New Mountain Finance Corporation 8.250% Notes due 2028 (NMFCZ) Q3 2012 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the New Mountain Finance Corporation Third Quarter 2012 Earnings Call and Webcast. [Operator Instructions] At this time, I would like to turn your conference call over to Mr. Rob Hamwee, CEO. Mr. Hamwee, please go ahead.

Great. Thank you, and good morning, everyone. With me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; and Adam Weinstein, CFO of NMFC. Steve is going to make some introductory remarks. But before he does, I'd like to ask Adam to make some important statements regarding today's call.

Thank you, Rob. I would like to advise everyone that today's call and webcast is 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 earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our November 6, 2012, 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 these statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law. Any references to New Mountain Capital or New Mountain are referring to New Mountain Capital, LLC, or its affiliates, and may be referring to our investment advisor, New Mountain Finance Advisers BDC, LLC, where appropriate. To obtain copies of our last SEC -- latest SEC filings and to access the slide presentation that we'll be referencing throughout this call, please visit our website at www.newmountainfinance.com or call us at (212) 720-0300. At this time, I'd like to turn the call over to Steve Klinsky, the Chairman of New Mountain Finance Corporation, who will give some highlights beginning on Page 4 of the slide presentation. Steve?

Thanks, everybody. Before turning the call back over to Rob and Adam, I wanted to welcome you all to New Mountain Finance Corporation's Third Quarter Earnings Call for 2012. Rob and Adam will go through the details, but I am pleased to present the highlights of another strong quarter for New Mountain Finance. New Mountain Finance's adjusted net investment income for the quarter ended September 30, 2012, is $0.32 per share, consistent with our previously announced guidance of $0.31 to $0.33 per share. The company's book value on September 30 was $14.10 per share, an increase of $0.27 per share, primarily reflecting stronger credit markets. We are also able to announce our regular dividend for the quarter -- the current quarter ending December 31, 2012. The regular dividend will again be $0.34 per share, consistent with our previously communicated view that we have reached a fully ramped steady-state dividend level. The credit quality of New Mountain Finance's loan portfolio continues to be strong with, once again, no new issuers placed on nonaccrual. As a reminder, we built our models based on a 3% assumed annual default rate and a 1% annual loss assumption from the date of the IPO. In fact, we have had only 1 issuer default since October 2008, when the debt effort began, and it represented just 0.7% of the cost basis of our existing portfolio and less than 0.4% of cumulative investments made to date. New Mountain Finance's pace of new investments continues to be robust. The company invested $173 million in gross originations in Q3, largely deploying the proceeds from July's capital raise. As discussed on our last call, earlier in the quarter, we raised approximately $85 million of new equity capital and increased our credit facilities by $50 million. In September, we continue to increase the company's float by selling into the market 4 million shares previously owned by New Mountain's private equity fund. Just to remind everyone, we, as management, were significant buyers personally in the IPO, and we sold none of those shares in these offerings. Targeted yields on new investments continue to be consistent with our previously communicated expectations. Our portfolio continues to emphasize positions in recession-resistant acyclical industries pursuant to New Mountain's overall strength and strategy. We continue to be very pleased with the progress of New Mountain Finance to date, and we are pleased to address you as fellow shareholders, as well as management. With that, let me turn the call over to Rob Hamwee, New Mountain Finance Corporation's Chief Executive Officer.

Thank you, Steve. As always, I'd like to start with a brief review of NMFC and our strategy. As outlined on Page 5 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm with approximately $9 billion of assets under management and over 90 staff members, including nearly 60 investment professionals. NMFC takes New Mountain's approach to private equity and applies it to corporate credit with the consistent focus on defensive growth business models and extensive fundamental research. Some of the key hallmarks of defensive growth business models include acyclicality, sustainable secular growth drivers, high barriers to competitive entry, niche market dominance, repetitive revenue, variable cost structure and strong free cash flow. With this historically successful business model focus approach in mind, our mandate since the inception of New Mountain's debt investment program in 2008, has been to target high-quality businesses that demonstrate most or all of the defensive growth attributes that are important to us and to do so within industries that are already well researched by 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 will allow us to generate attractive risk-adjusted rates of return plus [ph] changing cycles in market conditions. To achieve our mandate, we utilized the existing New Mountain investment team as our primary underwriting resource. Turning to Page 6. You can see our total return performance from our IPO in May 2011 to November 5, 2012. We continue to be very pleased with both our absolute and relative return on performance. As outlined on Page 7, credit markets have been very strong since our last call. QE3 and the promise of extraordinarily low risk-free rates for an extended period of time have served to compress spreads and corporate credit. Additionally, fund flows into credit across a broad spectrum of products have provided support for the market. Recent history has shown that market conditions can change quickly, so I'd like to reemphasize that New Mountain Capital and accordingly, NMFC, have always been proactively focused on defensive, acyclical business models, and that our financing is termed out into late 2016 and not subject to traditional mark-to-market marginals. Our single-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 on the BDC space. If you refer to Page 8, we once again lay out the cost basis of our investments, both the current 9/30/12 portfolio and our cumulative investment since the inception of our credit business in 2008, and then show what, if anything, has migrated down the performance ladder. We have had one SLF asset, with a cost of $14.6 million and a fair market value of $13.3 million, migrate from an internal rating of 2 to an internal rating of 3 in the current quarter, indicating operating performance below our expectations but no near or medium-term expectations for nonaccrual. We continue to have only one portfolio company on nonaccrual, representing a cost, 0.7% of our total portfolio, and under 0.2% of fair market value. Over 98% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale. Pages 9 and 10 show for the operating company and SLF, respectively, leverage multiples for all of our material holdings when we entered an investment and leverage levels for the same investment as of the end of the current quarter. 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 and marks. As you can see by looking at the 2 tables, leverage multiples are in almost all cases trending in the right direction, and even more importantly, no single company on either page has had a material increase in leverage multiple with the exception of 1 loan in the SLF, where leverage has increased from 3.2x to 4.3x. Even in this instance, we do not believe the enterprise value cushion we originally underwrote has deteriorated in a meaningful way. The weighted average variances have been broadly consistent with previous quarters at positive 0.24 for OpCo and positive 0.2 for the SLF. On Page 11, we show a table depicting how NMFC's publicly traded float has nearly doubled, based on the 2 equity offerings we completed in the quarter. We now have 21 million shares in our float, and liquidity and daily trading volume have increased commensurately. We have added this chart on Page 12 to help better 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 cover approximately 100% of our cumulative regular dividend out of NII. On the bottom of the page, we focused on below the line items. First, we looked at realized gains and realized credit and other losses. While you can see the individual quarterly data, I draw your attention to the number highlighted in blue, which shows cumulative net realized gains of $9.9 million since our IPO. Next, we look at unrealized appreciation and depreciation. As you can see highlighted in gray, we have cumulative net unrealized appreciation of $6.8 million. For clarity, our mark-to-market loss on our one defaulted investment, ATI, of $4.4 million is reflected in this number along with various other mark-to-market gains and losses reflected in our schedule of investments. Finally, we combine realized with unrealized depreciation [ph] to derive the final line in the table, which shows the current cumulative net realized and unrealized appreciation of $16.7 million. The point here is to show that on both a realized and combined realized/unrealized basis, we have offset any credit losses or impairments with below-the-line gains elsewhere in the portfolio. While market-driven volatility around unrealized appreciation-depreciation may cause the bottom-line number to vary, over time, true economic gains and losses will accumulate in the realized bucket, where we will strive to retain a positive balance. Moving on to portfolio activity. Q3 originations continue to demonstrate our strong sourcing capabilities. Specifically, as seen on Page 13, in Q3, we made investments of greater than $7.5 million in 9 portfolio companies and had total gross originations of $173 million. Repayments totaled $64 million and opportunistic sales were $1 million for total net originations less sales of $109 million. All the investments, in keeping with our strategy, are in industries and businesses that are well known to us through our historical private equity activity. For instance, Paradigm is a classic enterprise software business, and an area where New Mountain has nearly a decade of successful private equity investing across multiple platforms. Enterprise software, generally, and Paradigm, in particular, is characterized by many of the attributes we prize: Highly recurring revenue with 97% annual renewal rates, niche market dominance in a 3-player market, very high free cash flow, given limited CapEx and positive working capital generation, and limited cyclicality given the mission-critical nature of the product and its deeply embedded position. Another good example is our investment in Six3 Systems, a mid-cap federal services provider of the highest-end intelligence, surveillance and reconnaissance support to the intel and defense communities. One of our private equity portfolio companies competes in a similar space as Six3, and actually looked at potentially purchasing the company a few years back. Our federal services team maintains deep expertise in this area, including intimate knowledge of the company's management quality and operational capabilities. Pages 14 and 15 show the impact of Q3 investment in disposition activity on asset type and yields, respectively. Asset net origination type was modestly skewed towards first lien investments. Portfolio yields, reflecting this mix shift as well as a modest compression in asset level spreads, decreased from 10.5% to 10.2%. Although as we will see on the next page, asset level yields in Q4 to date are consistently higher than 10.2%. Moving on to Page 16. We continue to enjoy a robust pace of investment activity in the early part of the fourth quarter. In a market characterized by tightening yields and increasing deal flow, our integration with a broader New Mountain platform allows us to focus on opportunities that we believe to be high-quality businesses and where we already have great insights into how those businesses are likely to perform based on our industry research. 4 of the 5 deals shown on Page 16 are businesses that we studied extensively for our private equity fund, giving us great conviction in our credit selection in a somewhat heated market environment. Gross originations in the fourth quarter to date are already $124 million. After repayments in sales, net originations are $68 million. This puts us back into a fully invested and fully leveraged position, as shown in detail on Page 17. We believe that anticipated repayments for the rest of the year, along with proceeds from selected asset sales to optimize portfolio construction, would be sufficient to fund our investment pipeline through year end. In terms of the portfolio review on Page 18, the key statistics as of 9/30 was very similar to 6/30. As always, we maintain a portfolio comprised of companies in defensive growth industries like healthcare, education, services and software, that we believe will outperform in an increasingly uncertain economic environment. Finally, as illustrated on Page 19, we have a broadly diversified portfolio, with our largest investment at 5.3% of fair value, and the top 15 investments accounting for 49% of fair value, up slightly from 47% in Q2. With that, I will now turn it over to our CFO, Adam Weinstein, to discuss the financial statements and key financial metrics. Adam?

Thank you, Rob. For more details on our financial results and commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Before we turn to Slide 20, I want to mention that we've included a structured chart as Appendix A in the presentation. And so similar to our last call, I will only spend a moment reviewing our structure as a brief refresher and also how our structure was impacted by the share issuance and share sales in the current quarter. Our structure was set up similar to an upreach [ph] structure, whereby the public company, PubCo, has no direct operations of its own, and its sole asset is its units of our operating business, OpCo. Today, the other units of OpCo are held by a private BDC, owned by New Mountain's private equity fund, AIV Holdings. During the current quarter, and as a result of: a, the primary share issuance of PubCo shares in July of 5,926,802 shares; b, AIV Holdings' secondary sale of 4 million shares in September; and, c, 66,142 shares issued in our DRIP to PubCo shareholders, the ownership has shifted from PubCo owning 34.6% and AIV Holdings owning 65.4% at June 30 to PubCo and therefore, the public shareholders, now owning 56.1% and AIV Holdings owning 43.9% of OpCo at September 30. Our structure is a master-feeder, whereby the financial statements for OpCo flow to PubCo and AIV Holdings per rata based on their respective ownership. All discussion throughout this call and presentation is focused on OpCo and its operations. Additionally, OpCo owns the equity of a nonrecourse vehicle, the SLF. This vehicle originates lower yielding's first lien loans, but with greater leverage at 2:1. For GAAP, asset coverage and presentation purposes, we consolidate this SLF vehicle into the operations of OpCo. Now I'd like to turn your attention to Slide 20. The OpCo and SLF portfolios have approximately $858.9 million in investments at fair value in September 30, with approximately $12.7 million of cash and about $15.2 million of other assets, which includes approximately $8.6 million of interest and dividend receivable, much of which we received in October, November. $5.3 million of deferred credit facility costs that get amortized over the life of our credit facilities and represents an increase from last quarter due to the $25 million increase on each of our 2 credit facilities in connection with our primary share issuance in July and $1.3 million of other assets, including deferred offering costs, receivables from an affiliate and other prepaid expenses and assets. We had total debt outstanding of about $335.7 million on our 2 credit facilities, which is made up of $135.7 million on our OpCo credit facility, which had $185 million of capacity at 9/30, and $200 million on our SLF credit facility, which was at full capacity at 9/30. We had about $30.7 million of other liabilities, which is made up of about $19.8 million of outstanding commitments on one investment, which we already closed in early October, $9.3 million of payables to affiliates from management and incentive fees, $600,000 of interest payable and $1 million of vendor payables for various expenses. This all gets us to a net asset value of $520.4 million or $14.10 per share at September 30. This compares to a NAV per share of $13.83 at June 30, and $13.60 per share at December 31, 2011. Our consolidated debt-to-equity ratio at 9/30 is 0.65:1. As previously shown on Page 17, pro forma for quarter-to-date and expected activity were at 0.74:1, which is at the high end of our targeted debt-to-equity ratio. As a reminder, the OpCo credit facility allows us advance rates of 25%, 45% or 67%, depending on the type of the underlying asset at a rate of LIBOR plus 2.75%. And the SLF facility allows us advance rates of 67% on first lien assets at the rate of LIBOR plus 2%. Both facilities do not mature until October 2016. Importantly, our credit facilities' covenants are generally tied to the operating performance of the underlying businesses rather than the marks of our investments at any given time. On Slide 21, we show our consolidated income statement for the full quarter at the OpCo level. As we have discussed in the past, the main reason for the creation of our up [ph] BDC structure was to make sure that the built-in gains that were in the portfolio at the time of the IPO are only allocated to AIV Holdings, therefore not burdening the public shareholders with any of those taxable gains or increased accretion on the predecessor investments over time. Since we were not able to step up the assets for GAAP, our income statement will generally show greater accretion than if a step up had occurred until the predecessor assets are sold, mature or are repaid. Therefore, in this slide, we show the actual income statement in the left column, and then adjust the income statement to reflect it as if all assets were stepped up to fair value at the IPO in the right column. We used the adjusted income statement to judge our performance of the portfolio during the period, and it is also the basis for calculating our dividend and incentive fees. As has historically been the case, our interest income is predominantly paid in cash. Specifically, we had $20.6 million of interest income, which breaks out as follows. Cash interest income of $18.1 million, PIK income of about $600,000, net amortization of purchased premiums and discounts and origination fees of about $700,000, and about $1.2 million of prepayment fees on 4 investments that repaid above par during the quarter. Dividend and other income of $390,000 was made up of dividends on warrants owned, delayed compensation, revolver fees and consentment and amendment fees. Our part 1 incentive fee was approximately $3 million, reflecting higher adjusted preincentive NII than the previous quarter, and our management fee was approximately $2.8 million. Our interest expense of $2.4 million is broken out to represent about $1.9 million of actual interest expense on our borrowings, $230,000 of nonusage and custodian fees, and about $300,000 of amortization of our upfront borrowing costs. We have capped the amount of expense reimbursable to the administrator, for our second year as a public company, at $3.5 million. And so for this quarter, our combined amount of professional fees, accounting expenses and other expenses are $875,000 in total. These amounts relate to legal costs, audit and tax, board costs, other admin expenses and indirect expenses reimbursable under our administration agreement. The bottom line for the third quarter is adjusted net investment income of $11.9 million or $0.32 per share. This is in line with the adjusted NII range discussed on our August 9, 2012, call of between $0.31 and $0.33 per share. As a reminder, this updated range was provided in the context of our July capital raise, which had a modestly dilutive impact on our quarterly adjusted NII. We are pleased that we were able to deploy the proceeds in such a way as to limit the dilutive impact of the offering by only affecting our NII by $0.02 per share this quarter. Moving to below the adjusted NII line. We had adjusted net realized gains of $1.4 million as a result of refinancings and sales at prices above our adjusted cost basis. The largest part of this amount relates to a realized gain on the repayment of LVI Services. Unrealized gains of $11.5 million were driven in large part by write-ups resulting from continued performance of the underlying portfolio and broader market appreciation. Additionally, we accrued an additional $2.6 million for our part 2 incentive fee in the third quarter as, under GAAP, we are required to accrue incentive fees, assuming a hypothetical liquidation of the entire portfolio at the balance sheet date. However, if September 30 was the end of the calendar year, we would not actually pay any part 2 incentive fee, as cumulative net-adjusted realized gains did not exceed cumulative adjusted unrealized depreciation. In total for the quarter ended September 30, we had a net increase in capital resulting from operations of $22.2 million. Now we will turn your attention to Slide 22. As previously -- as briefly discussed earlier, the $11.9 million of actual adjusted NII for the third quarter fell within the range we discussed on our Q2 earnings call of $11.2 million to $12.3 million, or $0.31 to $0.33 per share. We paid a $0.34 per share dividend, which we believe to be our fully ramped run rate adjusted NII, excluding the impact of capital raises. Therefore, we expect to fall within the range of $12 million to $13.1 million of adjusted NII in the fourth quarter or $0.33 to $0.35 per share, although this is simply an estimate and could materially change. Given our belief that our fully ramped run rate dividend will continue to fall in the previously declared expected range of $0.33 to $0.35 per share, our board has declared a Q4 dividend of $0.34 per share in line with the previous 2 quarters. The Q4 quarterly dividend of $0.34 per share will be paid on December 28, 2012, for holders of record on December 14. At this time, I would like to turn the call back over to Rob.

Thanks, Adam. While, once again, we do not plan to give explicit forward guidance, 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 run rate NII falls between $0.33 and $0.35 per share in line with our current expectations. In closing, I would just like to say that we continue to be extremely pleased with our performance [Technical Difficulty]

Ladies and gentlemen, the speakers have been reconnected to the conference.

Thanks, Jamie. Apologies, everyone, still suffering the post-Sandy hangover. But in any event, we're just finishing up. In closing, I would just like to say that we continue to be extremely pleased with our performance to date. Most importantly, from a credit perspective, our portfolio continues to be very 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?

[Operator Instructions] And our first question comes from Ryan Lynch from Stifel, Nicolaus.

This quarter, you guys had your strongest quarter in terms of originations, and it looks like that's going to have an equally strong quarter in -- in fourth quarter from what you guys have updated us with. We've kind of heard from market participants the market's kind of had some tightening spread and getting a little more issuer-friendly. Can you guys kind of talk about your -- why you guys put so much capital work and are putting so much capital work in Q4?

Yes. I mean, I think it's -- as I've touched on in the comments, we're seeing a tremendous amount of deal flow which allows us to be very, very highly selective. And really, this is where the affiliation and being part of the New Mountain platform is so important, that we're still seeing businesses that we really know and that, we, based on that knowledge, feel very, very comfortable investing in and having a strong and informed view on the prospects of those businesses. Now are spreads down 50, 75 bps? They are, but we're still able on an absolute basis to get spreads that make sense for us and allow us to support the net income levels we're looking at and really not take on, or we believe, not take on any incremental credit risk. So we're happy with that. And again, I don't think it would be possible if we weren't part of New Mountain and weren't been -- hadn't seen these businesses from a private equity perspective and have that intimate knowledge. But that's really allowed us, I think, to maybe have a differentiated view as to the ability to deploy capital, frankly.

Then also in Q3, it looks like you guys primarily originated first-lien loans. And then in Q4, quarter-to-date, all your originations have been in second-lien loans. Is there something you guys are seeing on the second lien going forward which is giving you better risk-adjusted returns? Or can you kind of talk about that?

I think it's really a combination of 2 things. I think one is, as you know, we strive to maintain a balance. We've always talked about being ultimately 50-50, but we've always skewed a little more heavily toward 60-40, which is where we were at prior to the start of the fourth quarter, in terms of first lien, second lien -- first-lien, nonfirst-lien mix. And part of that is the way we utilize the SLF. And then that sort of capacity gets stilled up, we're more of a sell-and-replace mode vis-a-vis first lien. So we used some of the new capital to allocate in that way in the third quarter. As we've entered the fourth quarter, we're pretty well stilled [ph] up there. And again, we're more in a sale-and-replace mode. And then the other thing, again, is the market has moved, as we talked about. And so there's frankly less compelling spread opportunities available in first-lien loan land. But again, as I've stated previously, we are seeing the attractive opportunities on an absolute basis in the second-lien arena. So we're really -- we don't set out with a quota or any perceived view that, hey, we're going to originate x million dollars of any specific type of loan. We really are more focused on, where can you find absolute value? And where we do, that's where we execute.

Okay. And then one last question. Your investment in MACH Gen was ringed down a little bit further in Q3 and is currently marked at 67% of your cost basis. Is there any update you can give us on how that business is performing?

Yes. I mean, that's a little bit artificial, right, because MACH Gen did a couple of tenders recently at $0.90. So obviously, the -- if it was $0.75 and you sold 1/4 of your position into the tender at $0.90, the stub gets an implied value of $0.65 or what have you. So when you factor in the $0.90 pieces that we've gotten through the 2 tenders, MACH Gen's actually up modestly from our purchase and from recent marks. So I would say, that asset really is, and I can't get too much into because of confidentiality, but we're very comfortable with that asset. And at the same time, we've made it a smaller position through the tenders, as well as actually won its open market sale earlier on.

[Operator Instructions] And our next question comes from J.T. Rogers from Janney Capital Markets.

I had a -- just a question on what you all's view is on keeping the base [ph] of capacity available, if we run into, I guess, the talk now is fiscal cliff issues in January. Just having dry powder available to take advantage of any mispricing that might appear versus keeping fully levered and which obviously is driving consistently strong NII?

Yes, it's an interesting trade-off and one we talk a lot about. And I guess, the way we analyze it is really 2 things, J.T. I think, on one end, we have just a hard time viewing ourselves as sort of macro guys and trying to outguess the market. Because things, they get worse, but they can also get better, right? We've all been surprised about that, and spreads could tighten that much more. So in that sense, we view it as our mission is to be invested in such a way that we are, with the least risk possible, able to generate the net income to support the dividend that people are relying on, as opposed to trying to get an extra score by guessing the direction of the market and keeping material dry powder to execute on that if that were to happen. That being said, we do have reasonable visibility into some material repayments that are coming in, based on some M&A processes we're aware of at our underlying portfolio of companies. So to some degree, we're a little bit hedged in that we have pretty high expectations, that even if we do nothing, that we will be net long some meaningful amounts of cash early in the first quarter and we'll deploy that. That gives us an opportunity to execute on some optionality that may come up in the -- if that market were to go in that direction.

Okay, great. That makes a lot of sense. And just -- so honing up, I figured I'd just say, you're not macro investors, any view on the sort of -- on the macro environment, at least from what you're seeing from deals you're looking at and the companies in the portfolio?

Yes. I mean, while we don't act on it, it doesn't mean we don't have opinions, and we do. I think our perspective is that we're very cautious, frankly, and that we are seeing fine results out of our portfolio of companies, as we've shown in the data. But when we talk to the management teams, they're cautious, they're concerned. Obviously, we just had an election yesterday, and the implications of that are not necessarily pro-business, but we will see what comes out of that. And we're concerned that the policies of the Fed are perhaps propping up an economy that otherwise may be not as strong. So we're -- that's why we rely frankly on the acyclicality, the defensive growth nature of the underlying businesses. Because we start from a position as a firm of being generally concerned about the world. And I think that concern is just heightened, based on the world as it exists today and some of the specific comments we're hearing out of our management team.

Okay, great. That's really helpful. In terms of the portfolio companies that you're exiting and you have some visibility into, can you give us a sense of what the yield is on those companies that you're exiting, going in the fourth quarter that you do see an exit from?

Yes. I mean, there's a handful of them. The biggest one is actually one of our lowest-yielding assets. So it would be -- it's a nice one to get to redeploy. Around -- beyond that, it's sort of a mixed bag. There's one that is -- it's that slide where we showed that 10.2% portfolio level yield, asset level yield. There's one that's a few hundred bps ahead of that, and then there's one that's sort of right in line with that. But the biggest one is actually a couple of hundred bps below that. So we actually think that on the margin, the money we'd expect to get back will have a blended yield that is lower than the 10.2% yield. And as you can see, even in this somewhat compressed-spread environment, the money we're putting out in the fourth quarter is higher than the 10.2% yield. So we hope to kind of slowly rebuild that number. Although we peaked, as you can see on Page 18, at the 10.5%, which is a very good level for us. So we're comfortable with anywhere in the low to mid-10s.

Okay, great. And then just for the portfolio that you're exiting, I think you -- so it's a little bit lower than your current blended yield. Is it materially below enough that you would expect to see a, maybe, a meaningful pickup in rated average yield? Or is it going to be small, on the margin?

Yes, it's on the margin. And obviously, the other side of the equation is how the capital gets redeployed. Again, our best guide for that is what we've -- the data points we showed you for Q4 activity to date. But it's -- this is all around the margin, given that the portfolio has now grown to $900 million. So even a -- if you look at our concentration, even selling one of our bigger assets generates $30 million. So it doesn't move the needle dramatically.

Okay, great. And just one more question, if I could. Any view as to the M&A environment?

Yes, the M&A environment is incredibly robust. I mean, we're -- we know that from our private equity activities, and we know that from the calls we're getting in terms of looking at deals across all sizes. So this is going to be a very busy quarter for everybody, I believe, in terms of M&A. And I think, the first quarter is hard to predict given, again, some of the things we're all staring at right now. But I know there's a lot of activity trying to get done this quarter.

[Operator Instructions] Our next question comes from Jonathan Bock from Wells Fargo.

Rob, first question, and I know you alluded a little bit to it, saying that it's a robust environment. But portfolio velocity and how we can perhaps model and look at potential loans that will be coming back at you. And more importantly, what the outlook on those loans has been from a prepayment fee and/or a onetime fee standpoint, maybe boost in the NII line a little bit?

Yes, sure. So the rule of thumb I was using in this environment -- so assuming the environment doesn't change dramatically one way or the other, I sort of just use kind of a 3-year weighted average life assumption. So we have a $900 million portfolio entering 2013. I would expect over the course of 2013 to get $300 million of that paid back. Could it be $200 million? Could it be $400 million? Absolutely. But that's sort of, I think, been a pretty good rule of thumb for us. And then there are clearly fees associated with those prepayments at times, not always, but often times. I know we disclosed the exact prepayments we got in this -- fees from prepayments in this quarter. I don't know if you have that number.

Yes, yes. So it was really $1.1 million, which is exactly the same as last quarter. It was $1.1 million, roughly the same exact number.

I think that's a good number to think about going forward. Again, those things tend to be a little lumpy. Could be 700K, could be $1.4 million. But it's that magnitude, it's not -- it's unlikely to be $3 million, and it's unlikely to be 0. So we, I think, consistently benefit a little bit from that. And obviously, the flip side is we need to redeploy that capital in assets we like just as much as the assets that we're -- that are being monetized.

Okay, great. And also, Rob, your comments on second lien were very interesting, and that you're seeing a good risk adjusted returns there relative to the senior asset class. Maybe a few technical questions. First, what is that average leverage level you're looking at in those types of investments? How has that trended recently? And more importantly, would the majority of those second-lien investments also be affiliated with the private equity firm that would be taking capital off the table in the form of a dividend recap?

Yes. And let me just -- I'll address those questions. But let me just be clear, we're being very selective in the second-lien market. The majority, the vast majority of deals, we don't think are interesting. And we think there is significant stretching being done in that market. So we're investing in the deals we're investing in, because we know those companies intimately and have great confidence in our ability to predict their future operating prospects. So I'm not saying at all that, oh, the second-lien market, as a market, is a compelling buy sitting here today. I think we've been -- it just so happens that because of our being part of the New Mountain platform, we've been able to see [ph] things that we have great insight into. So that is just a overall caveat just to make sure we're clear about that. So to your specific question, the leverage multiple is a kind of custom suit, right? So if you look at the things we've done, and I can't -- just from confidentiality match leverage multiples to deal. But to give you a range, we've got second liens as low as low to mid-4s, and then as high as high 6s. So as I've always said, I'd rather be high 6s on a business I think is worth 12x, than low 4s on a business I think is worth 6x. We're ultimately underwriting enterprise values and stability of future cash flows, and that really drives us in terms of how we think about leverage multiples as opposed to having absolute rules about, oh, 5.5 or 6 or 4, whatever it may be. But that's the data around the recent second liens that we've done. In terms of which -- how many are sponsored dividends versus M&A, again, it's a mixed bag. I'll give you the exact number in a second. So the recent deals, it was about half and half.

And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

All right, great. Thanks. Nothing really else to say. Just want to thank everybody, and look forward to talking again at the end of the calendar year when we have our next call. And obviously, in the interim, as always, we're all accessible any time for any questions anybody may have. Thanks very much. Bye-bye.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.