquidity in all of those companies that it's not – it's highly unlikely they will need support unless the crisis really keeps those businesses closed for the period of time measured in years, not in quarters. That said, we've spoken to all those sponsors and they have absolutely said that it's not a question that they will support those businesses because they believe they are long-term valuable businesses. These are businesses that all traded at, these businesses probably traded at an average multiple of 14 times, 15 times again with 50% plus cash equity cushion. So I don't think there's any question about the Tier 1A, retail health care company. Moving on to Tier 1B, the three in the orange bucket, again it's strong sponsors, businesses that probably don't have liquidity measured in years, but measured in multiple quarters. And again, those sponsors are saying, I was going to sponsor, you can say lots of things, but they're saying if in the unlikely event that this goes into 2021 and they're still closed and they need to put capital in, they would expect to put capital in. But that talk is cheap, but they certainly have the capability and they certainly have the perception as we share that these are medium to long term, very strong businesses again, high multiple businesses, that it would make sense for them to support it. So they're saying it, but it's also a logical statement. And then it's really, the three in the red and the three is really two, because one of those position is $3 million so let's put that aside. But the three – the two material positions in the red, one, we do expect to restructure. The sponsors are weaker, they're smaller sponsors. It's actually two sponsors that control it. They have their own issues. Fortunately we're in the first lease year, so we'll likely wind up controlling that business although the negotiations still are ongoing. And then the other one in the red is also a smaller company with a smaller sponsor, but a company that has also liquidity and it's actually a very good business. Just again shut down now and that sponsor has indicated that they would like to support it, if needed. And so I would not expect that one to be a restructuring, but we put it up there, because you have to acknowledge they have a little less liquidity than the orange and the sponsor is clearly a smaller sponsor than the orange and yellow. Does that help?

Yes, that is, that's very helpful and very detailed informative. So I really appreciate that. So those are all my questions. I really appreciate the time today and hope you guys all stay up, stay safe and well.

Great, thank you, same to you. Thanks so much.

[Operator Instructions] And there are no further questions I will turn the call back over to Mr. Hamwee for closing remarks.

Thank you, Operator. So thanks again to everybody for participating. We do hope that everybody stays safe in these challenging environments and as I said, we do look-forward to being in regular dialogue as the world globe evolves. So thanks everyone and we will speak with you all soon. Bye, bye.

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