Good day. And welcome to the New Mountain Finance Corporation First Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO. Please go ahead.

Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation’s first quarter 2023 Earnings Call. On the line here with me today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Robert Hamwee, Vice Chairman of NMFC; and Laura Holson, COO and Interim CFO of NMFC. Steve is going to make some introductory remarks, but before he does, I’d like to ask Laura 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 in our May 8th 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 that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time, I’d like to turn the call over to Steve Klinsky, NMFC’s Chairman, who will give some highlights beginning on page four of the slide presentation. Steve?

Thanks, Laura. It’s great to be able to address you all today, both as NMFC’s Chairman and as a major fellow shareholder. I believe we have some good news to report. Adjusted net investment income for the first quarter was $0.38 per share, more than covering our $0.32 dividend per share that was paid in cash on March 31st. Our earnings improved by $0.08 compared to Q1 of last year and $0.03 sequentially over Q4 of 2022. Our net asset value was $13.14 per share, a $0.12 or 0.9% increase compared to last quarter. The fair value increase is reflective of continued strong credit performance, combined with modestly tighter market spreads, which positively affected the valuation of our assets. We believe our loans are well positioned overall in defensive growth industries that we think are right in all times and particularly attractive in the challenging macro conditions of today. New Mountain’s private equity funds have never had a bankruptcy or missed an interest payment and the firm now manages over $37 billion of assets. Similarly, as shown on page 13 of the presentation, cumulatively NMFC has experienced no net realized default losses since inception. Our 8 basis points per year of net realized default loss have been more than offset by realized gains elsewhere. The rising rate environment continues to be a substantial positive for our quarterly earnings since we chiefly lend on floating rates. As page 12 of the presentation shows, we expect to continue to significantly out earn our $0.32 per share base dividend at current interest rates, if all other factors hold constant. Given our earnings of $0.38 per share this quarter, we will make our first variable supplemental dividend in the amount of $0.03 per share. This is equal to half of the Q1 quarterly earnings…

Thank you, Steve. Good morning again, everyone, and thank you for joining us today. I would like to offer some more details on our overall investment strategy, portfolio construction and performance metrics. Starting on page seven, we highlight our disciplined industry selection, which shows exposure to a diversified list of defensive non-cyclical sectors. These sectors and industry niches are characterized by durable growth drivers, predictable revenue streams, margin stability and great free cash flow conversion. We have successfully avoided cyclical, volatile and secularly challenged industries, which are certain to underperform in today’s more difficult economic landscape. Our strategy has been consistent over our 12 years as a public company and it allows us to operate with confidence in any economic environment. Page eight 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 avoiding losses and paying out 100% of excess income to our shareholders. Our current portfolio is exposed to companies in good 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 nine. The internal risk rating of our portfolio improved last quarter. We now have over 93% of our portfolio within our green risk rating, up from over 91% last quarter. Meanwhile, exposure to yellow, orange and red names decreased as a percentage of the portfolio. Overall in the quarter, we had $59 million of ratings improvement and only $16 million of rating decline. Our most challenged names within the orange and red categories represent only 2% of NMFC’s fair…

Thanks, John. The outlook for 2023 and the sponsor focused direct lending market continues to look positive. While deal flow is down overall, the direct lending market remains the primary financing market available for sponsors and there are pockets of activity where we have the opportunity to make loans at attractive yields while remaining very selective. We also continue to see good opportunities to make incremental loans to existing well-performing portfolio companies seeking to pursue accretive M&A. Yield structures remain more lender-friendly across the Board, although there is increasing bifurcation in the market based on perceived credit quality. Perhaps most importantly, sponsor equity contributions have remained high, consistently representing 60% to 80% of the enterprise value of the company. Page 16 presents an interest rate analysis that provides insight into the positive effect of increasing base rates on NMFC’s earnings. As a reminder, the NMFC loan portfolio is 89% floating rate and 11% fixed rate, while our liabilities are 56% fixed rate and 44% floating rate. Given this capital structure mix, we are long LIBOR/SOFR and thus have material positive exposure to increasing rates. We have previously discussed the lag in flow-through of base rates, particularly on the asset side. In Q1, we saw base rates closer to current levels, with an average base rate on our assets of 4.6% versus current SOFR of about 5% and about 10 basis points lower than the average rate on our liabilities. To the extent rates continue to rise, we expect to see further benefit to NII. If rates follow the projected LIBOR/SOFR curve and settle in the 3% to 3.5% area, we would still expect our net investment income to exceed our regular dividend as shown on the bottom chart, all else equal. Moving on to origination activity on page 17, in…

Thank you, Laura. As we look out over the course of 2023, we remain confident in the quality of our investment portfolio and believe we are on track to deliver great risk adjusted returns for our shareholders. We once again thank you for your support and look forward to maintaining an open and transparent dialogue with all of our stakeholders. I will now turn things back to the Operator to begin Q&A. Operator?

[Operator Instructions] At this time, we are showing no questions. I would like to turn the conference back over to John Kline for any closing remarks.

I think I see one question in the queue.

Oh! There is one question just popped up. I am going to announce Ryan Lynch with KBW. Please go ahead.

Hey. Good morning. Thanks for taking my questions. First 1 I had, I just want to make sure I heard this correctly. Did you say you received a $10 million distribution from one of your equity investments, did get that correctly? And then, if so, what investment was that from and how should we expect that to be accounted for in the second quarter?

Yeah. Yeah, you did hear that correctly, Ryan. So this was from our Haven position, which was an equity distribution, in addition to the payments that we have already received through Q1. This was one that we received on this past Friday for an additional $10 million and so that will show up as an equity distribution in Q2.

Okay. Will that show up as a, like, how would that be accounted for, will it be a realized gain, will it come through the dividend income line?

It will be a realized gain.

Okay. Perfect.

And Ryan, this is John. It’s worth noting that in round terms, the valuation we had for Q1 is the correct valuation. So there won’t be a change, but it’s a realized event, which is great.

Yeah. Yeah. Totally get it. And then I wanted to talk about Edmentum for a minute. That’s a near the education kind of content space. There’s been some headwinds from some of the publicly traded education software companies out there, most recognizable being Chegg, with some of the disruption that potentially artificial intelligence is causing to that business. I’d love if you could just provide a little bit of background maybe on the details of what Edmentum’s role is in the education space, and how, if any, do you think the potential for artificial intelligence could impact that business?

So, Ryan, Rob Hamwee, who’s with us today, sits on the Board. So I will turn that question to him.

Okay. Thanks, John. Hey, Ryan. It’s a good question. It’s actually something I actually addressed yesterday at our weekly staff meeting, because it is so topical and interesting. The headline is that, Edmentum is actually very well positioned to benefit from the trends in artificial intelligence. Obviously, there’s tremendous volatility around that statement, because how quickly things are moving. But Edmentum is a digitally native provider of curriculum and assessment primarily for the K-12 market. And because they are digitally native, they have been -- they are software first and they have been thinking about AI for a long time and their most recent product incorporated non-generative AI in a material way, and in the recent months, the company has been really front footed on incorporating a generative AI into the product set. And the truth is, when you think about Chegg, right, like, that’s a consumer-facing product, our products are enterprise facing, right? We sell to districts. So the districts, they don’t move as quickly as a 14-year-old kid in terms of embracing ChatGPT for assessment and curriculum. But they will get there. And so it’s funny, right now, what they are requesting from Edmentum is to accept the requesting anything and most aren’t, but they are requesting help on the plagiarism side and where they would able to provide that. But as we look out two years or three years, we do believe that the biggest driver is going to be the ability to evolve assessment beyond recitation effects and writing papers. And we believe there are ways to use our software to allow districts to provide an effective answer to that, as well as using our software to provide personalized tutors to children. So longwinded answer, but we are pretty excited about the ability of generative AI to be a tailwind for Edmentum going forward.

That’s helpful. And just a follow-up question on that, though. I mean, it sounds like, right now, it’s pretty well, I want to say, protected, but it’s in a pretty good spot. There are maybe some different headwinds facing Chegg, because it’s more directed to student. But do you think that, given how quickly things are changing with artificial intelligence in that space that, that could potentially, even though the business is doing fine today, that could weigh on the multiple on that business just as potential sponsors are uncertain of what the world in this space looks like a year or two from now, so they are going to want to have a pretty low multiple on those businesses going forward. Is that a concern of yours?

I mean it’s always a concern, Ryan. But I actually, I think, again, I think, given our positioning and the ability to articulate a multiyear road map as to how integrating AI into our product suite will actually drive revenue as opposed to revenue being negatively impacted by it. At the end of the day, right, multiples are a function of growth, and I do think we can articulate when we do go to exit this position as well -- not just articulated, but have actual real-world evidence of how AI is a potential tailwind for Edmentum. And again, no guarantees, right? Ryan, it’s a brand new development, but I do think we are very well positioned to be a beneficiary as opposed to a victim. And I think, ultimately, the ability to demonstrate that, both with actual evidence and a roadmap, is what will drive multiple up or down, depending on how successful we are.

Yeah. Okay. I appreciate that and I fully understand that a very fluid situation that changes by the day, but I do appreciate the comments on that. One question I had is, as you guys had a nice tailwind in operating ROEs from higher rates. I just wanted to know, do you guys have this thought process at all when you manage the business regarding leverage that, base rates have increased so much at this point and have been a big tailwind for operating ROEs, we are obviously heading into a more shakier credit period, more certain macroeconomic environment. I understand the deal environment is really good for the deals that are getting down, there’s not a lot of deals getting done. Would you ever consider lowering leverage levels from where you are today as we head into that environment? And given that base rates are still so high today that, that does a lot of the work for you for generating such a high operating ROE and then if there is a further dislocation in the marketplace and the Fed has to cut rates, at that point, obviously, rates will be working against your favorite, but you would have further leverage to deploy in probably a better environment. Do you think about the business at all like that if that counterbalance versus leverage and base rates?

Yeah. It’s something we talk about a lot, Ryan, and I am glad you brought it up. I think one thing that’s happened over the course of the last couple of quarters is, we just see no or very little or limited portfolio velocity. So to the extent we are entering into an environment where we start to get more repayments, and I think, it’s fair to say that we should get more repayments over the next 12 months than the last, that would be my bold prediction. But we could see using that money partially to deploy into new assets, but partially to delever. I think we would be very comfortable being inside of our range right now, as Laura mentioned, we are right at the high end of our range from a leverage perspective. So I think that could be a move that we could make. We probably won’t go to the low end of the range, but if we could be in the middle of the range over the course of the next couple of quarters, that would be a very comfortable place for us to be.

Okay. And then maybe I will just ask one more, because I don’t know if anybody else was in the queue. Obviously, the topic as you are right now is kind of the whole banking crisis, the many banking crisis going on. I don’t really believe that banks are probably a primary competitor in your space in the direct lending marketplace, although there’s indirect impact, they obviously hold CLO paper and those sort of things, which help fund the broadly syndicated loan market, which can be a competitive all that. I would just love to hear, if there is a sort of pullback in bank’s lending both large and regional banks, I’d love to just hear your opinion of what sort of impacts, if at all, it could have in your marketplace, both from the way you compete in, as well as even from your borrower standpoint or are you guys being able to obtain credit on your liability stack?

Sure. I mean, a big picture, I think, everyone in this room feels there’s a great place for regional banks. In the U.S. economy, they provide a lot of service to small and middle market businesses throughout the U.S. and that’s really valuable for our economy. When I think about the leverage finance market, particularly the sponsor-oriented leverage finance market, regional banks and even the larger banks from a balance sheet perspective aren’t big players and they haven’t been for a while. I think you might have touched on it, but clearly, a lot of the bigger banks are very supportive of -- over time, generally supportive of CLO structures and that can be really valuable for the syndicated market. But in general, I think, right now we are in a period of time, and I know you know this, but we are in a period of time where there’s just not a lot of competition for direct lenders, and generally speaking, we think that’s a good thing. If there are fresh new buyouts to be done by our sponsor clients, most of the deals that we see are really going to direct lenders. And there is, I think, a lot of capital being raised by direct lenders, and we think it’s going to be a great period of time. And as you know, in this vintage, upfront fees are better, leverage is lower and the documents are better. I would say, on the CLO market, as we sit here right now, that’s the biggest, I think, source of competition that we may see. It’s not a comeback from the regional banks or from the large banks, and right now, we are not seeing robust CLO formation. And so that just makes me even more confident that as deal flow comes in 2023, direct lenders will be a big part of that.

Okay. I appreciate those comment. That’s all for me today.

The next question comes from Erik Zwick with Hovde Group. Please go ahead.

Thanks. Good morning. I wanted to first just ask about the pipeline. I am curious if you could provide any commentary in terms of the current mix in terms of the industries that you are seeing to be maybe more prominent and whether there’s any that you are staying away from now just because it appears that maybe the short- or mid-term prospects are not of attractive today given the current uncertainty over the economic environment today?

We see deal -- our deal pipeline picking up slowly. As I mentioned in my earlier comments, it has been -- over the last 12 months, it’s been a little bit depressed. But based on what we see across multiple businesses here at New Mountain, we do think it’s getting better. It continues to be a good environment for add-on investments. A lot of our best companies are seeing this current environment is one where they can buy -- do M&A at better prices and so we look to support the best businesses within our portfolio that want to do that. I would say we are starting to see -- we have seen good activity in software. I do expect that to continue. And we have also seen some interesting deals recently in the healthcare space, particularly healthcare technology that’s a little real-time insight into our portfolio. In terms of industries we stay away from, really, we -- that hasn’t really changed. When we think about our defensive growth philosophy, I think, it’s really tailor made for environments like today where we are really focused on buying great businesses in the best sectors that are sponsor backed. And these businesses have revenue drivers, they have margin stability and they have growth even in this sort of environment. And so we just want to do -- we want to focus as much as ever on the sectors that we have defined as being attractive and -- but it also makes us feel very good about our existing portfolio. We don’t have a lot of bad industries that are making us nervous in our existing portfolio.

That’s helpful. And then just a second one for me. In terms of the upcoming debt maturities, I think, $15 million in June and $117 million in August. I think you previously mentioned that you have sufficient capacity in the revolver to pay that down. But you also raised $60 million of notes in March and then mentioned some repayments coming through. It looks like cash position was maybe actually down quarter-over-quarter. So just curious is it still kind of the intent to use the revolver to pay down or to kind of repay those maturities as they come due or has something changed since your last comments?

Yeah. No. I think you summarized it well. So in 2022, we obviously raised the chunk of convertible notes. We upsized that this past quarter as you alluded to. So between kind of the capital from that, as well as just availability on our revolving lines, we feel pretty comfortable we are in a good position to address the upcoming maturities.

That’s helpful. And then just maybe as a bit of a follow-on to that last question. It seems like the revolvers are typically funded by banks and on vacation that, the banks are getting a little bit tighter on their willingness to lend and if we go into an environment where maybe investors are a little bit more skittish if we go into a more severe economic environment. Just curious about your thoughts kind of mid to longer term if we were to go into a protracted recession, your thoughts about funding the business over that term?

Yeah. I mean, I think, historically, we have had very strong relationships with a couple of the banks, Wells Fargo, Deutsche Bank, et cetera. And we feel pretty good that we are -- we have termed out financing and you can see the maturities on the revolving lines. But between that and the access to the capital markets more broadly, we have -- obviously, we have our investment-grade credit ratings. We feel pretty good that we will be in a reasonably good position to access the markets as need be. But it’s definitely something that we are watching and keeping a close eye on and just making sure we are being very proactive about just keeping the dialogue ongoing with the banks and just keeping our strong relationships there.

I appreciate the color there, Laura. Thanks for taking my questions today.

Next question comes from Bryce Rowe with B. Riley. Please go ahead.

Thank you. Good morning. I wanted to maybe touch on the topic of monetization of certain equity investments, obviously, you have had some success here with Haven recently. But curious, of those that are listed on page 18, how do you guys handicap which ones are better candidates versus not? And I kind of asked that question thinking about UniTek and Permian having improved as much as they have in the last 12 months to 18 months. I am just kind of curious what gets them to the point where they are ready for monetization or you would rather just continue to hold them as equity investments?

Sure. Well, the first thing I would note is that, we have significant control over the monetization of UniTek, Benevis, Permian. It meant it’s worth noting we are a minority and we are in with others. And I would say that, while it’s not a perfect M&A environment, I think, sponsors do want to -- and other buyers, frankly, are getting eager to buy good, well-performing assets. I think we mentioned that UniTek and Permian were two on this list that are growing nicely and have some really compelling structurally advantageous tailwinds and so we are -- we think that among this list, there could be another name on this list that over the medium term we could seek to exit.

That’s great, John. I appreciate that. And then maybe a bit of a follow-up. You have the categorization green, yellow, orange, red. And I think, for the first time, perhaps, in the deck, you have shown where each bucket is marked relative to par and that’s kind of an interesting thing to think about. Of the green bucket market, 94% of par, is that primarily just spread changes that we have seen over the last 12 months to 18 months that have put it at that level of a mark?

Yeah. That’s right. So, obviously, every quarter we are comparing the marks or the spreads of the underlying assets, right, to comparable syndicated loans and doing kind of a fulsome valuation process. So as you alluded to, just as spreads have widened a little bit in the market over the last 12 or so months, some of these assets, just even though they are well performing and we think they are ultimately still recoverable at par, they do just get marked down from kind of a technical perspective. And I think John touched on the statistic that if you did mark all the green names at par, book value would be kind of in excess of where we are showing the portfolio today.

Yeah. Got it. Thanks, Laura.

Sorry, the only other comment I want to make is and I made this comment, but I want to reemphasize it is that, when names do go to yellow, orange and red, we reflect that underperformance in the mark, which I think is -- we want to make sure our shareholders are very aware of that and I think it’s healthy for our book, and we want to be transparent about how we handle that fair value exercise.

Yeah. Great. I appreciate the comments.

Thanks, Bryce

This concludes our question-and-answer session. I would like to turn the conference back over to John Kline for any closing…

Thank you for joining us on our call today and we look forward to speaking to you all again next quarter.

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