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Edited Transcript of NMFC.OQ earnings conference call or presentation 9-Aug-22 2:00pm GMT

Q2 2022 New Mountain Finance Corp Earnings Call New York Sep 23, 2022 (Thomson StreetEvents) -- Edited Transcript of New Mountain Finance Corp earnings conference call or presentation Tuesday, August 9, 2022 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * John R. Kline New Mountain Finance Corporation - President & Director * Laura C. Holson New Mountain Finance Corporation - COO * Robert A. Hamwee New Mountain Finance Corporation - CEO & Director * Shiraz Y. Kajee New Mountain Finance Corporation - CFO & MD * Steven Bruce Klinsky New Mountain Finance Corporation - Chairman of the Board ================================================================================ Conference Call Participants ================================================================================ * Jordan Tyler Wathen Wells Fargo Securities, LLC, Research Division - Associate Equity Analyst * Ryan Lynch Keefe, Bruyette, & Woods, Inc., Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to today's New Mountain Finance Corporation Second Quarter 2022 Earnings Call. My name is Candice, and I will be your moderator for today's call. (Operator Instructions) I would now like to hand the conference over to our host, Mr. Robert Hamwee, CEO of New Mountain Finance Corporation to begin. -------------------------------------------------------------------------------- Robert A. Hamwee, New Mountain Finance Corporation - CEO & Director [2] -------------------------------------------------------------------------------- Thank you, and good morning, everyone. and welcome to New Mountain Finance Corporation's Second Quarter Earnings Call for 2022. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; John Kline, President of NMFC; Laura Holson, COO of NMFC; and Shiraz Kajee, CFO of NMFC. Steve is going to make some introductory remarks, but before he does, I'd like to ask Shiraz to make some important statements regarding today's call. -------------------------------------------------------------------------------- Shiraz Y. Kajee, New Mountain Finance Corporation - CFO & MD [3] -------------------------------------------------------------------------------- Thanks, Rob. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our August 8 earnings press release. I would also like to call your attention to the customary safe harbor disclosure in our 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. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time, I'd like to turn the call over to Steve Klinsky, NMFC's Chairman, who will give some highlights beginning on Page 5 of the slide presentation. Steve? -------------------------------------------------------------------------------- Steven Bruce Klinsky, New Mountain Finance Corporation - Chairman of the Board [4] -------------------------------------------------------------------------------- Thanks, Shiraz. It's great to be able to address all of you today as both the Chairman of NMFC and as a major fellow shareholder. I'll start by covering the highlights of the second quarter. Net investment income for the quarter was $0.31 per share, more than covering our dividend of $0.30 per share that was paid in cash on June 30 and exceeding our prior guidance. Our net asset value was $13.42 per share, a $0.14 or just 1.0% decrease from last quarter's net asset value, largely due to widening credit spreads in the market. The regular dividend for Q3 2022 was again set at $0.30 per share based on estimated net investment income of at least $0.30 per share. This represents an annualized dividend yield of 9% (sic) [>9%]. As we discussed on previous earnings calls, risk controls and downside protection have always been part of New Mountain's founding mission. Our firm as a whole now manages over $37 billion in total assets with a team of approximately 215 people. We have never had a bankruptcy or missed an interest payment in the history of our private equity work. We have applied that same team strength and focus on downside protection to NMFC and our credit efforts. The great bulk of NMFC's loans are in cyclical sectors with secular tailwinds, such as enterprise software, tech-enabled business services and health care services and technology. These are the types of defensive growth industries that we think are the right ones in all times and particularly attractive in the more challenging macro environment we are in today. We believe our portfolio continues to be well positioned due to this defensive growth investment strategy as is evidenced by an average net default loss of effectively 0 since we began our credit operation in 2008. Our portfolio company risk ratings have improved again since our last earnings call, despite the addition of 2 small positions to our non-accrual list this quarter. Over 90% of our portfolio is now rated green and our riskiest positions continue to be reduced. Lastly, I want to remind you that although we have not had to use it, our dividend protection program remains in place to the extent earnings ever fall below $0.30 per share, which we do not currently expect. Rising interest rates will continue to positively impact our earnings power as the team will explain on this call. Together, New Mountain professionals have invested over $700 million personally into NMFC in New Mountain's credit activities. I and management remain as NMFC's largest shareholders, and we continue to add to our positions in the most recent quarter. With that, let me turn the call back to Rob. -------------------------------------------------------------------------------- Robert A. Hamwee, New Mountain Finance Corporation - CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Steve. We believe our portfolio continues to be very well positioned overall, particularly for periods of macroeconomic volatility. The updated heat maps show the positive risk migration this quarter as summarized on Page 9 with 5 positions representing $185 million of fair value improving in ratings and 3 positions representing just $25 million worsening in rate. As Steve mentioned, we are pleased that over 90% of our portfolio is now rated green on our risk rating scale. Conversely, our red and orange name which represent our most challenged position, now represents just 2.4% of the portfolio, meaningfully down from 8.4% last quarter. Starting with the positive movers on Page 10, 4 of our formerly orange names migrated positively this quarter. Integro, an insurance and benefits business improved to green after a publicly traded insurance broker signed a definitive agreement to acquire the business for evaluation that fully clears the first lien debt, which represents over 85% of our position and will likely cover at least the majority of the second lien debt, depending on an earn-out and equity performance of the acquirer. We felt it was prudent to place a portion of our $10 million second lien position on non-accrual to reflect the uncertainty of full collectibility of the PIK interest. However, we believe the overall credit risk of our exposure has been reduced due to the signing of the transaction. Haven, formerly known as Tenawa, which as a reminder, ceased operations at its plant on April 14 due to a fire, migrated from orange to yellow as we further our work with insurance providers to assess coverage amounts and payout timing. The company already received an interim payment from the insurance carriers in late July. Permian and the Distribution & logistics business also improved from orange to yellow as a result of stronger operating environment for both companies. Lastly, the hospitality management business improved again from yellow to green as the impact of COVID on the travel industry further received. The 3 negative movers are all relatively small positions and include NHME, which we placed on non-accrual this quarter due to continued top line and inflation headwinds, our Specialty Chemicals business which has experienced supply chain and inflation challenges, and a Business Product firm that is based on idiosyncratic demand headwinds combined with supply chain issues. The updated heat map is shown on Page 11. As you can see, given our portfolio's strong bias towards defensive sectors like software, business services and health care, we believe the vast majority of our assets are well positioned to continue to perform no matter how the economic landscape develops. We continue to spend significant time and energy on our remaining red and orange names which now represent just 2.4% of our portfolio at fair value. We are pleased with the continued positive migration in several sizable names this quarter. Page 12 is a view of our credit performance based on underlying portfolio company leverage relative to LTM EBITDA and shaded to the corresponding color of the heat map. As you can see, the vast majority of our green-rated positions have shown results that are very consistent with our underwriting projections, exhibiting either very minor leverage increases or, in many cases, leverage decreases. On the lower right side of the page, we show a group of 9 companies that have more than 2.5 turns of negative leverage drift, the majority of which corresponds to our yellow, orange, and red rated names. These companies represent a small portion of our portfolio that have underperformed, partially due to adverse conditions caused by the volatility in certain parts of the economy. From a liquidity perspective, we believe that most of these companies have adequate resources to pursue their business plan and have reasonable prospects for improved performance. With that, I will turn it over to John to discuss market conditions and other important performance metrics. -------------------------------------------------------------------------------- John R. Kline, New Mountain Finance Corporation - President & Director [6] -------------------------------------------------------------------------------- Thanks, Rob. Good morning, everyone. Since our last call in May, the overall investing environment across most asset classes has continued to be challenging. We have seen higher interest rates, inflation, geopolitical instability, and now tangible evidence of economic softness in certain areas of the economy. Through this period, corporate direct lending continues to be one of the most resilient asset classes across all financial markets. Floating base rates, attractive spreads, secured debt structures and low loan-to-value ratios have provided investors with valuable stability in otherwise difficult investing environment. Additionally, our strategy of making loans to non-cyclical defensive businesses provides added margin of safety compared to that of the overall lending market. While new deal activity remains materially lower than the latter half of 2021, we continue to see compelling investment opportunities in a market where spreads are at least 100 basis points wider than they were at the beginning of the year. The deal structures of most new direct loan investments remain attractive with sponsor equity contributions consistently in the 60% to 80% range. Finally, it is important to highlight that the overall direct lending market continues to take meaningful share from the syndicated loan and high-yield bond asset classes as our private financing solutions offer an ease of execution, price clarity, and capital certainty that is not currently available in these other markets. Page 14 represents an interest rate analysis that provides insight into the positive effect of increasing base rates on NMFC's earnings. As a reminder, the NMFC loan portfolio is 89% floating rate and 11% fixed rate, while our liabilities are 54% fixed rate and 46% floating rate. Given this capital structure mix, we are long LIBOR and thus have material-positive exposure to increasing rates. During Q2, 3-month LIBOR increased from about 1% on April 1 to about 2.3% on June 30. It is worth noting that many of our borrowers locked in LIBOR early in the second quarter at lower rates, while our floating rate liabilities continue to reset throughout the quarter. Given these circumstances, base rates were not a tailwind during the second quarter. However, as our loans reset at current base rates, the portfolio yield will begin to improve. While each of our borrowers have slightly different timing for rate resets and make slightly different choices regarding the duration of their LIBOR or SOFR contracts, we think it's valuable to provide a rough sensitivity around the earnings power of the portfolio at various static base rates. For example, on a go-forward basis, if base rate settings averaged 2%, NMFC's annual net investment income will increase by $0.04 per share, all other variables being equal. At 3% LIBOR, NMFC's run rate earnings power would be approximately 11% higher, representing an incremental $0.14 per share. Meanwhile, given the presence of LIBOR floors on our assets, which averaged 89 basis points, the NII downside, if rates decline, remains limited. This positive interest rate optionality continues to offer our shareholders material potential return enhancement and provides an attractive hedge against rising rates and general inflation. Turning to Page 15. We present more detail behind the $0.14 per share decline in our book value this quarter. Starting on the left side of the page, we show that credit-driven fair value changes resulted in a net NAV increase of $0.13 per share from Q1 to Q2. This net increase was supported by positive credit catalysts for Haven and Integro and good underlying performance at UniTek, Permian, and Edmentum. Our remaining portfolio experienced $0.27 per share of depreciation, the vast majority of which is represented by write-downs associated with general spread widening in the overall credit market. Page 16 addresses NMFC's long-term credit performance since its inception. On the left side of the page, we show the current state of the portfolio where we have $3.3 billion of investments at fair value with $45 million or less than 1.5% of our portfolio currently on non-accrual. As mentioned earlier, we did put both NHME and a portion of Integro's second lien on non-accrual, which represent only $10.9 million or 0.3% of our current book value. NMFC's cumulative credit performance shown on the right side of the page remains strong. Since our inception in 2008, we have made $9.6 billion of total investments, of which only $306 million have been placed on non-accrual. Of the non-accruals, only $79 million have become realized losses over the course of our 13-plus-year history. As shown on the next page, default losses have been more than offset by realized gains elsewhere in the portfolio. The chart on Page 17 tracks the company's overall economic performance since its IPO in 2011. As you can see at the top of the page, since our initial listing, NMFC has paid $992 million of regular dividends to our shareholders, which have been fully supported by $1 billion of net investment income. On the lower half of the page, we focus on below the line items where we show that since inception, highlighted in blue, we have a cumulative net realized gain of $17.2 million, which is an approximately $15 million improvement compared to last quarter as a result of certain opportunistic sales in our net lease portfolio that we disclosed last quarter. The cumulative realized gain is offset by $49.5 million of cumulative unrealized depreciation on our portfolio, which increased this quarter by about $30 million due primarily to general mark-to-market declines associated with widening risk spreads in the general market. On the bottom right in yellow, we show the cumulative net realized and unrealized loss stands at just $32 million, which remains a tiny fraction of the $1 billion of NII that we have generated since our IPO. As we look forward, our team remains very focused on reversing the small cumulative loss and maintaining best-in-class credit quality throughout the portfolio. Page 18 shows a stock chart detailing NMFC's equity returns since its IPO over 11 years ago. Over this period, NMFC has generated a compound annual return of 10.2%, which represents a very strong cash flow-oriented return in an environment where risk-free rates have averaged less than 1%. This year, NMFC's performance has compared favorably to most equity indexes and has materially exceeded that of the high-yield index as well as an index of BDC peers that have been public at least as long as we have. I will now turn the call over to our COO, Laura Holson, to discuss more details on our recent originations and current portfolio construction. -------------------------------------------------------------------------------- Laura C. Holson, New Mountain Finance Corporation - COO [7] -------------------------------------------------------------------------------- Thanks, John. As shown on Page 19, we originated over $220 million in Q2 in our core defensive growth verticals, including enterprise software, health care services, and technology and business services. We primarily funded these originations with repayments and a modest amount of sales keeping us fully invested and at the high end of our target leverage range. We continue to have great success targeting and sourcing high-quality deals within niches of the economy where we have the highest conviction. Since quarter end, overall deal activity has been steady, but more borrowers continue to migrate to the direct lending market as the syndicated market remains somewhat closed to new issue. As always, we remain extremely selective on credit and are focusing on the highest quality opportunities in a widening opportunity set. We expect to remain fully invested in our target leverage range as our deal flow absorbs any proceeds from ordinary course loan repayments as well as any incremental capital raised through our ATM program. Turning to Page 20. We show that our asset mix is consistent with prior quarters or slightly more than 2/3 of our investments, inclusive of first lien, SLPs, and net lease are senior in nature. Approximately 7% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. Assuming solid operating performance and a supportive valuation environment, we believe these equity positions could continue to increase in value and drive book value appreciation. We hope to monetize certain of these equity positions in the medium-term and rotate those dollars into yielding assets. Page 21 shows that the average yield of NMFC's portfolio increased from 9.8% in Q1 to 10.3% for Q2, largely due to the benefit of the increasing forward LIBOR curve. Post quarter end, we've seen spreads widen approximately 75 basis points as well as higher fees for direct lending opportunities, which help support our net investment income target. Turning to Page 22, we show detailed breakouts of NMFC's industry exposure. The center pie chart shows overall industry exposure, while the surrounding pie charts give more insight into the significant diversity within our software, services, and healthcare sectors. We believe these sectors are well positioned in an inflationary environment given the pricing power and margin profile that comes along with the largely tech and services nature of these industries. The sectors we focus on have uniquely attractive cash flow characteristics such as high EBITDA margins, minimal CapEx and working capital needs, and flexible cost structures. As a result, as interest rates rise, we believe most of our borrowers have sufficient free cash flow to cover the increasing interest burden. We have successfully avoided nearly all of the most troubled industries while maintaining high exposure to the most defensive sectors within the U.S. economy that we believe can perform well in more volatile macro environments. Finally, as illustrated on Page 23, we have a diversified portfolio. Our largest single obligor Edmentum now represents 4.4% of fair value as the company continues to appreciate in value due to the strong underlying business performance and secular tailwinds in the education technology space. The top 15 investments inclusive of our SLP funds account for 37% of total fair value. With that, I will now turn it over to our CFO, Shiraz Kajee, to discuss the financial statements. Shiraz? -------------------------------------------------------------------------------- Shiraz Y. Kajee, New Mountain Finance Corporation - CFO & MD [8] -------------------------------------------------------------------------------- Thank you, Laura. For more details on our financial results and today's commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Now I'd like to turn your attention to Slide 24. Portfolio had over $3.3 billion in investments at fair value at June 30 and total assets of $3.4 billion. With total liabilities of $2.1 billion, of which total statutory debt outstanding was $1.7 billion, excluding $300 million of drawn SBA-guaranteed debentures. Net asset value of $1.4 billion or $13.42 per share was down $0.14 or 1% from the prior quarter. At quarter end, our statutory debt-to-equity ratio was 1.27:1. However, net of available cash on the balance sheet, net leverage is 1.25:1 within our target leverage range. Slide 25, we show our historical leverage ratios, and our historical NAV adjusted for the cumulative impact of special dividends. Consistent with our goal of minimizing credit losses and maintaining a stable book value over the long-term, you will see that current NAV adjusted for special dividends is in line with NAV from our IPO over 11 years ago. Slide 26, we show our quarterly income statement results. We believe that our NII is the most appropriate measure of our quarterly performance. This slide highlights while realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line. For the current quarter, we earned total investment income of $72.8 million, a $4.2 million increase from the prior quarter. This was due to higher interest income from initial base rate resets and higher fee income in the quarter. Total net expenses were approximately $41.4 million, a $2.4 million increase quarter-over-quarter due primarily to higher costs and our floating rate debt. As discussed, the investment adviser is committed to a management fee of 1.25% for the 2022 and 2023 calendar years. We've also pledged to reduce our incentive fee if and as needed during this period to fully support the $0.30 per share quarterly dividend. Based on our forward view of the earnings power of the business, we do not expect to use this pledge. It is important to note that investment adviser cannot recoup fees previously waived. This results in quarterly NII of $31.4 million or $0.31 per weighted average share, which exceeded our Q2 regular dividend of $0.30 per share as a result of the net unrealized depreciation in the quarter but an increase in net assets resulting from operations of $15.8 million. Slide 27 demonstrates 90% of our total investment income is recurring in nature. We believe this consistency shows the stability and predictability of our investment income. Turning to Slide 28, the red line shows our dividend coverage, while NII exceeded our Q2 dividend. The dividend protection program could have provided additional coverage if needed. Based on preliminary estimates, we expect our Q3 NII will be at least $0.30 per share. Given that our Board of Directors has declared a Q3 dividend of $0.30 per share, which will be paid on September 30 to holders of record on September 16. On Slide 29, we highlight our various financing sources. Taking into account SBA-guaranteed debentures, we had over $2.3 billion of total borrowing capacity at quarter end with over $330 million available on our revolving lines subject to foreign-based limitations. As a reminder, both our Wells Fargo and Deutsche Bank credit facilities covenants are generally tied to the performance -- the operating performance of the underlying businesses that we lend to rather than the marks of our investments at any given time. Finally, on Slide 30, we show our leverage maturity schedule. As we've diversified our debt issuance, we have been successful at laddering our maturities to better manage liquidity and over 75% of our debt matures after 2025. Our $55 million 2022 maturity was repaid on July 15. Furthermore, our multiple investment-grade credit ratings provide us access to various unsecured debt markets, that we continue to explore to further ladder our maturities in the most cost-efficient manner. With that, I would like to turn the call back over to Rob. -------------------------------------------------------------------------------- Robert A. Hamwee, New Mountain Finance Corporation - CEO & Director [9] -------------------------------------------------------------------------------- Thanks, Shiraz. In closing, we are optimistic about the prospects for NMFC in the months and years ahead. Our long-standing focus on lending to defensive growth businesses supported by strong sponsors should continue to serve us well. We once again thank you for your continuing support and interest, wish you all good health, and look forward to maintaining an open and transparent dialogue with all of our stakeholders in the days ahead. I will now turn things back to the operator to begin Q&A. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) So our first question comes from the line of Jordan Wathen of Wells Fargo. -------------------------------------------------------------------------------- Jordan Tyler Wathen, Wells Fargo Securities, LLC, Research Division - Associate Equity Analyst [2] -------------------------------------------------------------------------------- Just a question on Edmentum. Obviously, you guys have chosen to hold on to this one and you've added more over time. And the results have been pretty impressive with some capital gains. How are you guys thinking about that asset today? And is there a point at which it becomes too big as a percentage of the portfolio where it becomes something that you feel like you have to move rather than something that's just nice to have. -------------------------------------------------------------------------------- Robert A. Hamwee, New Mountain Finance Corporation - CEO & Director [3] -------------------------------------------------------------------------------- Yes. So fortunately, Edmentum has become as big as it has for a good reason, right, as the value has just grown so significantly. And also we've taken a fair amount of cash off the table on Edmentum as we sold down our position there. You may recall, at one point, we owned over 40% of the company. And through a series of sales, we now own close to 10% of the company. And so it's just that the enterprise value of the company has continued to grow so strongly that's reflected -- despite the decreasing ownership percentage, the valuation continues to rise. All that said, I can't speak to exact specifics. It's certainly our intention to broadly monetize the equity portfolio over time, Edmentum is obviously a critical part of that. And I think we -- there's certainly a reasonable chance that we'd see Edmentum monetize in the quarters to come. Obviously, no guarantees there but that is certainly a real possibility. -------------------------------------------------------------------------------- Jordan Tyler Wathen, Wells Fargo Securities, LLC, Research Division - Associate Equity Analyst [4] -------------------------------------------------------------------------------- Okay. And then we noticed the new PIK preferred you had to Kaseya, could you guys just talk about maybe how you're thinking about those higher yielding, maybe more structured investments as part of the mega deals and what you're seeing out there? And what's interesting do you do and what isn't? -------------------------------------------------------------------------------- Robert A. Hamwee, New Mountain Finance Corporation - CEO & Director [5] -------------------------------------------------------------------------------- Sure. John, do you want to address that one? -------------------------------------------------------------------------------- John R. Kline, New Mountain Finance Corporation - President & Director [6] -------------------------------------------------------------------------------- Sure. I think as we said in our comments, we think the deal environment is very interesting right now. We expect our sponsor clients to be very active in the markets. Generally, as I mentioned, the pricing for loans has gotten much more attractive, which is great. Structures are better, equity contributions are big. And as you can see, we've been participating mostly on the unitranche side, but selectively down the capital structure on PIK preferreds. And I think that's going to continue over the course of this year and next. Unitranche will be our bread and butter. But when we see just really great compelling situations where we can buy more of a junior piece of the capital structure that has a yield that makes sense as a yield enhancement for our overall portfolio, we're definitely going to do that. So -- and as I said, I think the environment will be good for both unitranche and select preferred investments. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- There's a new question registered from Ryan Lynch of KBW. -------------------------------------------------------------------------------- Ryan Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8] -------------------------------------------------------------------------------- First question -- I also actually just wanted to first give you a compliment on the slide deck, a ton of, I think, helpful information both on the movements of some of the stressed investments, improvements, and declines, is very helpful. And then also Slide 15, actually showing the movement in NAV related to credit versus the NAV movements related to broad-base spread movements was incredibly helpful. So really well done with the slide deck. My first question, I wanted to talk about -- you gave some commentary on your movements from interest rates, the kind of broad-based commentary. I was wondering if you guys had run any sort of analysis, you may or may not have, but on what you guys expect the potential impact for rising rates for the third quarter just because rates -- they're moving so quickly recently, and they've reset kind of on this lag. And so as you mentioned, rates were very high in the second quarter, but you and most BDCs haven't really gotten much of a benefit from that because they're kind of resetting on this lag. And so I wonder if you guys have done an analysis of the potential impacts for rising rates as they reset at the beginning of the third quarter, what you expect? -------------------------------------------------------------------------------- Robert A. Hamwee, New Mountain Finance Corporation - CEO & Director [9] -------------------------------------------------------------------------------- John, you touched on that a little bit. Do you want to give a little more detail around that? -------------------------------------------------------------------------------- John R. Kline, New Mountain Finance Corporation - President & Director [10] -------------------------------------------------------------------------------- Sure. It's something that we're constantly looking at. And as I tried to allude to, Ryan, it's a little bit of a -- it's constantly moving because when we think about all the different floating rate exposures we have, our liabilities, in some cases, will move every day where we get to reset every day to whatever the day -- 1 month LIBOR is. Different facilities are slightly different with regard to the resets. And then on the asset side, while companies tend to cluster at certain dates in terms of resets, it's not totally consistent. But when we think about this quarter, there is a material tailwind. And as rates rise, companies are going to be forced to choose either 1-month LIBOR, 3-month LIBOR. And in certain cases, they may take a bet and take a longer LIBOR contract. But in general, I'd say that's looking to be a real tailwind for us, and it's something that every month that we reevaluate and look at. And I can just tell you it is very positive. It's just difficult to put a precise number of cents per share, just given some of the movements that I tried to articulate. But it is positive. And as long as LIBOR goes up, our companies are going to be -- our assets, our loans are going to be forced to reset at those higher rates, which is a good thing just given our asset liability mix that we discussed on Page 14. -------------------------------------------------------------------------------- Ryan Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11] -------------------------------------------------------------------------------- Okay. That's fair enough to understand. It's a complicated and kind of a fluid situation, but I appreciate the commentary. You gave a lot of comments on kind of the broader environment for deploying and lending money, which is very consistent with what we've heard other direct lenders talk about how it's certainly become more favorable from a lending standpoint. I'm just curious you guys have this equity co-investment program that you guys announced a while ago. Does this environment, which has become certainly more lender-friendly, but I would also assume purchase price multiples are also lower, which could be radically mean it's a decent time to be -- making some equity investments. I'm just curious, in this current environment, do you see any sort of changes in your appetite to participate in the equity co-investments more or less than what you guys have done in the past? -------------------------------------------------------------------------------- Robert A. Hamwee, New Mountain Finance Corporation - CEO & Director [12] -------------------------------------------------------------------------------- Yes. I think it's a good question. I think we're not trying necessary to time the market in terms of tops and bottoms. So I think our approach will continue to be sort of slow and steady on the equity co-invest and where there is something that just makes perfect sense, and we'll always do it in small dollars. But I do think our goal of building a really high-graded portfolio of equity co-invest to further build book value over the long-term is still very much on topic for us, and I would expect to see selective additions to that program in the quarters ahead. But I don't think, Ryan, we're trying to make it, call and say oh, gosh the lows are in, or now we're going to wait because we think the lows will be 6 months. I think it's really more idiosyncratic from the bottom up. When we see something that really fits well with the program, we'll add that. And so I do -- that said, we all are seeing some very interesting things, so I would expect to see a couple of additions in the next couple of quarters. -------------------------------------------------------------------------------- Ryan Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [13] -------------------------------------------------------------------------------- Okay. That makes sense. So nothing really accelerating or decelerating from the broader market, it's just more bottoms up today. The other question I had, and it looks like your guys' core income has come a long way from you guys implementing sort of those willingness to do those potential fee waivers of incentive fees. It looks like over the next couple of quarters, given the trajectory of interest rates, of course, things could change. But it looks like you guys are going to have a pretty meaningful dividend coverage and actually over-earning the dividend. I'm just curious, do you guys have -- can you remind me of what is the stated policy that you guys choose to set the dividend at? Would you guys -- (inaudible) policy that you guys are fine meaningfully over-earning the dividend and potentially growing a little bit of book value a quarter if you guys do have core earnings well above the dividend or would you guys ever anticipate either raising the dividend or paying out that extra earnings in the form of like some sort of supplemental dividend, which you've seen some other BDCs? Just trying to get a sense because I think we could be approaching a new territory that we haven't seen in a while. Well, there could be some meaningful over in your earning the core dividend. -------------------------------------------------------------------------------- Robert A. Hamwee, New Mountain Finance Corporation - CEO & Director [14] -------------------------------------------------------------------------------- Yes, it's a great question, and it's something we spend a lot of time talking about. I think philosophically, we want to pay out our NII. We want to do it in a consistent way. So if we had a crystal ball and the crystal ball said, hey, base rates are reset for the next 10 years at 3.5%. And therefore, we're going to over-earn the dividend for the next 10 years by x, we would consider raising the dividend to match that. The problem, of course, is we don't know what interest rates are going to be in 18 months or 2 years, it's obviously a very volatile thing. So while -- I don't want to say we've never raised dividend. At some point that could happen. I think our medium-term plan is probably to over-earn potentially either book-to-bill value and/or over-distribute in the form of specials, but continuously reevaluate. And if we feel we've gotten to a new plateau that is consistent in all -- in virtually all cases, then we reevaluate. But I think what we don't want to do is going to raise and then cut because the Fed reverses direction in 18 months from now and LIBOR is back at -- or SOFR is back at 50 basis points. So that's the tension we're navigating against. But I do think Ryan, philosophically, yes, we want to distribute our NII in a fulsome way. And we do feel good about having a little more cushion for sure. -------------------------------------------------------------------------------- Ryan Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [15] -------------------------------------------------------------------------------- Yes, I think that makes a ton of sense. You certainly don't want to get over your [SKUs] and really just depending on what the broader market and the Fed does with rates in order for you to earn the dividend. So that makes sense. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- As there are no further questions, at this time, I'd like to turn the call back over to Robert for closing remarks. -------------------------------------------------------------------------------- Robert A. Hamwee, New Mountain Finance Corporation - CEO & Director [17] -------------------------------------------------------------------------------- Thank you, operator. Well, thank you, everyone. As always, we appreciate the time and the interest. And again, we're always here to talk to, and we look forward to communicating again next quarter and into the months ahead. And I hope everyone has a great end of the summer. Thank you. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, that now concludes today's New Mountain Finance Corporation Earnings Call. I'd like to wish you a great day ahead. You may now disconnect your lines.