Good day, and welcome to the New Mountain Finance Corporation First Quarter 2023 Earnings Conference Call. [Operator instructions] Please note, this event is being recorded. I would like now to turn the conference over to John Kline, President and CEO of New Mountain Finance. Please go ahead.

Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's First Quarter 2024 Earnings Call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Laura Holston, COO of NMFC; and Kris Corbett, CFO and Treasurer of NMFC. Laura is a little under the weather today, so she will not be making prepared remarks but will be available for Q&A. Now Steve is going to make some introductory remarks, but before he does, I'd like to ask Kris to make some important statements regarding today's call.

Thanks, John. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available on our May 1 earnings press release. I would also like to call your attention to the customary safe harbor disclosure in our press release and on Pages 2 and 3 of our 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, Kris. It's great to be able to address you all today, both as NMFC's Chairman and as a major fellow shareholder. Adjusted net investment income for the quarter was $0.36 per share, in line with our implied guidance and more than covering our $0.32 per share regular dividend that was paid in cash on March 29. Our net asset value per share decreased slightly to $12.77, a $0.10 decline compared to last quarter. NMFC experienced strong core credit performance, offset by a decrease in value of one of our equity positions, which John will discuss later in the presentation. Given our earnings of $0.36 per share this quarter, we will make our fifth consecutive variable supplemental dividend payment. The variable supplemental dividend for this quarter will be $0.02 per share, which is equal to half of the amount of our Q1 quarterly earnings in excess of our regular dividend of $0.32. NMFC will pay these distributions on June 28 to holders of record as of June 14. The remainder of the excess earnings will remain on our balance sheet and may be paid out in the future. Our dividend at $0.34 represents an annualized current distribution yield of 11%. Looking forward to Q2, in addition to our $0.32 regular dividend, we expect to again generate a variable supplemental dividend of $0.02 per share, or $0.34 in total payable in the third quarter of 2024. We also continue to keep our dividend protection program in place and are committed to reduce our incentive fee if and as needed, to fully support the $0.32 per share quarterly regular dividend. We do not anticipate utilizing this pledge given our strong credit performance and current earnings power. We believe the strength of New Mountain and of NMFC is driven by the consistency of…

Thank you, Steve. I would like to begin by offering some more details on our direct lending investment strategy and track record. Starting on Page 8, we highlight our exposure to a diversified list of defensive, noncyclical sectors. These sectors mapped industries where New Mountain has made successful private equity investments and where our firm's knowledge is the strongest. We seek to make investments in companies with durable growth drivers, predictable revenue streams, margin stability and great free cash flow conversion. As you can see from the industry pie chart on Page 8, we have virtually no exposure to cyclical, volatile and secularly challenged industries, which could be riskier areas to invest in given today's higher rate environment. Our strategy has been consistent over our 13 years as a public company, and it allows us to operate with confidence in any economic environment. Page 9 provides a high-level snapshot of our business where we show a long-term track record of delivering consistent, enhanced yield to our shareholders by minimizing credit losses and distributing virtually all of our excess income to shareholders. Since our IPO in 2011, NMFC has returned over $1.2 billion to shareholders through our dividend program, generating an annualized return of approximately 10%. This represents a very strong cash flow-oriented return well in excess of the high-yield index. Our current portfolio invests in companies within a high-quality industries that are performing well and where our last dollar of risk is approximately 40% of the purchase price paid for the business. We lend primarily to businesses owned by financial sponsors, who are sophisticated and supportive owners with significant capital that is junior to the loans that we make. Turning to Page 10. The internal risk rating of our portfolio improved quarter-over-quarter with 96.5% of our portfolio rated green compared…

Thank you, John. For more details, please refer to our quarterly report on Form 10-Q that was filed yesterday with the SEC. As shown on Slide 23, the portfolio had approximately $3.1 billion in investments at fair value on March 31 and total assets of $3.3 billion, with total liabilities of $1.9 billion, of which total statutory debt outstanding was $1.5 billion. Net asset value of $1.4 billion or $12.77 per share was down slightly compared to the prior quarter. At quarter end, our statutory debt-to-equity ratio was 1.08:1 and 1.03:1 net of available cash on the balance sheet. This represents the lower end of our target range and is meaningfully lower than Q1 of the prior year. On Slide 24, we show our quarterly income statement results. For the current quarter, we earned total investment income of $90.3 million, a 2% decrease from prior year. Total net expenses of approximately $53 million decreased 1% versus prior year. As a reminder, the investment adviser has committed to a management fee of 1.25% for the 2024 calendar year. As mentioned earlier, the investment adviser has also pledged to reduce its incentive fee if and as needed during this period to fully support the $0.32 per share regular quarterly dividend. Based on our forward view of the earnings power of the business, we do not expect to use this pledge. It is important to note that the investment adviser cannot recoup fees previously waived. Our adjusted net investment income for the quarter was $0.36 per weighted average share, which has meaningfully exceeded our Q1 regular dividend of $0.32 per share. As Slide 25 demonstrates, 98% of our total investment income is recurring this quarter, given the minimal fees earned in Q1. You will see historically that over 90% of our quarterly income…

Thank you, Kris. As we look forward over the remainder of 2024, we remain confident in the continued strong performance of NMFC's portfolio and believe we are on track to continue to deliver great risk-adjusted returns to our shareholders. We once again would like to thank all of our stakeholders for the ongoing partnership and support and look forward to maintaining our dialogue throughout the year. I will now turn things back to the operator to begin Q&A. Operator?

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Our first question comes from Bryce Rowe of B. Riley.

Maybe I just wanted to start on some of the origination versus repayment dynamic in terms of pricing. And I think you noted it in your prepared remarks, as well as kind of show it on Slide 20. So it looks like some of the repayment activity is coming off at a higher yield and the originations are coming on at a lower yield. Can you talk about that dynamic and kind of what your expectations are, especially considering maybe increased competition and tighter spreads that we're starting to see here.

Sure, sure. Well, I think that's undoubtedly true when you look at the numbers. We did have particularly some second lien positions repay, and those definitely had attractive spreads. Now we think that the primarily unitranche loans that we're originating right now also have very good spreads, but they are a little lower. I think -- my own view is this is a moment in time, and we alluded to this in our prepared remarks, where there's not quite enough deal activity to satisfy the demand in the lending community. But I think it's our belief that, that could normalize over the rest of the year, and we expect to see spreads at least stabilize and potentially get a little better. I think when we look at the originations we've made, we really like the risk-adjusted returns that, that those new loans afford us and think they're smart loans to make and feel very good about it. But it's something we have to watch as we consider just our ROE. But you can see that based on the results and the earnings power that the portfolio has, we're still in very good shape and feel good throughout the rest of the year.

Maybe one question on the income statement. Dividends from the SLPs look to be a little bit larger than you've seen here recently, anything specifically going on and just trying to get a feel for how sustainable those dividend levels are.

Sure. The SLP funds have been great for us over the last 10 years. And I really think that over the course of the last 2 to 3 years, we've accumulated positions in really well performing loans that have very nice spreads. And I think we're reaping the benefits of that right now. I think the SLPs will continue to produce great income for NMFC. It's possible that there'll be a little bit of spread pressure on those funds. But we -- as far as I can see over the next few quarters, I think the distribution yields from the SOPs will be very strong.

Last one for me, and not -- just around the capital structure. You've got some SBA debentures that are starting to approach maturity, I guess, in '25. Just curious how you're thinking about the SBIC licenses that you have. Is there an opportunity to re-up and apply for a third? Or have you guys kind of outrun those SBIC licenses and expect them just to level off here?

Sure. I think the SBA program has been a really great program for us for a long period of time. SBA 1 has done very well. But as you mentioned, it is heading towards maturity. Right now, our mindset is to try to replace that with a third license, but we don't have anything to report with regard to achieving that third license. And so that's sort of where things stand. So we're very aware of the March '25 first maturity. And of course, we still have SBA II, which has longer maturities. So generally, we feel really good about the SBA program, and we've been able to populate it with good conforming loans. I guess I'd also note that we have some other debt that's coming due over the next year or so that is actually at much higher rates. So there could potentially be an opportunity depending on what the overall rate environment looks like there could be an opportunity to refinance those at attractive rates.

Our next question comes from Finian O'Shea of Wells Fargo.

Could we go back to the commentary on the potential incentive fee waivers? I appreciate that, of course. But gleaning out the remarks, it sounded like this is for a specific period or maybe ensuring against a specific ROE headwind factor for a specific period. Can you outline that again, like what -- for how long and against -- is it for spreads or whatnot, what you anticipate the headwind might be and for how long?

Sure, sure. So thanks for that question. We've had this program for a while. The whole intent of the program is to provide our investors with great confidence that if for any reason our earnings dip below the $0.32 base dividend that we will support it through waiving incentive fee and applying those dollars back to the company such that we meet -- we make sure that the NII is covering our dividend. And I think that's really powerful. And I think it gives a lot of our stakeholders a lot of comfort that even if NII does ever dip below $0.32, that they can feel good about their $0.32 dividend. That's a really powerful thing. It's been in place for a while. We haven't talked about it maybe quite as much because the NII has been so high. It's still meaningfully above -- our NII is still meaningfully above the $0.32. But we just want to have investors just continue to keep that in mind. It's set to expire at the end of this year, although my expectation would be that we'll talk to our Board in very short order to extend that. It's a program that we feel very strongly about. And again, I think a lot of our shareholders really like it.

And that would include like what's going through my head, sort of is if base rates relapse, New Mountain and many other BDCs, of course, would probably be facing dividend cuts, right? So would it -- in that sort of new environment that may eventually come, would it still apply then?

Yes. Well, the way we've done it in the past is we've always set the dividend protection program to be absolute over a certain period of time. And so we -- my mindset would be to talk to our Board about extending it for 1 to 2 years. And then if it's in place, we would live up to that dividend protection program pledge. So that's our mindset. I think we show -- we do -- in our deck, we do show sensitivities around what happens at different base rates. And of course, there are different things that, in a lower base rate environment, there are some positive changes that can occur as well. For example, on the previous question I mentioned the fact that we have some pretty high cost debt maturing in '25. So if base rates, for example, were to plummet into '25, we would lose yield on our assets, but I think we'd also have a tremendous opportunity to refinance a meaningful amount of debt that's coming due at lower rates. So there are certain hedges that are in place. And the analysis that we provide on Page 16 is a dynamic analysis and changes based on the facts and circumstances of our assets and liabilities.

That's helpful. And a follow-up on the equity rotation potential, I think it's Slide 19, and you all do a great job at presenting all of these sort of dimensions of the New Mountain story. Obviously, a handful of big names here. They've all been here for a little while. And of course, it's been a funky market we've all been through in the last handful of years. But just seeing like a check on as a group where these businesses are in their rebound or whatnot in salability. And then more specifically on just a second part on Edmentum. This sounded like -- it sounded like a sort of rethinking, we're not in COVID anymore. Is it just that? Or did something more fundamental operationally happen that caused that rethink. Is that one sort of like 2 steps back kind of situation?

Sure. Sure. Thanks for that question. And let me know if we -- if I don't handle all of it. But when we think about our equity position, I think it is fair to say that they have been around for a little bit. The one thing -- and I don't use this as an excuse, but it has been over the last 3 years, a challenging market for every asset owner to sell companies. So it has not been a great environment. I think you acknowledged that in your question. And we are eager to monetize. There's no doubt about that. With regard to the performance of the top investments, I would say UniTek is very healthy, has delevered a lot and has pretty nice tailwinds and has shown consistent growth over the last 3 to 4 years. And I think that company is performing very well. And just as a reminder, that the end markets are telecom fiber construction, which is a really great market right now. And Edmentum will talk more about. Benevis, I'd say, is a slow and steady recovery in the dental practice management industry, and we have a lot of resources focused on getting that business to the earnings power that we really think it can get to. And then Permian, I think, has some really nice tailwinds as we shift the business mix in that business. So in general, we think the businesses are actually doing pretty darn well. And in a better M&A environment, we'll have a lot better opportunities to monetize -- but no matter how well your company is doing, if the M&A environment is bad, it's tough to get a good price. On Edmentum, there -- and I think you could double check this, there are a lot of public data points, but there was a big COVID bump, a positive bump for a lot of education technology businesses. That is very, very clear. And that -- and Edmentum just has had -- the market has affected Edmentum the same as a lot of other companies have been affected by that bump. So I really think it's just waiting, as I mentioned, for the markets to normalize. But there's nothing in the products, the execution of the business that is causing us concern. We just are going to have to fight harder to win business in a market that is not quite as good as it was during COVID but when every school system was rushing towards these ed tech solutions for remote learning, et cetera. So I think it's just -- it will take a little time for the markets to normalize and for us to attack the market even harder. And so I think we'll know a lot more about Edmentum over the next 12 months, and we have -- we're actually very optimistic about how the performance will evolve over the next 12 to 18 months. Did I get everything?

Yes.

The next question comes from Erik Zwick of Boenning and Scattergood.

Good morning, everyone. Now with Hovde Group. I wanted to start maybe first and just your thoughts on the opportunity for portfolio growth. You noticed a deal flow is picking up in real time. And I guess the harder part of the equation is maybe to have more than a couple of months out of a strong view on repayment activity. But just thinking with spread compression, maybe putting a little bit of pressure on investment income dollars if you were to grow the portfolio to potentially offset that. Do you see that kind of pathway -- or how do you think about the opportunity to grow the portfolio over the next quarter or 2?

Sure. Thanks for that question. And I'm glad you asked it because net of cash, this quarter, we were at 1.03x statutory debt. And so that is the lowest level we've been at a little while. And so I guess, I would say that we're very committed to our range, which is statutory leverage between 1 and 1.25x. But I think there is definitely an opportunity to move the leverage up a little bit to improve the ROE, use that as a lever to offset some of the spread compression, which you can see and we acknowledge. But we don't want to -- we want to be very disciplined about the way we do that, and we definitely don't want to be -- as we've said in the past, we don't want to be at the absolute top end of our range every quarter, but could we be at the mid-to-high end of the range in a comfortable manner? I think that is possible.

That makes sense. And second one for me, it was interesting to note on Slide 21 to see the interest coverage ratio for the portfolio go up. I'm curious what maybe the major drivers of that? Certainly on the graph above the average portfolio weighted EBITDA growth, so that helps, and base rates have been stable now for a couple of quarters. So curious if there was anything else driving that increase and whether you think we've maybe seen the bottom of that ratio for this cycle?

Yes. I'm glad you asked that question, too. I mean, I really view it as good performance. It's reflective of good performance of our underlying portfolio companies. I think it's also reflective of the new deals that we're originating having better coverage than maybe some of the old deals that we had, and that's a function of just less aggressive gearing in a higher interest rate environment that we're in right now. So I really see those as the 2 factors, good performance and a positive mix from an interest coverage perspective.

[Operator Instructions] With no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Kline for any closing remarks.

Great. Well, we thank you for your interest in New Mountain Finance Corporation, and we very much look forward to speaking to you on the next earnings call. Goodbye.

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