Rob Hamwee - CEO Shiraz Kajee - CFO Steven Klinsky - Chairman & CEO, New Mountain Capital John Kline - COO.

Jeff Greenblatt - Monarch Capital Holdings Allison Taylor - Oppenheimer Jim Young - West Family Investments.

Welcome to the New Mountain Finance Corporation Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Rob Hamwee, Chief Executive Officer. Please go ahead, sir..

Thank you and good morning, everyone and welcome to New Mountain Finance Corporation's fourth quarter earnings call for 2015. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; John Kline, COO of NMFC; and Shiraz Kajee, CFO of NMFC.

I am pleased to introduce Shiraz, who officially joined us on December 1, 2015 as our new CFO. Steve Klinsky is now going to make some introductory remarks, but before he does, I would like to ask Shiraz to make some important statements regarding today's call..

Thanks, Rob. Good morning, everyone. I would just like to add that I'm very happy to be part of the great team here at New Mountain. 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 earnings press release.

I would also like to call your attention to the customary Safe Harbor disclosure in our February 29, 2016 press release and on page 2 of the slide presentation regarding forward-looking statements.

Today's conference call and webcast may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections.

We do not undertake to update our forward-looking statements or projections unless required to by law. Any reference 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 Advisors BDC LLC where appropriate.

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 would like to turn the call over to Steve Klinsky, who will give some highlights beginning on page 4 to 5 of the slide presentation.

Steve?.

Rob, John and Shiraz will go through the details in a moment, but let me start by presenting the highlights of another solid quarter for New Mountain Finance. New Mountain Finance's adjusted net investment income for the quarter ended December 31, 2015, was $0.35 per share.

Once again, at the high end of our initial guidance of $0.33 to $0.35 per share and at the high end of our recently updated guidance of $0.34 to $0.35 per share, this more than covers our Q4 dividend of $0.34 per share.

The company's book value on December 31 was $13.08 per share, consistent with our most recent guidance of $13 to $13.10 per share and a decrease of $0.65 from last quarter. The majority of the decline in book value was a function of broad market movements.

We were also able to announce our regular dividend for the current quarter which will again be $0.34 per share, an annualized yield of 11% based on Friday's close. The Company invested $212 million in gross originations in Q4 and had $129 million of repayments in the quarter.

The overall credit quality of the Company's loan portfolio continues to be strong, as once again no new loans were placed on non-accrual. Since the inception of our debt effort in 2008, we have had only two issuers with a realized default loss, representing less than 0.2% of cumulative investments made to date.

We recently announced a stock buyback program to take advantage of opportunities when we believe our stock is traded to meaningfully undervalued levels.

I and other members of New Mountain also continue to be significant buyers of our stock, purchasing over 1.1 million shares since our last call four months ago, bringing aggregate ownership to 7.6 million shares, nearly 12% of total shares outstanding. We also continue to grow and strengthen our team.

I am pleased to announce that Teddy Kaplan has now joined us to lead an effort to find high-yielding opportunities in net-leased corporate real estate. We believe Teddy is one of the top net-lease experts in the industry and he joins us from Angelo Gordon, where he was a managing direct of Angelo Gordon's net-lease real estate group.

We believe corporate net-leases are an attractive addition to our existing credit underwriting capabilities because they will allow us to use our existing corporate research in another value added way and because they can offer strong yield with no prepayment risk with yield growth from contractual rent escalators over time and with collateral protection from the physical assets owned.

In summary, despite challenging market conditions, we're pleased with NMFC's continued performance and progress. With that let me turn the call back over to Rob Hamwee, NMFC's CEO..

Thank you, Steve. Before diving into the details of the quarter, as always, I'd like to give everyone a brief review of NMFC and our strategy.

As outlined on page 6 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm with over $15 billion of assets under management and 100 staff managers, including over 60 investment professionals.

Since the inception of our debt effort investment program in 2008, we have taken New Mountain's approach to private equity and applied it to corporate credit with a consistent focus on defensive growth business models and extensive fundamental research within industries that are already well known to New Mountain or more simply put, we invest in recession resistant businesses that we really know and that we really like.

We believe that this approach results in a differentiated and sustainable model that allows us to generate attractive risk-adjusted rates of return across changing cycles and market conditions. To achieve our mandate, we utilized the existing New Mountain investment team as our primary underwriting resource.

Turning to page 7, you can see our total return performance from our IPO in May, 2011 through February 26, 2016.

In the nearly 5 years since our IPO, we have generated a compounded annual return to our initial public investors of 8.3%, meaningfully higher than our peers in the high-yield index and a cash-on-cash return to our initial public investors of 10.5%.

Page 8 goes into a little more detail around relative performance against our peer set, benchmarking against the 10 largest externally managed BDCs that have been public at least as long as we have. Page 9 shows return attribution.

Total cumulative return continued to be driven almost entirely by our cash dividend which in turn has been more than 100% covered by NII.

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

Our highest priority continues to be our focus on risk control and credit performance which we believe over time is the single biggest differentiator of total return in the BDC space.

If you refer to page 10, we once again lay out the cost basis of our investments with the current portfolio and our cumulative investments since the inception of our credit business in 2008 and then show what has migrated down the performance latter.

Since inception, we have made investments of $3.7 billion in 173 portfolio companies, of which only four, representing just $36 million of cost, have migrated to non-accrual and only two, representing $6 million of cost, have thus far resulted in realized default losses.

Approximately 98% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale. Page 11 shows leverage multiple for all of our holdings above $7.5 million when we entered an investment and leverage levels for the same investment as of the end of the current quarter.

While not a perfect metric, the asset by asset trend in leverage multiple is a good snapshot of credit performance and helps provide some empirical, fundamental support for our internal ratings and marks. As you can see by looking at the table, leverage multiples are roughly flat or trending in the right direction, with only a few exceptions.

Of the three loans that show negative migration of two turns or more, all are rated 3 on our internal scale. The first is to a business that is currently in the early stage of the sale process, expected to pay off the loan in full.

The other two are first lien loans to energy service businesses that, while cyclically challenged, have meaningful liquidity. These two loans are carried at meaningful discounts to par, reflecting degradation in earnings and prospects, although both recently paid their semiannual coupon and are therefore not near term non-accrual candidates.

The chart on page 12 helps track the Company's overall economic performance since its IPO. At the top of the page, we show how the regular quarterly dividend is being covered out of net-investment income. As you can see, we continued to more than cover 100% of our cumulative regular dividend out of NII.

On the bottom of the page, we focus on below-the-line items. First, we look at realized gains and realized credit and other losses. As you can see, looking at the row highlighted in green, we have had success generating real economic gains every year through a combination of equity gains, portfolio company dividends and trading profits.

Conversely, realized losses including default losses, highlighted in orange, have been significantly smaller and less frequent and show that we're typically not avoiding non-accruals by selling poor credit at a material loss prior to actual default.

The net cumulative impact of this success to date is highlighted in blue which shows cumulative net-realized gains of $43.8 million since our IPO. Next, we look at unrealized appreciation and depreciation.

This quarter, modest mark-to-market gains on underlying assets were significantly outweighed by mark-to-market losses, primarily reflecting broad based market weakness for asset prices, driven by a rising spread environment and not idiosyncratic credit performance in fourth quarter.

This $43 million change in unrealized depreciation is detailed further on page 13 which shows $9 million of mark-to-market depreciation on our two energy related businesses and $34 million of depreciation from broader market movement. I will now turn the call over to John Kline, NMFC's COO, to discuss market conditions and portfolio activity.

John?.

Thanks, Rob. As outlined on page 14, since our last call on November 5, we have witnessed increased market volatility and widening credit spreads.

This has been due to a variety of factors, including broad-based weakness in energy and materials, pockets of weakness in retail and industrials, concerns about global economic growth, negative fund flows and leverage credit and general investor risk aversion.

The NMFC portfolio continues to be well positioned in this more volatile market environment, given our focus on defensive, acyclical business models. As page 15 shows, NMFC is well-positioned in the event of future rate increases, as 84% of our portfolio is invested in floating-rate debt.

Therefore, even in the face of a material rise in interest rates, assuming a consistently shaped yield curve, we would not expect to see a significant change in our book value.

Furthermore, as the table at the bottom of page demonstrates, a meaningful rise in short term rates will generally increase our NII per share, with the only exception being a modest rise having a slightly negative impact, as the majority of our borrowings rise while our interest income does not initially go up, given the presence of LIBOR floors on our assets.

Moving on to portfolio activity, as seen on pages 16 and 17, total originations in the quarter ran at a strong pace, totaling $212 million. Total originations were offset by $129 million of repayments and $10 million of sale proceeds, yielding net originations, less sales, of $73 million.

For the year, we have net deployments of $140 million which was funded by our $79 million equity raise in September, along with borrowings on our credit facilities. At year-end, our statutory to debt-to-equity ratio was 0.75 times and our economic debt-to-equity ratio, inclusive of our SBIC debt was 0.89 times.

As you're aware, NMFC seeks to always maintain an optimized portfolio by fully and appropriately leveraging our equity base. Having successfully deployed our latest equity raise throughout Q4, we have been able to maintain a fully invested portfolio in Q1.

We will seek to use future cash proceeds from repayments for new originations and for tactical purchases of our own stock. We continue to aggressively pursue new opportunities for our SBIC subsidiary which has available capital for investments.

Pages 18 and 19 show the impact of Q4 investment and disposition activity on asset type and asset yields, respectively. Q4 asset originations were fairly well balanced between first lien and second lien investments. In Q4, yields on originations were 11%, approximately 50 basis points higher than the NMFC portfolio average at the end of Q3.

The more lender friendly market environment enabled us to negotiate higher spreads on originations, while still maintaining our strict underwriting standards. Meanwhile, cumulative sales and repayments in the quarter had an average yield of 9.2%. The net impact is the overall portfolio was up 20 basis points to 10.7%.

In terms of the portfolio review on page 20, the key statistics as of 12, 31 were very similar to 9, 30. The asset mix composed of 44% first lien, 49% second lien and unsecured debt, 7% preferred equity, common equity and other.

As always, we maintain a portfolio comprised of companies in defensive growth industries, like software, business services and education, that we believe will outperform in an uncertain economic environment.

Finally, as illustrated on page 21, we have broadly diversified portfolio with our largest investment at 3.4% of fair value and the top 15 investments accounting for 37% of fair value. With that, I will now turn it over to our CFO, Shiraz Kajee, to discuss the financial statements and key financial metrics.

Shiraz?.

Thanks, John. For more details on our financial results and today's commentary please refer to the Form 10-K that was filed last evening with the SEC. Now, I would like to turn your attention to slide 22. Portfolio had just over $1.54 billion in investments at fair value at December 31, 2015 and total assets of just over $1.6 billion.

We had total liabilities of $765.2 million, of which total statutory debt outstanding was $624.3 million, excluding $117.7 million of drawn SBA-guaranteed debentures. Net asset value of $836.9 million or $13.08 per share, was down $0.65 from the prior quarter. As of December 31, our statutory debt-to-equity ratio was 0.751.

On slide 23, we showed the historical NAV per share and leverage ratios which are broadly consistent with our current target leverage of between 0.7 and 0.81. We also show the NAV adjusted for the cumulative impact of special dividends which portrays a more accurate reflection of true economic value creation.

Slide 24, we show our quarterly income statement results. We believe that our adjusted NII is the most appropriate measure of our quarterly performance. This slide highlights that, while realizations and unrealized appreciation and depreciation can be volatile below the line, we continued to generate stable net investment income above the line.

Focusing on the quarter ended December 31, 2015, we earned total investment income of approximately $42 million. This represents a $4.1 million or 10.8% increase from the prior quarter largely attributable to an increase in interest income from a larger asset base.

Total net expenses of $19.5 million increased $2 million or 11.4%, due to an increase in incentive fees associated with the asset growth, as well as an increase in interest expense associated with the higher average debt balance.

As mentioned on prior calls, due to the merger of our Wells Fargo credit facilities and consistent with the methodology since IPO, the investment advisor will continue to wave management fees on the leverage associated with those assets that share the same underlying yield characteristics with investments leveraged under the legacy SLF credit facility.

This results in an effective management fee of 1.4% for the fourth quarter which is broadly in line with prior quarters.

It is expected, based on our current portfolio construct, that the 2016 effective management fee will be broadly consistent with prior years and it is important to note that the investment advisor cannot recoup management fees previously waived.

In total, this results in fourth quarter adjusted NII of $22.5 million or $0.35 per weighted average share which is at the high end of our guidance and more than covers our Q4 regular dividend of $0.34 per share.

As a result of the net unrealized depreciation in the quarter that Rob discussed earlier, for the quarter ended December 31, 2015, we had a decrease in net assets resulting from operations of $20 million. On slide 25, I'd like to give a brief summary of our annual performance for 2015.

For the year ended December 31, 2015, where the total pro forma adjusted investment income was approximately $154.3 million and total net expenses of $71.5 million. This all results in 2015 total pro forma adjusted net investment income of $82.8 million or $1.39 per weighted average share.

In total for the year ended December 31, 2015, we had total net increase pro forma net assets resulting from operations of approximately $32.9 million. Finally for 2015, we declared total regular dividends of $1.36 per share. As slide 26 demonstrates, total investment income is predominantly paid in cash.

As you can see, total interest income as a percentage of total investment income remains strong at 91% in this quarter. We believe this consistency is one measurement of the stability and predictability of our investment income.

Turning to slide 27, as briefly discussed earlier, our adjusted NII for the fourth quarter more than covered our Q4 dividend.

Given our belief that our Q1 2016 adjusted NII will fall in the previously declared expected range of $0.33 to $0.35 per share, our Board of Directors has declared a Q1, 2016 dividend of $0.34 per share, in line with the past 15 quarters.

A Q1 2016 quarterly dividend of $0.34 per share will be paid on March 31, 2016, to holders of record on March 17, 2016. Finally, on slide 28 we highlight our various financing sources.

Taking into account SBA-guaranteed debentures related to our SBIC license, we have $855 million of total borrowing capacity to date and we have no maturities until 2019.

As a reminder, our Wells Fargo credit facility's covenants are generally tied to the operating performance of the underlying businesses that we lend to, rather than to the marks on investment at any given time. At this time, I would like to turn the call back over to Rob..

Thanks, Shiraz. It continues to remain our intention to consistently pay the $0.34 per share on a quarterly basis for future quarters, so long as the adjusted NII covered the dividend in line with our current expectations. In closing, I would just like to say that we continue to be pleased with our performance to date.

Most importantly, from a credit perspective, our portfolio overall continues to be very healthy. Once again, we would like to thank you for your support and interest and at this point, turn things to the operator to begin Q&A.

Operator?.

[Operator Instructions]. And our first question will come from Jeff Greenblatt of Monarch Capital Holdings..

I have just a quick question. Looking at the stock and trying to understand your repurchase program from the perspective I guess as shareholder which I obviously you guys are very significant shareholders of. I just want to make sure I'm looking at it correctly.

The stock today is trading at around 11% current yield and it's at a discount obviously to NAV of 1306. But more importantly for my point of view it's at a discount to what the principle amount is of these loans outstanding because obviously the NAV is just a floating mark to market.

And my right to assume that roughly just assume your past credit history continues and the loans payoff, is the principle value per share to me $0.50 to one dollar holler than of 1306. I haven't done the actual map, I don’t whether you guys have..

Yes we actually do look at that and it's a very good point because when we think about buying the stock back there are really two elements at work.

One, we think credit is cheap now because as you point out we have loans that were very highly confident that we are going to get paid $0.100 that were marking because spread have lied in generally it at $0.96 or $0.97. And then two, when we traded material discount to book value we're getting those at a bigger discount effectively.

So you’re exactly right and your $0.50 to a $1 is right, it's little bit about $13.90 is the last number we looked at..

So then here's the second part of my question I guess, on a yield to maturity basis obviously an investment in the stock today is significantly higher or higher than the 11% current yield that you're capturing the yield to maturity to the 13.90 book as well - 13.90 principle as well.

So when you look at new loans you are making which looks like you're making it around 10.7% or so on some of the new paper and obviously that depends upon whether it's second lien or first lien.

But if you had the opportunity to buy your entire portfolio you know well on a diversified basis at a reasonably higher 100, 200, 300 basis higher yield to maturity than making new loans why wouldn't you just purchase your stock over making new loans.

As I understand there some element of needing to be in the marketplace but it seems like right now that GAAP is just too wide as a shareholder I'd rather just see you keep buying your stock and limit the originations until that GAAP closes or market conditions change..

Right. So that's what we're doing, that GAAP occurred in Q1 not in Q4. So the originations we talked about in Q4 we didn't really have that trade-off. In Q1, as John described had very limited originations partly because we're buying back our stock and I think we're particularly aggressive buyers of our own stock at a discount.

I'm not going to give the exact guidance but sub $0.90 on the dollar discounts to those numbers we've been talking about and you know the stock has been jumping around. But yes as those numbers widen we are going to use whatever liquidity we have and as you say we do need to be in the market and service our clients, so we need to balance that.

But we have no problem buying back our own stock..

So there's no reason why I shouldn't assume that over time because obviously this portfolio gets significant repayments each quarter. There's no reason I shouldn't assume over time that if market conditions continued to provide that opportunity that $50 million repurchase can't be considered by the board for additional.

I think it can be, although again we have a very different mindset on buying the stock back at 12.60 then at 11.40..

Okay, I didn't hear it and if you didn’t say it's fine, did you say since the announcement how much of the repurchase program you have used--?.

We’ve used a pretty small proportion of it. We did about 125,000 shares in the few weeks primarily when the stock was trading at a lower level. The average price is sub 11.50..

[Operator Instructions]. Our next question will come from Allison Taylor of Oppenheimer..

So curious about your views on acquisitions given this environment where you are trading fairly close to NAV and there are other competitors' portfolios out there that are trading at significant discounts.

Is that something that you guys would ever look at?.

So while I would caveat I would never say never, it's really not a focus of ours right now and the real reason Allison, first and foremost is as you know we're very focused on the types of businesses and industries that we lend, this whole defensive growth focus and you look at our pie chart on the industries, it's very difficult to find a target that lines up with that and we're very hesitant to straight from an asset level strategy that’s worked really very well for us.

So it's always tempting to think about accretive acquisitions on a relative currency basis, it's just hard to get excited about taking over a portfolio that almost by definition is going to include a material segment of the loan to businesses that we just don't know as well as those businesses that we typically lend to..

[Operator Instructions]. And we do have a question from Jim Young of West Family Investments..

When you look at the unrealized losses in the quarter of $43.2 million, how does that breakout between your first lien and second lien loans?.

Don't have that number at my fingertips. We can certainly get back to you with that answer. I'm going to guess it's plus or minus 50:50, given that the portfolio is plus or minus 50:50 but let's obviously easily knowable, so we can do that math and get right back to you..

And this concludes our question and answer session. I would like to turn the conference back over to Rob Hamwee for any closing remarks..

Great. Thank you operator and thank you everyone for your time and attention today, we really appreciate it and look forward to speaking again in a couple of months for our Q1 results..

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