Good morning, and welcome to the New Mountain Finance Corporation's Third Quarter 2021 Earnings Call. All participants will be in a listen-only mode. After today’s presentation there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to hand over the conference to Rob Hamwee. Please go ahead.

Thank you, and good morning, everyone, and welcome to New Mountain Finance Corporation's third quarter earnings call for 2021. 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. We hope that everyone is doing well and that you and your families remain in good health. Steve is going to make some introductory remarks, but before he does, I'd like to ask Shiraz to make some important statements regarding today's call.

Thanks, 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 November 3 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'll 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 5 of the slide presentation. Steve?

Thanks, Shiraz. It's great to be able to address all of you today as both the Chairman of NMFC and as a major fellow shareholder. I will start by covering the highlights of the third quarter. Net investment income for the quarter ended September 30 was $0.31 per share, fully covering our dividend of $0.30 per share that was paid in cash on September 30, and above our prior guidance. The regular dividend for Q4 2021 was again set at $0.30 per share based on estimated net II of at least $0.30 per share which will be payable on December 30 to shareholders of record as of December 16. Our September 30 net asset value was $13.26 per share, a slight decrease of $0.07 per share from the June 30 NAV of $13.33 per share, reflecting relatively stable marks across the quarter, few minor idiosyncratic credit movements. As we discussed on previous earnings calls, risk control has always been part of New Mountain's founding mission. Our firm as a whole now manages over $35 billion in total assets with a team of over 190 people. And as you can see from Slide 36 in the back, has continued to grow material and number and strength over the last 12 months. Additionally, the firm has over 58,000 employees at our private equity portfolio companies in the field. We have never had a bankruptcy or missed an interest payment in the history of our private equity work while generating over $52 billion of estimated total enterprise value for all stakeholders. We have applied that same team strength and focus on defensive growth industries, the NMFC and our credit efforts. 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.…

Thank you, Steve. As Steve mentioned, we are thrilled with the opportunity to co-invest in certain New Mountain private equity and strategic equity deals in a way that we hope protects and enhances NMFC's book value over time. New Mountain Capital is a top quartile performing PE firm at our option and subject to the approval of NMFC's investment committee and Board of Directors we expect to invest $3 million to $5 million alongside New Mountain's private equity and strategic equity funds in certain deals. We believe this provides NMFC shareholders unique access to top-tier private equity co-investment, and we hope that the potential gains associated with these investments can over time help offset any potential credit losses. We completed our first investment in September, a $5 million investment in HomretBurg, a national independent wealth management firm. We expect that over time, this program will represent 2% to 4% of our total assets. We look forward to keeping shareholders updated on future co-investments with New Mountain's private equity and strategic equity funds. As we have throughout the COVID crisis, we continue to have extensive conversations with both company management and sponsors and update each portfolio company scores on our heat map using the same criteria discussed in the past and as outlined on Page 9. While our book value was down slightly, our portfolio has remained generally unchanged from a risk rating standpoint. The updated heat maps show the net positive migration this quarter as summarized on Pages 10 and 11, with $121 million of positive migration, offset by $61 million of negative migration. Additionally, there was $227 million of net positive intra green migration. The one specialty chemicals business that migrated to orange last quarter has now migrated to red. This business has faced some market and execution challenges,…

Thanks, Rob. We are pleased to report that overall conditions in the direct lending market continue to be very healthy. Transaction volume has reached a record level, and we have seen rapidly increasing deal sizes. Direct lending transactions in excess of $1 billion are now commonplace. Performance trends across a variety of industries remain quite strong, which has created a backdrop for very high sponsor purchase prices, resulting in very attractive loan-to-value ratios for lenders. Companies within many of our core defensive growth sectors, such as software, health care technology, field services and technology-enabled business services have particularly strong tailwinds and continue to attract substantial investment from our sponsor clients. Interest spread and loan structures across the direct lending market are consistent with what we observed last quarter, reflecting the ongoing competitive lending environment. Increasingly, there is a very tight pricing range for direct lending solutions as most deals that we evaluate have very similar spreads regardless of credit quality. Given this dynamic, we believe there is little incentive to stretch on credit quality which plays very well into our strategy of financing best-in-class companies in defensive industries. Turning to Page 17. We show how potential changes in the base rate could impact NMFC's future earnings. As you can see, the vast majority of our assets are floating rate loans while our liabilities are 56% fixed rate and 44% floating rate. NMFC's current balance sheet mix offers our shareholders consistent and stable earnings in all scenarios where LIBOR remains under 1%. If base rates rise above 1%, as many expect, there is meaningful upside to NMFC's net investment income. We believe this positive interest rate optionality offers material value to our shareholders compared to that offered by fixed rate debt investments. Page 18 addresses NMFC's historical credit performance. On the…

Thank you, John. For more details on our financial results in today's commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Now I'd like to turn you on to Slide 28. Portfolio had $3 billion in investments at fair value at September 30, 2021, and total assets of $3.2 billion. While total liabilities of $1.9 billion, of which total statutory debt outstanding was $1.5 billion, excluding $300 million of drawn SBA guaranteed debentures. Net asset value of $1.3 billion or $13.26 per share was down $0.07 from the prior quarter. At September 30, our statutory debt-to-equity ratio was 1.19:1, and as previously noted, net of available cash on the balance sheet, the pro forma leverage would be 1.13:1. On Slide 29, we show our historical leverage ratios and our historical NAV adjusted for the cumulative impact of special dividends. On Slide 30, we show our quarterly income statement results. We believe that our NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line. Focusing on the quarter ended September 30, we earned total investment income of $68.2 million, a $2 million increase from the prior quarter due to higher fee income this quarter. Total net expenses were approximately $37.8 million, a slight increase quarter-over-quarter. This results in third quarter NII of $30.4 million or $0.31 per weighted average share, which exceeded our Q3 regular dividend of $0.30 per share. And as a result of net unrealized depreciation in the quarter, for the quarter ended September 30, with an increase in net assets resulting from operations of $22 million. As discussed, the investment adviser has committed to…

Thanks, Shiraz. In closing, we are optimistic about the prospects for NMFC in the months and years ahead. Our long-standing focus on lending to defensive growth businesses supported by strong sponsors should continue to serve us well. We once again thank you for your continuing support and interest, 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?

The first question comes from Paul Johnson from KBW. Please go ahead.

So one question. As I look at your investments for the quarter on Slide 21 and 22, and this might not be anything new, but it appears that there's maybe not a major spread difference between the second lien loans and in the first lien loans made during the quarter, even some of the preferred investments. But I'm just curious, in today's world, if you're not getting compensated necessarily in terms of returns for second lien or subordinated type of investments like we used to in the past. What makes you comfortable with those types of investments today?

Sure, Paul. It's a good question. And there are a couple of things I just want to note at the outset. For example, one of the preferred stock investments that we made was 7% that was purchased at $0.85. So that would be just one note to make. And then there were some other preferred stocks that were definitely higher spreads. But I think your comment about the spread difference between unitranche and second lien is a good one. It's one we've actually noted on prior calls that the incremental return on second lien versus a first lien is less than ever. And so our mindset is to be just incredibly selective about which second liens we invest in, and we only pursue a second lien investment when we just have amazingly high conviction about the quality of the business and the enterprise value cushion both as represented by the multiple the sponsor pad but also our internal view of the enterprise value. We just want to make sure that, that cushion is very substantial. And so our mindset is that there are great second lien investments out there to be made. You just have to just be incredibly selective on credit quality. And that's what we've done and that's what we'll continue to do.

And then just a broader question. Just with all the competition going on in the market and then the advent of the mega tranche deals and taking market share in the middle market. Have you found it any more difficult, I guess, to win deals or to secure places and club deals and such, is that -- has that been any more difficult for you, I guess, in the current quarter? Or what you're experiencing now versus the past?

No. I mean, I think if anything, Paul, and hey, this is Rob. I actually think it's the opposite. As the market has expanded and frankly, as the types of deals that quality sponsors are doing are -- tend to be more and more in our sector. I just think we have more shots on goal than ever. And whether it's being part of a club in a mega tranche or leading a smaller unitranche ourselves. We're participating selectively in a clubbed up second lien. We feel like our deal flow is higher than it's ever been. And it's also a function of the expanding scale of the New Mountain overall platform. As I think we've articulated before, our current private equity fund is over $9 billion, Steve pointed out how large the team has become. So our touch points across the deal universe is higher than ever as an institution and that's allowing us to have a wider aperture than ever before. Additionally, our footprint as an issuer of paper, and you've noted this before also, given the scale of our private equity platform makes us very important to credit funds that want to participate in our deals, many of whom themselves are sponsor affiliated. And so leveraging that heft in the marketplace really enhances our access to the deals we want to do. And the proof is in the pudding, right? Q3 was our highest deal flow quarter ever, both at the NMFC level and across the broader credit platform, and we're seeing ongoing strength in Q4. So access to the best possible deals is really -- is not on our list of issues or concerns.

Okay. That's good to know. And then as far as, I know, your portfolio is obviously more heavy with the health care, the services and software sectors, which don't tend to be affected as much by the inflationary issues or the supply chain issues that we've been experiencing this year. But have you seen any of those pressures show up anywhere in your portfolio? Or has this been something that's almost been kind of nonexistent just because of more service-oriented portfolio that you guys have?

Yes. It's a good question. I won't say it's nonexistent, but it's very limited because as you point out, we're not -- the companies we lend to are not procuring physical goods for the most part. So the good level of inflation, the supply chain issues, the shortages really doesn't affect the types of companies we lend to. What we have to obviously watch is labor inflation at our companies and labor availability. And that may be a headwind for equity values at 15 times to 20 times. They're not at all close to impacting debt service capabilities. And we don't foresee that being an issue that impacts borrowers in a material way but we are keeping an eye on it. And the other thing I'll point out is that given the businesses we lend to tend to have high margins. And in variable cost structures, it's not a huge. We have plenty of cushion. It's not like it's a 5% margin, and if costs go up by 3% and you can't pass it on, you've eaten into 60% of your cash flow. So the bottom line is we're not seeing it materially in the monthly numbers we track and we just think structurally, we're well protected against that important issue in the economy today.

And then my last question, I just want to make sure that we understand this right. I think that the fee waiver that you guys extended is great, that's a very shareholder-friendly move. But the new fee structure, the 1.4% essentially coming into place when the when the fee cap expires in '23, is that essentially taking the place of the old fee structure where you were just essentially kind of waving down to get to that kind of 1.3%, 1.4% effective rate? So essentially, it's basically just kind of one fee construct that's replacing the old fee structure that was in place?

Yes, that's exactly right. We've obviously gotten commentary across the years from you guys and others about how it's difficult to model the 175 that netted down to the 1.3% to 1.4%. So we've simply just -- we're getting rid of that construct. It's now incredibly simple. It's 1.4%. It's the highest possible fee. But obviously, we've got the waiver out through '23 -- the end of '23 at the 1.25%, that's the flat rate. And of course, we'll keep tracking market conditions and everything else over the next two years. But that's right. So it's -- for modeling purposes, it's 1.25% through the end of '23 and then 1.4% flat after that.

Gentlemen, so far there are no more questions. This concludes our question-and-answer session. I would now like to turn the conference back over to Rob Hamwee for any closing remarks.

Great. Thank you. And again, I just want to thank all of our stakeholders for participating today, and we look forward to speaking to you all through the quarter as warranted and obviously on our call next quarter. So thank you. Have a great day.