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…

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…

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…

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…

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.