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Edited Transcript of NMFC earnings conference call or presentation 8-May-18 2:00pm GMT

Q1 2018 New Mountain Finance Corp Earnings Call

New York May 14, 2018 (Thomson StreetEvents) -- Edited Transcript of New Mountain Finance Corp earnings conference call or presentation Tuesday, May 8, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Kline

New Mountain Finance Corporation - President & COO

* Robert A. Hamwee

New Mountain Finance Corporation - CEO & Member of Board of Director

* Shiraz Y. Kajee

New Mountain Finance Corporation - Treasurer & CFO

* Steven Bruce Klinsky

New Mountain Finance Corporation - Chairman of the Board

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Conference Call Participants

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* Jonathan Gerald Bock

Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst

* Paul Conrad Johnson

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the New Mountain Finance Corporation First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Rob Hamwee, Chief Executive Officer of New Mountain Finance Corporation. Please go head.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [2]

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Thank you. Good morning, everyone, and welcome to New Mountain Finance Corporation's First Quarter Earnings Call for 2018. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; John Kline, President and COO of NMFC; and Shiraz Kajee, CFO of NMFC.

Steve Klinsky is going to make some introductory remarks. Before he does, I'd like to ask Shiraz to make some important statements regarding today's call.

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Shiraz Y. Kajee, New Mountain Finance Corporation - Treasurer & CFO [3]

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Thanks, Rob. Good morning, everyone. Before we get into the presentation, I'd like to advise everyone that today's call and webcast are being recorded. Please note that they're 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 May 7 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 Pages 4 and 5 of the slide presentation. Steve?

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Steven Bruce Klinsky, New Mountain Finance Corporation - Chairman of the Board [4]

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The team will go into the details in a moment, but let me start by presenting the highlights of another strong quarter for New Mountain Finance. New Mountain Finance's net investment income for the quarter ended March 31, 2018, was $0.34 per share, in the middle of our guidance of $0.33 to $0.35 per share and once again covering our quarterly dividend of $0.34 per share.

New Mountain Finance book value was stable at $13.60 per share as compared to $13.63 per share last quarter. We are also able to announce our regular dividend, which for the 24th straight quarter, will again be $0.34 per share, an annualized yield of 10.1% based on last Thursday's close.

The company had another productive quarter of deal generation, investing $238 million in gross originations versus repayments of $84 million, which keeps us fully invested. Credit quality remains strong as for the fourth consecutive quarter, there were no new nonaccruals.

I and other members of New Mountain continue to be very large owners of our stock, with aggregate ownership of 9.6 million shares, approximately 13% of total shares outstanding, an increase of over 0.5 million shares over last quarter.

Finally, the broader New Mountain platform that supports NMFC continues to grow with over $20 billion of assets under management and 140 team members. In summary, we are very pleased with NMFC's continued performance and progress overall.

With that, let me turn the call back over to Rob Hamwee, NMFC's CEO.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [5]

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Thank you, Steve. Before diving into the details of the quarter, as always, I'd like to give everyone a brief review of NMFC and our strategy. As outlined on Page 6 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm.

Since the inception of our debt investment program in 2008, we have taken New Mountain's approach to private equity and applied it to corporate credit, with a consistent focus on the extensive growth of business models and extensive fundamental research within industries that are already well known to New Mountain, or more simply put, we invest in recession-resistant businesses that we really know and that we really like. We believe this approach results in a differentiated and sustainable model that allows us to generate attractive risk-adjusted rates of return across changing cycles and market conditions. To achieve our mandate, we utilize the existing New Mountain investment team as our primary underwriting resource.

Turning to Page 7. You can see our total return performance from our IPO in May 2011, through May 3, 2018. In the 7 years since our IPO, we have generated a compounded annual return to our initial public investors of over 10%, meaningfully higher than our peers and the high yield index and approximately 900 basis points per annum above relevant risk-free benchmarks.

Page 8 goes into a little more detail around relative performance against our peer set, benchmarking against the 10 largest externally managed BDCs that have been public at least as long as we have.

Page 9 shows return attribution. Total cumulative return continues to be largely driven by our cash dividend, which in turn has been more than 100% covered by NII. As the bar on the far right illustrates, over the 7 years we have been public, we have effectively maintained a stable book value, inclusive of special dividends while generating a 10.4% cash-on-cash return for our shareholders.

We attribute our success to: one, our differentiated underwriting platform; two, our ability to consistently generate the vast majority of our NII from stable cash interest income and an amount that covers our dividend; three, our focus on running the business with an efficient balance sheet and always fully utilizing inexpensive, appropriately structured leverage before accessing more expensive equity; and four, our alignment of shareholder and management interest.

Our highest priority continues to be our focus on risk control and credit performance, which we believe, over time, is the single biggest differentiator of total return in the BDC space. I am pleased to report that there has been no significant negative credit migration this quarter although post-quarter-end, one of our smaller investments, American Tire Distributors, lost one of its largest suppliers, leading us to reevaluate our investment thesis and ultimately decide to exit our position at a $6 million loss.

If you refer to Page 10, we once again lay out the cost basis of our investments, both the current portfolio and our cumulative investment since the inception of our credit business in 2008 and then show what has migrated down the performance ladder. Since inception, we have made investments of over $5.5 billion in 229 portfolio companies, of which only 7 representing just $112 million of costs have migrated to nonaccrual, of which only 4 representing $43 million of cost have thus far resulted in realized default losses. Further, virtually 100% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale.

Page 11 shows leverage multiples for all of our holdings above $7.5 million when we entered an investment and leverage levels for the same investment as of the end of the most recent reporting period. While not a perfect metric, the asset-by-asset trend and leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical fundamental support for our internal ratings in markets.

As you can see by looking at the table, leverage multiples are roughly flat or trending in the right direction, with only a few exceptions. Only one loan, Edmentum, which we restructured in 2015, and as previously discussed, in which we recently invested incremental capital to increase our ownership and support an ambitious future growth plan, shows negative migration of $0.025 or more. We remain optimistic about the long-term prospects for the company and our investment.

The chart on Page 12 helps track the company's overall economic performance since its IPO. At the top of the page, we show how the regular quarterly dividend is being covered out of net investment income. As you can see we continue to more than cover 100% of our cumulative regular dividend out of NII. On the bottom 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've had success generating real economic gains every year through a combination of equity gains, portfolio company dividends and trading profits. Conversely, realized losses including default losses, highlighted in orange, have generally been smaller and less frequent and show that we are typically not avoiding non-accruals by selling poor credits at a material loss prior to the taxable [loan].

As highlighted in blue, we continue to have net cumulative realized gains of $12 million. Looking further down the page, we can see that cumulative net unrealized appreciation, highlighted in gray, spanned to $25 million and cumulative net realized and unrealized loss highlighted in yellow is at $13 million.

The net result of all this is that in our 7 years as a public company, we have earned net investment income of $507 million against total cumulative net losses including unrealized of only $13 million.

The cornerstone of our strategy at NMFC has always been to earn our dividend with the least possible amount of risk. As widely reported, in late March, legislation was signed that allows BDCs to increase their leverage cap from 1:1 to 2:1. We believe this development potentially gives us an opportunity to earn our dividend with a net reduction in overall corporate risk. Specifically, by taking on some amount of incremental leverage, we can reduce the required yield on our individual assets. Unbalanced, we believe the incremental risk we add to the business over time by increasing our liabilities will be more than offset by the lower risk in our asset base.

The exact amount of incremental leverage utilized in this paradigm will be a function of a number of things, including prevailing asset yields and the cost of marginal credit as leverage increases. Our goal, as managers of NMFC, will be to seek the optimal levels of leverage and asset yields for any given set of market conditions. In order to procure this enhanced flexibility, we have filed our proxy statement and expect to hold the requisite meeting in June.

There are 2 important issues to highlight here beyond the fundamental one: First, no matter where we determine the optimal leverage point to be, we will only approach it if we can get there using the historically safe, termed-out, non-mark to market financing we have predominantly used in the past. Second, as incremental assets added through increased leverage will be predominantly senior, the management fee burden on these assets will be significantly less than our headline 1.75%.

Specifically, as discussed many times over the years, on senior assets, we charge a management fee only on the implied equity utilized to purchase those assets, which in most cases range from 30% to 35% -- from 30% to 50%. Therefore, we would expect management fees on the vast majority of these incremental assets to generally range from 60 to 80 basis points. We look forward to continuing this dialogue on this important opportunity, and as always, we'll keep an open line of communication with all stakeholders as we move forward.

I will now turn the call over to John Kline, NMFC's President, to discuss market conditions and portfolio [active]. John?

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John R. Kline, New Mountain Finance Corporation - President & COO [6]

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Thanks, Rob. As outlined on Page 14, the state of the leverage credit markets is very similar to when we last spoke in March. Despite some equity market volatility throughout the first 4 months of the year, the leverage loan market has remained remarkably stable. Most deals that we evaluate have strong competitive tension between lenders. And at the margin, we believe that more middle market executions are being led by syndication agents to maximize the competition between capital providers.

Market spreads remain lower than last year but have remained relatively stable since our March earnings call. NMFC's biggest earnings tailwind remains the upward trend of 3-month LIBOR, which has increased from approximately 2% at the time of our last call in March to 2.36% today. Additionally, while Q1 is typically slow from a new deal flow perspective, we have seen promising new origination volume thus far in 2018, with a strong forward pipeline in place. Over the last month, we have also added a new origination-focused team member who will further enhance our client coverage in this competitive market.

Turning to Page 15. NMFC continues to be positively exposed to future rate increases as 85% of our portfolio is invested in floating rate debt, and 55% of our liabilities are locked in over the medium term at attractive fixed rates. 3-month LIBOR has increased to 2.36%, which is roughly 140 basis points above the average LIBOR floor on our floating rate assets.

Moving on to portfolio activity, as seen on Pages 16 and 17. NMFC had an active quarter with total originations of $238 million, offset by $84 million of portfolio repayments and $3 million of sale proceeds, representing $151 million expansion of our investment portfolio. Our new investments were highlighted by a larger-size directed origination of a unitranched loan for Benevis, several club deals including a loan to ACA Compliance and one addition to both our net leased portfolio and our SBIC investing program. We believe that the consistency of our deal flow in this competitive market shows the strength of the broad sourcing network that we have built.

Since the end of Q1, we have booked $84 million of new investments, including 2 investments funded by our SBIC programs and the capital contribution for SLP III. These new investments were offset by $48 million of sales and repayments, yielding portfolio growth of $35 million.

On Page 18, we are pleased to announce our third SLP fund. As a reminder, our SLP programs are off-balance sheet vehicles, which invest in first-lien syndicated loans focused in our core defensive growth industry sectors. We seed our SLP funds with equity and utilize long-term non-mark to market credit facilities.

Our past SLP funds have generated yields in the mid-teens and have experienced no credit losses to date. SLP III is structured as a joint venture between NMFC and SkyKnight Income, LLC. NMFC and its partner have an aggregate capital commitment of $100 million, which will be split 80% to NMFC and 20% to SkyKnight. We have entered into an agreement with Citibank to provide a $300 million, 5-year committed leverage facility with an attractive borrowing cost.

The total size of SLP III will be approximately $400 million. Once fully ramped, our goal is to generate a yield to NMFC in the 11% to 13% range, which we view to be attractive on a risk-adjusted basis.

Turning to Page 19. We show that our Q1 originations were weighted toward first-lien assets. Inclusive of net lease, 61% of our originations were at the top of the capital structure, with 39% invested in junior loans. On the right side of the page, we show that nearly all of our repayments were first-lien assets.

As shown on Page 20, Q1 asset yields on new originations of 10.1% were somewhat lower than the average yield of the portfolio. This is due primarily to the first-lien heavy mix on new originations in the quarter. Overall, we continue to maintain a healthy weighted average interest rate on our investment portfolio despite the competitive environment.

Looking forward, we still believe lower spreads on new originations could pressure our portfolio yield as existing higher-yielding loans get replaced by lower spread assets. Offsetting this trend, we see rising base rates as a valuable tailwind across the majority of our portfolio, and over time, expect increased earnings from our SBA financing programs, which currently have approximately $150 million of aggregate undrawn capacity.

And finally, as Rob mentioned earlier, we believe that accessing additional leverage afforded by the recent change in the '40 Act could provide us with another valuable lever to support our dividend.

Page 21 showed that NMFC maintains a balanced portfolio across our defensive growth-oriented sectors. In the services section of the pie chart, we break out subsectors to give better insight into the diversity within our largest sector. On the bottom of the page, we show that our portfolio by -- we show our portfolio by asset type, where we continue to maintain a balanced split between senior and subordinated investments.

As you can see, first-lien debt, SLP investments and net lease investments represent 45% of the portfolio, with non-first lien-oriented investments making up 55% of the portfolio. The pie chart on the lower right shows that we continue to have an exceptionally clean book of investments.

Finally, as illustrated on Page 22, we had a broadly diversified portfolio with our largest investment at 5.3% of fair value and the top 15 investments accounted for 42% 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. Shiraz?

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Shiraz Y. Kajee, New Mountain Finance Corporation - Treasurer & CFO [7]

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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 23. The portfolio had approximately $2 billion in investments at fair value at March 31, 2018, and total assets of $2.1 billion. We had total liabilities of $1 billion, of which total statutory debt outstanding was $841 million, excluding $150 million of drawn SBA-guaranteed debentures.

Net asset value of $1 billion or $13.60 per share was down $0.03 from the prior quarter. As of March 31, our statutory debt to equity ratio was 0.8:1, at the high end of our target range.

Slide 24, we show historical leverage ratios, which are broadly consistent with our current target statutory leverage of between 0.7:1 and 0.8:1. On this slide, we also show the historical NAV adjusted for the cumulative impact of special dividends, which portrays a more accurate reflection of true economic value creation.

On Slide 25, 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 March 31, 2018, we earned total investment income of $52.9 million, and total net expenses were approximately $27.2 million. As in prior quarters, the investment adviser continues to waive certain management fees such that the effective annualized management fee is 1.46%. It is important to note that the investment adviser cannot recoup previously waived. This results in first quarter NII of $25.7 million or $0.34 per weighted average share, which is within our guidance and covered our Q1 regular dividend of $0.34 per share. In total for the quarter ended March 31, 2018, we had an increase in net assets resulting from operations of $23.8 million.

As Slide 26 demonstrates, our total investment income is recurring in nature and predominantly paid in cash. As you can see, 90% of total investment income is recurring, and cash income is 82% this quarter. We believe this consistency shows the stability and predictability of our investment income.

Turning to Slide 27. As briefly discussed earlier, our NII for the first quarter covered our Q1 dividend. Given our belief that our Q2 2018 NII or forward-looking guidance of $0.33 to $0.35 per share, our Board of Directors has declared a Q2 2018 dividend of $0.34 per share, which will be paid on June 29, 2018, to holders of record on June 15, 2018.

Finally, on Slide 28, we highlight our various financing sources. Taking into account SBA-guaranteed debentures, we had approximately $1.3 billion of total borrowing capacity at quarter-end, with no near-term maturities.

As a reminder, our Wells Fargo credit facility's 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.

With that, I would like to turn the call back over to Rob.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [8]

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Thanks, Shiraz. It continues to remain our intention to consistently pay the $0.34 per share on a quarterly basis for future quarters so long as the adjusted NII covers the dividend in line with our current expectations.

In closing, I would just like to say that we continue to be pleased with our performance to date. Most importantly, from a credit perspective, our portfolio overall continues to be healthy. Once again, we'd like to thank you for your support and interest, and at this point, turn things back to the operator to begin Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Paul Johnson of KBW.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [2]

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My first question was on your investment in Edmentum. I know you guys provided some more capital. I saw there was a press release that, I think, there was $25 million or so between you and some other investors extended to the company. My question is how much of that funding went into the VC? And then also what was the rationale for the investment, just kind of given it's been a struggling investment of yours?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [3]

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Yes. So -- and we talked a little bit about this last quarter. But that money went in about $12 million and change, about half of it from us, half of it from another investor in a [role] of a senior security. And the rationale is pretty simple, it's a business that since we've kind of taken control of it has done okay, and we think it's now positioned with a little bit of incremental capital to do significantly better than okay. We -- as I think again I've mentioned in the past, we brought in a very talented new CEO in the summer of last year. And based on her plan and execution to date, we have really a lot of confidence in where that company's going. And so are inclined to be as supportive of it as we possibly can be.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [4]

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Okay. And then my other question was on the third SLF. It's sort of a side question that you guys formed. I'm just kind of curious here. Given it's the same partner and virtually the same equity split as the SLF II (sic) [SLP II], curious why you chose to open up a new JV as opposed to kind of simply expanding the second one. Is there any sort of advantage to doing that?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [5]

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Yes, actually, it's a different credit provider. Wells Fargo is the credit provider for SLP II. And as John mentioned, Citi is the credit provider for SLP III, and we think it's good to have more than one credit provider for these vehicles over time.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [6]

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Sure, that makes sense, that makes sense. And then lastly, just on your originations, it was obviously a good quarter for you guys. Leverage is probably about as high as it's been in the BDC. I'm just kind of curious, is that in anticipation for the increased leverage that you guys have [going], I think the Sierra [would wrote] in June? Or is that more just kind of a timing issue on the strong originations for the quarter?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [7]

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Yes, it's really more of a timing issue. The -- we didn't -- I don't think we found out about the change in legislation until late March and obviously a little too late to influence our behavior in terms of what would have been closed by end of March. So it's really more idiosyncratic around timing of originations and repayments. Obviously, as we navigate this quarter, depending on how the process goes around the proxy that may have an influence on exactly where we wind up at 6/30.

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Operator [8]

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(Operator Instructions) The next question comes from Jonathan Bock of Wells Fargo.

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Jonathan Gerald Bock, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [9]

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So if we were able to maybe break out some things. One, the -- a credit to you and the board as you're -- and Steve, as you guys are approaching this leverage discussion. What we want to understand is, let's imagine that regulatory constraints were no longer an issue today, how quickly would it take to perhaps lever the senior secured assets to a level beyond 1:1? Do you have current availability to do that and flexibility in your borrowing base? And just give us a sense of timing, given that folks generally don't ask for votes unless they believe it to be a positive NPV proposition over the next 12 months.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [10]

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Yes. It's a good question, Jonathan. I mean, I think if we can get behind the map a little bit, I think the short answer though is it's quarters, it's not months, but it's not years either. And of course, as always, it will depend on prevailing market conditions and the pipeline of opportunities. But if I had to handicap it, I would say it's quarters. Because when we think about it, right, we have roughly a little over $1 billion equity base. So for every 0.1 of leverage increase, you're talking about a net increment of $100 million or so, of assets above our replacement rate. So to go from 0.8 to 1.2, I'll make that up, is a net increase of $400 million of assets, just to put it into context, right? So it's a decent amount, but it's not insane in the context of the scale of the market, our footprint in that market, our deal flow and our ability.

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Jonathan Gerald Bock, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [11]

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That would make sense. Rob, I have no questions about your ability to deploy the capital effectively. I think the question just in terms of adjusting with your leverage facilities, how long does that typically take?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [12]

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Yes, so we are in dialogue around that. I expect that we'll -- is very doable. I don't want to get too far ahead of those conversations. But I would not expect that to be the constraint.

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Jonathan Gerald Bock, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [13]

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Okay, okay, great. Then maybe one item I know folks appreciate is trying to understand kind of incremental math. And clearly, with the 60 to 80 basis point fee discussion on the new incremental senior secured assets, that's very helpful and also very attractive. Can you walk us through what you think onboarding yields generally are in financing costs?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [14]

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Sure, sure. So let's -- just to keep the math simple, let's assume we're going to onboard $100 million of incremental assets, and let's also assume that all those assets are our senior assets, so lower-yielding to a higher advance rate. So let's think about the return side of the equation and we'll think about the cost side of the equation. So for $100 million of assets, let's assume that they're going to be -- again, I'm going to make this up but it's ballpark L 5.50. And let's assume L is close to 2.50, just again to make the math simple. So let's assume that it's 2.50 base rate, 5.50 of spread. So 8% assets, so on $100 million, that's $8 million of marginal revenue. On the cost side, obviously, the first one is the interest expense. So let's assume those assets have a 60% advance rate on our senior facility. And our senior facility is advancing capital at L plus 200. So with the same math at $60 million of borrowings at 4.5%, and then let's say we borrow the unsecured market at some higher price because now we're more levered, but we've recently borrowed at just under 5%. So let's assume it's, again I'm going to make this up, but 50 basis points more. Essentially, the math's simple because treasury rates have gone up. Let's just saying we're borrowing in the unsecured market on the incremental $40 million at 6%. Again, just totally making these numbers up for illustrative purposes. So -- and I'm doing the math in real time, so bear with me. So $60 million at 4.5% is 2.4, 2.7 of cost and 2.4 on the $40 million. So roughly $5 million of incremental interest expense, right? And on the management fee side, again, use the midpoint of that range, 70 bps on the $100 million, so another $700,000. So now you're at $5.7 million of costs. Interestingly, virtually all of our other costs are fixed, right? So maybe a couple, $50,000 or $100,000. But you're dropping more than $2 million to the bottom line using this math which again is illustrative for here. And that's there to effectively allow one to take an average lower-yielding asset across the portfolio to the tune of $2 million and/or offset general markets by compression. So that's the accretive nature of the math, given our cost to borrow and given the way our management fees work. So then they're pretty excited about that as a tool.

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Jonathan Gerald Bock, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [15]

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Right, I appreciate that and that math is -- that illustrative math is compelling. Then would you be able to walk us through the next step, which should be if you look at your on -- off-balance sheet JVs, does 2:1 leverage alter your thinking on the net attractiveness that those JVs kind of offer in today's environment, given while they're a little bit more levered than what you traditionally have on balance sheet, I'm wondering if 2:1 kind of changes that dynamic and their relative attractiveness to something you could put on balance sheet at a higher leverage?

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [16]

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I think the short answer is no, Jonathan, because those are fundamentally different assets. Those are the broadly syndicated first-liens that today are yielding L 3.50, L 3.75 and we're using 3:1 leverage there to make that math work for a double-digit return. And we still think that's the place where we want to be able to be active in because if you remember the original industrial logic all the way back to [LLS 1,] whatever it was 4 years ago is that again, our core competency is -- our knowledge of businesses that we know really well through private equity, sometimes, those businesses are financed where the only actionable part of the capital structure is an L plus 3.75 regular way syndicated loan. And we want to have a bucket for that because, again, we have such high conviction around those businesses that we want to make sure we can express that conviction somewhere as long as the return math makes sense, which in today's world it still does.

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Operator [17]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Rob Hamwee for any closing remarks.

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Robert A. Hamwee, New Mountain Finance Corporation - CEO & Member of Board of Director [18]

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Great. Thank you. And thank you, everyone. We appreciate the time and attention and look forward to speaking again in the weeks ahead. Bye-bye now.

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Operator [19]

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