Good morning. Thank you for attending the New Mountain Finance Corporation First Quarter 2022 Earnings Call. My name is Tamia and I will be your moderator for today. All lines will be muted during the presentation portion of the call with the opportunity for question-and-answer at the end. [Operator Instructions] I would now like to pass the conference over to our host Robert Hamwee. Please proceed.

Thank you. Good morning everyone and welcome to New Mountain Finance Corporation's first quarter earnings call for 2022. On the line with me here today are Steve Klinsky, Chairman of NMFC and the CEO of New Mountain Capital; John Kline, President of NMFC; Laura Holson, COO of NMFC; and Shiraz Kajee, CFO of NMFC. 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 May 9th earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our press release and on page two of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections and we ask you to 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 Steven Klinsky, NMFC's Chairman, who will give some highlights beginning on page five 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 first quarter. Net investment income for the quarter was $0.30 per share, fully covering our dividend of $0.30 per share that was paid in cash on March 31st and in line with prior guidance. Our net asset value was $13.56 per share, a $0.07 increase from last quarter's net asset value. We generated approximately $18 million of realized gains this quarter, primarily resulting from the sale of one of our REIT assets. The regular dividend for Q2 2022 was again set at $0.30 per share based on estimated net investment income of $0.30 per share. As we discussed on previous earnings calls, risk control and downside protection has always been part of New Mountain's founding mission. Our firm as a whole now manages over $37 billion of total assets with a team of approximately 200 people. We have never had a bankruptcy or missed an interest payment in the history of our private equity work. We have applied that same team strength and focus on downside protection to NMFC and our credit efforts. The great bulk of NMFC's loans are in acyclical sectors with secular tailwinds such as enterprise software, tech-enabled business services, and health care services and technology. These are the types of defensive growth industries that we think are the right ones in all times and particularly, attractive in the more challenging macro environment we are in today. We believe our portfolio continues to be well-positioned due to this defensive growth investment strategy and is evidenced by an average net default loss of effectively zero since we began our credit operations in 2008. Our portfolio company risk ratings have improved modestly since our last earnings call and we had no new non-accruals this quarter. Coming off of a record origination year in 2021, the first quarter represented a slower origination quarter given the seasonally slower period and the enhanced market volatility, which reduced overall deal volumes. Our sourcing capabilities are as strong as ever and we remain very selective about only lending to what we believe, are the most defensive companies. Our at-the-market or ATM stock program is off to a nice start with approximately $49.5 million of net proceeds since it launched in November. Lastly, I want to remind you that, although we have not had to use it, our dividend protection program remains in place, even if earnings fall below $0.30 per share. Rising interest rates can materially improve our earnings as the team will explain on this call. Together, the New Mountain professionals have invested approximately $700 million personally into NMFC and New Mountain's other credit activities. I and management remain as NMFC's largest shareholders. With that, let me turn the call back to Rob.

Thank you, Steve. While we collectively adapt to life with COVID, we have decided to expand our heat map to reflect the broader market conditions our borrowers face beyond just COVID. The revised risk rating system is outlined on page 8. The X-axis replaces COVID exposure, with operating performance and reflects both business performance as well as overall market environment. Tier 1 continues to be the most negative, reflecting severe business underperformance and/or severe market headwinds and Tier 4 continues to be the most positive, reflecting in line or stable performance and/or market conditions. The Y-axis is generally unchanged and as a reminder, ranks on a scale from A to C the business quality, balance sheet strength and strong sponsor support for the company. We believe our portfolio continues to be very well positioned overall.\ The updated heat maps show the positive risk migration this quarter, as summarized on page nine and with four positions representing $168 million of fair value improving in rating and three positions representing $33 million, worsening in rating. Starting with the positive movers on page 10, two of our formerly red names Haven, formerly known as Tenawa and Permian migrated to orange this quarter, due to significantly better execution at the company's and a stronger operating environment. After quarter end, Haven ceased operations at its plant due to a fire. Fortunately, there were no serious injuries and the company is working with a variety of experts to determine next steps. Given expected insurance coverage and potential rebuild options, we do not currently expect this to negatively impact our carrying or ultimate value. The hospitality management business improved from orange to yellow, as the impact of COVID on the travel industry receipts and KPIs show meaningful progress. Lastly, our UniTek position migrated from yellow to green…

Thanks, Rob. Since our last call in March we have experienced sustained volatility in most areas of the equity and fixed income markets caused by rising interest rates, inflation concerns, supply chain disruptions and geopolitical instability. Through this period, corporate direct lending has been one of the most resilient asset classes across all financial markets. Our market has benefited from continued good credit performance, particularly in defensive industries, floating interest rates and secured debt structures. Loan-to-value ratios in many of our core industry verticals are less than 40% and in some cases under 30%. While deal flow remains materially lower than the latter half of 2021, we have seen increased activity in the large unitranche segment of the market, as equity sponsors have gravitated to the certainty and stability of direct lending versus other financing alternatives. Yields continue to be very attractive with floating rate spreads of $5.50 to $6.75 on many new unitranche loans. While we remain mindful of the overall economic environment, we continue to have high conviction in our investment strategy of lending to stable and valuable businesses within defensive growth industries that are well researched by the New Mountain platform. Page 14 presents an interest rate analysis, where we show how the current trends in the interest rate market could impact NMFC's future earnings. During Q1, three-month LIBOR increased from 21 basis points on January 1 to 96 basis points on March 31. Given the presence on floor – given the presence of floors on our assets and the lack of floors on our liabilities, this rate movement has been a modest earnings headwind during Q1. However, since quarter end, LIBOR has moved even higher to 1.4% and is expected to continue to increase throughout the rest of the year. If this rate trajectory continues, we…

Thanks John. As Steve previewed, Q1 was a seasonally slower origination quarter for our direct lending platform overall. Page 20 aligns the diverse origination within NMFC in our core defensive growth verticals, including two veterinary services businesses and add-on for an existing software business and a health care technology business. $154 million of gross originations less $74 million of repayments and sales effectively deployed the ATM proceeds, keeping us fully invested and within our target leverage range. We continue to have great success targeting and sourcing high-quality deals, within niches of the economy, where we have the highest conviction. Since quarter end, deal activity has picked up and we have committed to several larger deals that we expect to fund over the course of Q2 and Q3. We expect to remain fully invested in our target leverage range, as our deal flow absorbs any proceeds from ordinary course loan repayments, as well as any incremental capital raised through our ATM programs. Turning to page 21, we show that in Q1, our originations were heavily weighted towards first lien loans, due to continued sponsor adoption of the unitranche product. We plan to maintain an asset mix that is consistent with our quarter end portfolio, or slightly more than two-thirds of our investments, inclusive of the first lien SLPs and net lease are senior in nature. Page 22 shows that the average yield of NMFC's portfolio increased from 9.1% in Q4 to 9.8% for Q1, largely due to the benefit of the increasing for LIBOR curve. While the environment is competitive, the market spreads for high-quality deals remain supportive of our net investment income target. Turning to page 23, we show detailed breakouts of NMFC's industry exposure. The center pie chart shows overall industry exposure, while the surrounding pie charts give more…

Thank you, Laura. 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 25. The portfolio had approximately $3.3 billion in investments at fair value at March 31, and total assets of $3.4 billion, with total liabilities of $2 billion, of which total statutory debt outstanding was $1.7 billion, excluding $300 million of drawn SBA guaranteed debentures. Net asset value of $1.3 billion or $13.56 per share was up $0.07 from the prior quarter. At quarter end, our statutory debt-to-equity ratio was 1.23:1, and net of available cash on the balance sheet, the pro forma leverage ratio would be 1.21:1. On slide 26, we show historical leverage ratios and our historical NAV adjusted for the cumulative impact of special dividends. Consistent with our goal of minimizing credit losses and maintaining a stable book value over the long term, you will see that current NAV adjusted for special dividends has surpassed NAV from our IPO, almost 11 years ago. On slide 27, 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. For the current quarter we earned total investment income of $68.6 million a slight decrease from the prior quarter. Total net expenses were approximately $39 million a slight increase quarter-over-quarter. As discussed investment adviser has committed to a management fee of 1.25% for the 2022 and 2023 calendar years. We have also pledged to reduce our incentive fee if and as needed during this period to fully…

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?

Absolutely. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Rowan with Janney. Your line is open.

Good morning.

Hi, John.

So I appreciate the information you provided regarding your earnings sensitivity to the potential increase in base rates. I just want to make sure that's a parallel shift assumption, or I just want to make sure that that target that you provided does not account for slope shift of the yield curve?

So it's a function really of LIBOR right and increasingly SOFR which for now we'll assume broadly mimics LIBOR right? It's one and three month LIBOR. So we don't -- we're not sensitive to what happens further out on the yield curve. So the shape of the yield curve is not really relevant to us. It's really what happens on the short end and really the one month to three month LIBOR. Does that make sense?

Sure. And then lastly is there any potential volatility in noncontrolling interest given market volatility. Does that -- does market volatility impact noncontrolling expense at all?

I'm sorry. Does it impact?

The noncontrolling interest?

The noncontrolling interest in our equity positions?

In the lease corp.

Oh okay. I'm sorry. Hey John do you want to?

So we value the full net lease program and we report that value on the financials. And then we -- that's the value of the full net lease subsidiary. And then we put note that there is a noncontrolling interest, I think of approximately 10% and that would be noted in the footnote. So, what you see in the financials would be the 100% and then of that 100% NMFC owns 90% of that. Shiraz, correct me if that's wrong.

That's correct John. Yes.

Does that answer your question? Okay. Thank you.

Sure. Yes.

Thank you. The next question comes from Bryce Rowe with Hovde Group. Please proceed.

Great. Good morning. Thanks for taking the question here. Rob. Let's see -- interesting to see the action taken on the real estate portfolio. Curious if that's going to trigger some level of, let's call it special dividend that we might see either later this year or early next year. Just trying to get a feel for how you might try to manage those gains?

Yes. I mean it's a good question, obviously, we'll have to see how the rest of the year plays out and what if any losses we might have to offset against that. But that is something very much on our radar screen. I think we'll have a better sense of it as we get a little later in the year August and certainly on our November call. But it is something we're focused on and it's a great point.

Okay. That's helpful Rob. And then maybe one for Laura. Laura you made reference to increase in rates on -- the impact on your borrowers and how it kind of -- and how it relates to the size of the equity checks sponsors are writing. Could you kind of run through that again? And just help us think about that a little bit?

Sure. Yes. I think the statistics that we looked at was what does the 1% change in rates, how does that compare to the overall cash equity check that sponsors have in top 20 borrowers. We thought that it was a relevant statistic because fundamentally, if the business is performing well and obviously given the very attractive loan to values that John talked about in the market section, sponsors are not going to walk away in our view generally speaking of hundreds of millions or billions of dollars of cash equity over what is a relatively small dollar amount for 1%, 2% change in interest burden. So we thought that was a relevant analysis. So the statistic that I quoted was that for the top 20 borrowers, a 1% increase in rates represents on average about 1.5% of the overall sponsor cash equity check. So, it was kind of one component of the analysis and then we've obviously run some sensitivities on free cash flow coverage etcetera. And again, given the attractive cash flow characteristics of our borrowers we think we're relatively well positioned there as well.

Okay. Okay. And when you look at that coverage interest coverage, where does it sit maybe right now? And if you think about the analysis that you're running how does an increase in rates kind of impact that statistic?

Yes. So the weighted average interest coverage today is kind of a little bit above 2.5x across the portfolio overall. And we think that we continue again for most of the borrowers to be well covered as we took up rates 1%, 2%, 3%, etcetera.

Okay, all right. That's good information. I appreciate it. And then, maybe one more for me, as you think about being fully levered here and maybe increase in volatility, slowing some level of repayment activity. It sounds like you've got a decent pipeline behind you. Can you talk about, being able to stay fully levered, not go too much higher here from a leverage perspective and possibly deal with slowing level of repayment activity?

Yeah. Sure. So it's a balance, we're always striving to maintain. And in the end right where we will size our commitments, relative to our available resources right, which is a function of the repayments which are inherently volatile and difficult to predict. Although, we have some decent forward visibility because, we have multiple businesses in the portfolio that are currently under definitive agreements to be sold. So we do have some visibility on proceeds coming back to us in the near-term. And then, of course, that's supplemented by the ATM proceeds. So the sum of those two things is really what, -- where we size our commitments on. And we're just committed to managing within the leverage profile that we've established. So I think the good news from our perspective is, there's more than enough deal flow to cover any conceivable, repayment and ATM proceeds paradigm. So we're in an enviable position of being frankly long deal flow relative to capital and that allows us to continue to be incredibly selective. So I think we'll have no problem maintaining our fully leveraged position, but we do not anticipate it to exceed that. And the other part of the equation of course is the NAV, which drives the leverage calculation. And we obviously track that very much during the quarter particularly in times of high periods of volatility.

Hi Bryce, this is John. The only thing I'd add is, while we're fairly fully invested in NMFC which we consider our flagship credit fund, we do have multiple other funds that are private funds and are active in raising more capital. So, even if NMFC is fully invested, we remain open for business and open to support our clients in pursuing transactions that they want to pursue. So we feel comfortable holistically, just about our ability to be in business and be very relevant in the financing market.

Got it. Thank you all for your time this morning.

Yeah. Thank you.

Thank you. The next question comes from Ryan Lynch with KBW. Your line is open.

Hey, Ryan.

Hey, good morning. I had a couple of questions. First, you've gotten this complement in the past, but I really appreciate your guys' slide deck. And I also appreciate you guys, I think updating your rating system to kind of reflect kind of the environment we're in today with less focus on COVID and just more focus on overall business strength. So thanks for providing that update. I did have a question on some of your commentary on the net lease update. You obviously talked about selling some of those assets which have been incredibly successful, but I was interested to hear that you said a lot of those proceeds are going to go back into your core lending strategy. So to me, that feels like, you're pulling back a little bit from that strategy, which has been incredibly successful. Obviously you get high cash returns on it. You've exited those investments at very nice gains, and it seems like you may have some nice gains in the future. So, it would be helpful if you could just educate me on, why you guys are pulling back, because I'm just not as familiar with the whole net leasing space. I'm not sure, if rising rates has something to do with, the decision to kind of pull back some of the air, because again it's been so successful in the past?

Yeah. And it's a great question and you put your finger on it Ryan. It's a rates issue primarily. And as we think about -- we love this space and we have a very successful private fund dedicated to the space, where in the private fund you don't have to worry about beginning to end market volatility. I think in the public entity, when we came in, in the context of a very reasonable cap rate where we could as easily project a compression of cap rates, which is what did in fact happen and has helped us we do feel that we're not trying to necessarily predict rates, et cetera. But I think we feel there's certainly a lot more volatility around rates going forward. And we just don't want to introduce that degree of volatility into the public vehicle from a movement in NAV perspective. And so we opportunistically took a -- and then we feel a little bit better to be lucky than good category that we did it frankly before rates started moving, which we didn't predict. We didn't have our crystal ball last November, but we were able to enter into some very successful exits. And now as rates become increasingly volatile, we just -- we want to -- we're still going to have a decent sized net lease portfolio, but we just didn't want to necessarily double back down in that sector given the rate volatility. It's the only place right where we have any real duration and we feel comfortable with probably a little bit less duration rather than more duration given where we stand today and the uncertainty around the inflation and interest rate outlook from here.

And Ryan, the only thing I -- this is John. The only thing I'd add is, as Rob said, we do like the asset class. We are building our net lease capabilities overall at New Mountain. But Rob, I think really articulated the timing aspect that plays a role in our thinking. And we really do feel like at this moment in time being long floating rates in NMFC is really in the interest of our shareholders and that's what we're really inclined to do at this time.

That's helpful. Makes sense the explanation and nice timing on some of those exits that you guys have. Then the other question I had is, there's certainly a revaluation of purchase price and valuation of businesses today. You're certainly seeing in the public side, I know you focus on high-quality businesses, but in the public markets those businesses have been hit fairly hard as well and it primarily has to do with the higher valuations. I think high-quality profitable businesses like tech-focused businesses, enterprise businesses that you guys focus on like Adobe or Salesforce or ServiceNow these companies have -- the multiples have come down significantly. So I think that's going to trickle down into the private markets. There already has or is coming in the future. So I'd love to hear your commentary on what have you seen in the private market valuations for some of these high-growth defensive oriented businesses? This is obviously what you focus on at NMFC, but broader New Mountain Capital does that on the private equity side. And then what does it mean if you have a business that you've made a loan to, it's a really strong business performing really well, but multiples come down 20%, 30%, 40%. What does that mean for you as a lender? I know you've made investments with fairly low loan to values. That's been one of the benefits. But what does that mean when those multiples have come down for the ability for them to service debt and then ultimately actually repay you back years down the road?

Yes. It's another very good question and something we talk a lot about particularly as we look at new underwriting commitments, but just trying to take it in pieces. It's funny that the public markets, obviously, have adjusted very rapidly. And we have not yet seen that flow-through on our private equity side in a material way. We expect it to happen. Ultimately, those two markets can't stay radically disconnected for long periods of time, but right now the private markets continue to be quite ebullient. And in fact there have been some very high profile recently announced large transactions at quite interesting multiples in the -- from a public to private standpoint. But that said, I think, we have to assume that there's likely to be material multiple compression in the private market, which we frankly always assume, because that speaks to why we kind of scratch our head sometimes when a business is bought for 25 times EBITDA, but we feel pretty good lending at six or seven times, because that allows for that compression. If 25 times like you say it goes down by 20% or 30%, it's 18 times or it's 16 times, but that still leaves a very large cushion against our last dollar attachment point on our average dollar attachment point and our last dollar attachment point to allow for that ultimate repayment. It's not really a debt service issue because that's a function of cash flows, it's not asset values. But you're right, the repayment is critical, right? So, I think the basic answer to the question is, we always contemplate this as a possibility because we don't think like we've now swung to some super cheap environment. We were in a very fully priced environment, and maybe now we're repricing to a normalized environment and the pendulum may swing even further. So that's why, particularly on the higher multiple businesses, we're typically looking at loan to values in the 20s or 30s, which just gives that tremendous amount of cushion to deal with the environment that we're in today and that may extend, even more dramatically in the future we don't know.

Yes, that's helpful commentary and color. And obviously, it's a lot of unpredictability and tough to really see, how it all plays out but that's helpful. The other question I had was, your business is built on a lot of the defensively positioned characteristics of your borrowers. I'm just curious, have you gotten any feedback on, how your overall portfolio is dealing with and managing through the inflationary and labor pressures. Or is it really even too early to really know, because they just really started kind of late last year early this year. I'm sure you don't have financials, yet probably even for Q1, for a lot of these companies. So do you have a sense of that, yet, or is it just too early in the process to really know?

Sure. I can take that one, Ryan. This is John. In some cases, it's too early to know. And in some cases, we have great visibility. So in many cases, we've seen budgets. In many cases, we've seen Q1 results. And so we can start to get information, on how the companies are dealing with the various challenges in the economy right now. In general, I think we've been pretty pleased with our direct lending portfolio. And we like to talk a lot about, how we don't want to be -- we don't want to invest in companies that are slaves to their input costs, or have margins that if labor moves on them just a little bit, the businesses don't work. So when we think -- really long and hard about our core positions, we think they're really well set up in an environment of input inflation, labor inflation, et cetera. So in general, we feel good but it's certainly something that we're very mindful of and we're watching closely.

Yes. And the only thing, I'd add to that and Laura touched on this in her comments, but I think a critical component in an inflationary environment, is pricing power. And when we think about one of our core defensive growth hallmarks, is this concept of niche market dominance in a well-defined market where the company is a dominant player that typically, does lead to pricing power as well as having some type of technology or skill set that's not repeatable or competitive. So we have seen, as we start looking at budgets at Q1 numbers, monthly numbers, the ability to take price and keep up with what really is our key input, which is the wage side. And wage inflation is definitely there. But again we're seeing margin preservation through pricing power, which is a function of competitive positioning ultimately. So early days but I think we do feel -- we feel quite good about how the portfolio is positioned. Not to say, I'm sure there'll be some bumps along the road, but as a portfolio it's positioned really, really well.

Yes. Okay. Understood. John, Rob I appreciate the insights and dialogue today. Thank.

Yes. Thank you.

Thanks, Ryan

Operator, are there any other questions? Well, we're not sure what happened to our operator, but we don't see any questions on our board. So I think, we're going to go ahead and thank everybody as always, for their time and interest. And look forward to speaking with you all in the weeks and months ahead. So thank you.