NMFC - NASDAQ

Good day, and welcome to the New Mountain Finance Corporation's Fourth Quarter 2024 Earnings Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO of New Mountain Finance Corporation. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's fourth quarter 2024 earnings call. On the line with me here today are Steve Klinsky, Chairman of NMFC, and CEO, New Mountain Capital, Laura Holson, COO of NMFC, and Kris Corbett, CFO and Treasurer of NMFC. Steve is going to make some introductory remarks, but before he does, I would like to ask Kris to make some important statements regarding today's call.

Thanks, John. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our February 26 earnings press release. I would like to call your attention to the customary safe harbor disclosures in our press release and on page two and three of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections. 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 access the slide presentation that we will be referring to throughout this call, please visit our website at www.newmountainfinance.com. At this time, I would like to turn the call over to Steve Klinsky, NMFC's Chairman, who will give us some highlights beginning on page five of the slide presentation. Steve?

Thanks, Kris. It's great to be able to address you all today both as NMFC's Chairman and as a major fellow shareholder. Adjusted net investment income for the quarter was $0.32 per share, covering our $0.32 per share regular dividend that was paid in cash on December 31. Our net asset value per share of $12.55 declined $0.07 or 0.6%, demonstrating relatively stable credit performance across our portfolio. Importantly, we had no new non-accruals during the quarter and no red names on our heat map. Looking forward to Q1, we would like to announce a $0.32 dividend payable on March 31 to shareholders of record on March 17. Our core dividend continues to be supported by our strong recurring earnings, and if necessary, dividend protection program that we renewed in 2024. So far, 2025 is off to a very good start for NMFC. I would like to announce an important transaction that aligns with our strategic priorities. On February 25, we sold a stake in UniTek Global Services to BTG Pactual Strategic Capital. BTG invested $90 million through a convertible preferred security valuing UniTek at approximately $370 million, which implies over a two times multiple on our original cost basis and is above our Q4 mark. This transaction returned $42 million to NMFC through full redemption of UniTek's PIK second lien tranche and PIK senior preferred two tranche. This partial exit aligns with our goal of monetizing accrued PIK income while we also retained a combined 31% ownership stake in the company through both NMFC and another New Mountain Credit Fund. Looking forward, we believe that UniTek has meaningfully improved its prospects under New Mountain's leadership, including major new wins in the data center space. We will offer more details on this transaction and other highlights on the Q1 call in early May. New Mountain's private equity funds have never had a bankruptcy or missed an interest payment, and the firm now manages over $55 billion of assets. Similarly, NMFC has experienced only 12 basis points of average annualized net realized losses in its nearly 14 years as a public company while paying out almost $19 per share of cumulative dividends. That we think are right in all times and particularly attractive in less certain economic times. As the UniTek example also shows, in those very few cases where we have had loan defaults, NMFC seeks to use the core business building competency of New Mountain Capital to make gains on these once troubled positions. New Mountain's team now numbers over 270 members, and the firm believes we have achieved over $87 billion of enterprise value gains at our private equity companies for all shareholders. New Mountain seeks to be stronger every year in the carefully selected sectors where we have chosen to both lend and acquire, such as Life Science flies, healthcare information technology, software, and infrastructure services. Strength of our PE efforts are fully applied as strength for our credit efforts and for NMFC. Finally, we as management continue as major shareholders of NMFC. During Q4, I and other members of the NMC team increased our holdings by 1.6 million shares. We now own about 14% of NMFC as compared to about 12% last quarter. With that, let me turn the call to John.

Thank you, Steve. I would like to begin by offering a broader review of our direct lending investment strategy and long-term track record. Starting on page eight, we highlight our exposure to a diversified list of defensive non-cyclical sectors. These sectors map to the industries where New Mountain has made successful private equity investments and where our firm's knowledge is the strongest. We seek to make investments in companies with durable growth drivers, predictable revenue streams, margin stability, and strong free cash flow conversion. As you can see from the industry pie chart on page eight, we have virtually no exposure to cyclical, volatile, and secularly challenged industries. Moreover, we believe that our portfolio has limited exposure to companies dependent on various forms of government spending and limited exposure to tariffs on foreign goods. Our strategy has been consistent over our nearly 14 years as a public company, and it allows us to operate with confidence in any economic environment. Page nine provides key performance statistics showing a long-term track record of delivering consistent enhanced yield to our shareholders by minimizing credit losses, distributing virtually all of our excess income to shareholders. Since our IPO in 2011, NMFC has returned approximately $1.4 billion to shareholders through our dividend program, generating an annualized return of 10%. Our dividend yield is approximately 11% or nearly 700 basis points over short-term risk-free interest rates. NMFC's current portfolio invests in companies within high-quality industries that are performing well and where our last dollar of risk is approximately 40% of the purchase price paid for the business. We lend primarily to businesses owned by financial sponsors or sophisticated and supportive owners with significant capital that is junior to the loans that we make. Turning to page ten, we would like to give a bit more detail on the strategic areas of focus for NMFC. We have successfully evolved our portfolio mix to 75% senior-oriented assets, and from here, we would like to maintain or increase that heavily senior-oriented mix. Within this category, we have our core first lien and unitranche loans, our well-performing senior loan funds, and our net lease subsidiary, which owns a diversified group of mission-critical real estate occupied by defensive growth-oriented businesses. While senior lending represents the vast majority of our portfolio, many of our most profitable investments come from high conviction, junior capital positions. We selectively make these investments in instances where we have particularly high conviction investment views informed by the broader NMC platform and where risk-adjusted returns are especially compelling. This strategy has been effective for us in the past, and we believe it will be accretive to shareholder value going forward. Additionally, we see a clear opportunity, particularly within the top ten positions. Over time, we seek to have each of our portfolio companies represent less than 2% of total AUM. We also continue to have a sharp focus on optimizing the cost, duration, and quality of our liabilities. Our team has made great progress over the last year and sees more opportunity to improve the right side of our balance sheet throughout 2025. Over the next twelve months, we expect that our liabilities will be approximately 75% floating rate inclusive of hedges, and we remain committed to building a high-quality ladder mix of unsecured bonds. Finally, in addition to the UniTek partial sale, we expect to have future opportunities to sell certain equity stakes. While our PIK portfolio has strong credit quality and generates attractive shareholder returns, we remain committed to maintaining prudent overall levels of PIK income. Turning to page eleven, the internal risk rating of our portfolio was roughly consistent with the prior quarter at approximately 97% green rated. Similar to the prior quarter, we have no companies rated red, and importantly, we had only $17 million of fair market value or one company moved negatively on our risk rating scale. Our most challenged names marked orange represent only 1.2% fair market value, making them a negligible part of our portfolio. The updated heat map is shown in its entirety on page twelve. With 97% of our assets rated green, we believe our portfolio is well-positioned to continue to perform no matter how the economic landscape develops. The vast majority of our investments continue to experience both top and bottom-line growth consistent with our underwriting. Turning to page thirteen, we provide a graphical analysis of NAV changes during the quarter resulting in a book value of $12.55, a $0.07 decline compared to last quarter. Overall, the quarter benefited from good core credit performance, offset by modest declines in the value of Inventum and Health Systems. Health Systems, a business that operates in the cybersecurity market, was the largest single name decrease during the quarter. The trading levels of this loan declined due to concerns around two of its smaller business segments that are facing headwinds from extended sales cycles and increased competition. We remain relatively positive on the prospects for the overall business as the company's most important division continues to grow. Page fourteen addresses NMFC's non-accrual. On the left side of the page, we show the current state of the portfolio where we have approximately $3.1 billion of investments at fair market value, of which only $38 million or 1.2% of the portfolio is currently on non-accrual. We show these statistics pro forma for the UniTek transaction, after which we will have no non-accruing positions in that capital structure. On the right side of the page, we show our cumulative credit performance since IPO. During that time, NMFC has made nearly $10.1 billion of investments, realizing losses of $67 million. This represents an average annualized net realized loss rate of approximately 12 basis points since IPO. On page fifteen, we present NMFC's consistent and compelling returns over the last thirteen plus years. Cumulatively, NMFC has earned nearly $1.4 billion in net investment income while generating only $67 million of cumulative net realized losses and only $49 million of cumulative net unrealized depreciation, resulting in over $1.2 billion of value created for shareholders. I will now turn the call over to our Chief Operating Officer, Laura Holson, to discuss the current market environment and provide more details on NMFC's quarterly performance.

Thanks, John. 2024 concluded in similar fashion to the rest of the year, with episodic new deal activity. Spreads have tightened over the last twelve to eighteen months as we have been in a less active deal flow environment and the syndicated market has been aggressive. That said, we believe direct lending remains an attractive asset class in today's market. We have consistently found opportunities in our defensive growth verticals where we can make loans that attach at dollar one in the capital structure and 9% to 10% unlevered return. Deal structures remain compelling with significant sponsor equity contribution, representing the vast majority of the capital structures. We continue to expect an increase in volume of M&A activity in 2025 for the reasons we have previously discussed, including the magnitude of dry powder for private equity, the ongoing pressure to return capital to LPs, as well as attractive financing markets for borrowers. The bid-ask gap remains the question as many of the higher multiple deals from the 2021 timeframe age into maturity. However, there are also a fair amount of pre-2021 deals that we expect sponsors are focused on exiting. Counter to the expected pickup in M&A activity is a backdrop of volatility and uncertainty across political and regulatory headlines, and a continued high base rate environment which is a tailwind to returns but a headwind to deal activity. We believe we are as well-positioned as we can be. However, credit selection remains critical, particularly as there is minimal pricing and structural flexibility. Page seventeen presents an interest rate analysis that provides insight into the effective base rates on NMFC's earnings. The NMFC loan portfolio is 86% floating rate and 14% fixed rate, while our liabilities are 49% floating and 51% fixed rate. Pro forma for the 2022 convert and 2021 unsecured notes maturities over the next twelve months, we expect our mix will shift towards 74% floating, 26% fixed. We highlight our sensitivity to interest rates on the bottom chart. While we would expect to see earnings pressure in the scenarios where base rates decrease, we are evolving our capital structure to help offset some of that pressure. Namely, we have been swapping our new fixed rate exposure to floating rate, and we also have some opportunities to potentially refinance some shorter-dated higher-cost fixed rate debt. Our 7.5% converts mature in October 2025, and our 8.25% baby bonds are callable in November of 2025, both of which represent opportunities to hopefully refinance at lower rates. Moving on to page eighteen, in Q4, we originated $33 million of assets, offset by $218 million of repayments and sales, driving deleveraging to the middle of our target leverage range. Notable repayments in the quarter included Recorded Future, a software business that was acquired by Strategic, as well as two second lien assets. While I have mentioned the challenges of spread compression in direct lending, these market environments can be beneficial for derisking. We have been able to take advantage of the hot market and exit a handful of assets that have opportunistically repriced where we believed recent performance either did not warrant a repricing or our underwriting informed a negative change in our credit view. The depth of knowledge in our core defensive growth power alleys allows us to continuously refresh our thinking and stay close to an evolving landscape. Turning to page nineteen, similar to last quarter, approximately 75% of our investments inclusive of first lien, SLPs, and net lease are senior in nature. Second lien positions represent just 7% of our portfolio, down from 8% last quarter and 15% in Q4 of last year. Approximately 8% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. We continue to dedicate meaningful time and resources to business building at these companies, all of which we believe are making positive progress. As evidenced by the UniTek strategic transaction announced earlier, our ability to own and operate businesses is a key differentiator. We leverage the full operating capabilities of our private equity team and approach our credit equity positions like any other New Mountain Capital-owned business. Page twenty shows that the average yield of NMFC's portfolio increased to 11% for Q4, primarily due to the higher for longer shift in the forward SOFR curve. Generally speaking, even though spreads are tighter as evidenced by lower yields on our originations compared to on our repayments, total yields remain attractive for the risk. Page twenty-one highlights the scale and positive credit trends of our underlying borrowers. The weighted average EBITDA of our borrowers decreased slightly in the fourth quarter to $184 million due to the realization of some larger companies during the quarter, partially offset by underlying growth at the individual companies we lend to. While we first and foremost concentrate on how an opportunity maps against our defensive growth criteria and internal New Mountain knowledge, we believe that larger borrowers tend to be marginally safer all else equal. We also show the relevant leverage and interest coverage stats across the portfolio. Portfolio company leverage has come down slightly over the last several quarters. Loan to values continue to be quite compelling, and the current portfolio has an average loan to value of 41%. The weighted average interest coverage on the portfolio increased to 1.8 times this quarter. We have seen sponsors continue to proactively support company liquidity and continued M&A activity. This is a great indication that our portfolio of companies that are performing well and are able to attract additional investment at healthy valuations. Finally, as illustrated on page twenty-two, we have a diversified portfolio across 121 portfolio companies. Excluding our investments in the SLPs and net lease funds, the top ten single name issuers account for 27% of total fair value and represent our highest conviction names. Taking into account the partial monetization of UniTek, that position decreases from 3.5% to just 2.2% of fair market value. I will now turn the call over to our Chief Financial Officer, Kris Corbett, to discuss our financial results.

Thank you, Laura. For more details, please refer to our quarterly report on Form 10-K that was filed yesterday with the SEC. As shown on slide twenty-three, the portfolio had over $3 billion of investments at fair value on December 31 and total assets of $3.2 billion with total liabilities of $2 billion, of which total such debt outstanding was $1.6 billion. Net asset value of approximately $1.4 billion or $12.55 per share was down slightly compared to the prior quarter. At quarter-end, our statutory debt to equity ratio was 1.125 to 1 and 1.11 to 1 net available cash on the balance sheet, which is in the middle of our target range of 1 to 1.25 times. On slide twenty-four, we show our quarterly income statement results. For the quarter, we earned total investment income of $91 million or a 2% decrease over the prior year. Total net expenses of $57 million decreased 9% versus the prior year. This increase in expenses was a product of higher financing costs. Our adjusted net investment income for the quarter was $0.32 per weighted average share, which covered our Q4 regular dividend. As shown in slide twenty-five, we earned total investment income of $371 million for the year, which represented a decrease of 1% over the prior year. Total net expenses of $225 million increased 4% over the prior year. Slide twenty-six highlights that 96% of our total investment income is recurring in the fourth quarter. For Q4, PIK interest income represented only 10% of total investment income, whereas non-cash dividend from our preferred equity investments represented 9% of total investment income. This aligns with the asset mix strategy John mentioned earlier. Importantly, positions generating non-cash income during the fourth quarter are marked at a weighted average fair market value of 94% of par. Over 94% of this income is generated from our green-rated names. Additionally, over 75% of this income is generated by positions that included PIK from inception to best enable these borrowers to execute on their strategic growth plans. Turning to slide twenty-seven, the red line shows the coverage of our regular dividend. For Q1 2025, our Board of Directors has again declared a dividend of $0.32 per share. On slide twenty-nine, we highlight our various financing sources and diversified leverage profile. Taking into account SBA-guaranteed debentures, we have $3 billion of total borrowing capacity with $1.1 billion available on our revolving lines subject to borrowing base limitations. This represents our most significant availability since the inception of our business and more than covers our unfunded commitments of $244 million. 2024 marked a significant evolution of our capital structure. We issued our first two investment-grade bonds, we enhanced our corporate revolver by increasing its capacity and extending its maturity while also lowering its spread. We also streamlined our asset-based credit facilities by lowering the cost of our Wells Fargo credit facility and fully repaying our higher-cost Deutsche Bank credit facility. This resulted in an increase of our floating rate liabilities mix from approximately 40% at December 31, 2023, to 50% at December 31, 2024, to more closely match our floating rate assets. While during the same period increasing our unsecured debt percentage from 51% to 79%. Looking forward to 2025, the facilities outlined in red represent opportunities to refinance and reduce our cost of financing in the medium term. Further, we are targeting to increase our floating rate liability mix over the course of the next twelve months to approximately 75%. Finally, on slide thirty, we show our leverage maturity schedule. We continue to ladder our maturities and have sufficient liquidity to manage upcoming maturities in 2025 and early 2026. Notably, over 60% of our debt matures in or after 2028, with near-term maturities representing an opportunity to continue to access the investment-grade bond market. With that, I would like to turn the call back over to John.

Thank you, Kris. We are pleased to have a strong start to 2025 with the UniTek sale as an important catalyst. Credit quality remains good. Our portfolio is more senior than ever before. We have made substantial positive changes to our liability structure with more opportunity ahead. In closing, we once again would like to thank all of our stakeholders for the ongoing partnership and support and look forward to speaking to you again on our next call in May. I would now like to turn things over to the operator to begin Q&A. Operator?

Thank you. If at any time your question has been addressed and you would like to withdraw your question, at this time, we will pause for just a moment to assemble our roster. And your first question today will come from Robert Dodd with Raymond James. Please go ahead.

Hello, everybody, and congrats on the quarter, particularly UniTek. So well, after quarter end. On UniTek, McKenna, I realize you said there'd be more, you know, more detail on the Q1 call, but at the exit valuation unit, not exit, but partial realization. How does that enterprise value stack up with the enterprise value used to inform the mark at Q4?

Sure. It is, as Steve mentioned, it's modestly higher. But overall, the big picture, it would be in line to modestly higher.

Got it. Got it. Thank you. And then on, you know, one of the other themes I think, you know, in the prepared remarks, I think it was said that there's, you know, some uncertainties in the market. Maybe it's going to slow activity a little bit in the near the early part of 2025, and that's kind of an overcurrent theme from your competitors this quarter. How in that light, potentially, how comfortable do you still feel about UniTek aside lowering your PIK exposure as we go through the year? So we set it as a target, but it's partly informed by the fact that you sort of be in an active market this year. So how do you think those things go together?

I think we, along with many of our competitors, think that this year will be active. But I think it is fair to say it's been a slower start than we would have expected. And so, but when we think about the opportunity to reduce some of the PIK positions, I think we will be able to show some progress based on what we're seeing on the Q1 call. So we feel like we feel good about it. And beyond Q1, we'd be opportunistic that we can continue to work down PIK positions. So I wouldn't say the market environment has changed our view or our outlook for that, you know, strategic goal.

Got it. Got it. Thank you. And then just, I mean, in terms of allocation, you talk you want to increase senior, which is obviously first lien, loan funds, net lease. Would you is the expectation you'd keep the mix between those three the same, or is there one of those areas in particular you'd like to increase more?

No. I think it's safe to say that we would within that category, the mix will stay the same.

Got it. Thank you. And then just, you know, overall, you know, any kind of the market spreads that do look like they may be leveled out but do you think that is that a temporary thing? All things kind of, you know, recalibrate? Or do you think we're at kind of the bottom on like for like, but it's obviously trends where you're at in the market. But you know, what are your thoughts on that going through? And then just tied to that, how much Yeah. You walked away from some repricing because you didn't think credit risk was appropriate. How much of the portfolio is left do you think that's potentially vulnerable to kind of repricing activity?

Yeah. On the first point around spreads, we do feel like they have stabilized. I mean, we're seeing Unitranche is now, you know, for high-quality companies in the 450, 475 to 500 area depending on, you know, all the circumstances. And to be honest, they've been hovering there for a while. So we haven't seen, you know, meaningful movement. I think to the extent that M&A picks up, we hope and expect spreads to pick back up alongside that. But we don't we have not seen, you know, material further pressure downward. And we feel reasonably confident that we will not, particularly as if M&A starts to pick back up again. To your second question about just repricing, we certainly have seen multiple waves of repricing in the syndicated market. I think within our portfolio specifically, the majority of deals that could reprice probably at this point have gone through that exercise. I mean, keep in mind, you know, a lot of our sponsor clients are pretty sophisticated. They have capital markets teams that are really, you know, mining the work their portfolios to make sure they're doing their best to capture all those opportunities. And so I think the vast majority is really kind of rolled through already. But so we feel reasonably good at least on that point.

Got it. Thank you.

Seeing no further questions, this will conclude our question and answer session. I would like to turn the conference back over to John Kline for any closing remarks.

Great. Well, thank you everyone for joining our Q4 2024 earnings call, and we look forward to speaking to you very soon in May.