New Mountain Finance Corporation Price & Performance (NMFC)

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 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 will be that we will be referring to throughout this call, please visit our website www.newmountainfinance.com New. At this time, I'd like to turn the call over to Steve Kalinski, NMFC's Chairman who will give us some highlights beginning on Page five of the slide presentation. Thanks, Chris. 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 New 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 New. 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 $90,000,000 through a convertible [indiscernible] valuing UniTAC at approximately $370,000,000 which implies over a two times multiple on our original cost basis. And is above our Q4 mark. This transaction returned $42,000,000 to NMFC through full redemption of Unitek's PIK second lien tranche, and PICC 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 and the firm now manages over $55,000,000,000 of assets. Similarly, NMFC has experienced only 12 basis points of of average annualized net realized losses in its nearly fourteen years as a public company. While paying out almost $19 per share of cumulative dividends. We believe NMFC's loans today are well positioned overall in defense growth industries that we think are right in all times and particularly attractive in less certain economic times. As the Unitek example also shows, 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 two seventy members and the firm believes we have achieved over $87,000,000,000 of enterprise value 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 Plies, 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 1,600,000.0 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 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 fourteen 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, and distributing virtually all of our excess income to shareholders.

Since our IPO in 2011, NMFC has returned approximately $1,400,000,000 to shareholders through our dividend program generating an annualized return 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 who are sophisticated and supportive 10, 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's group of mission critical real estate occupied by defensive growth oriented businesses. [indiscernible] 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 to increase the diversity of the portfolio particularly within the top 10 positions. But 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 inclusive of hedges and we remain committed to building a high quality Finally, in addition to the UniTec partial sale, we expect to have future opportunities to sell certain equity stakes and PIK investments. While our PIK portfolio has strong credit quality, and attractive generates attractive shareholder returns we remain committed to maintaining prudent overall levels of PIK income. Turning to Page 11, the internal risk rating of our portfolio were roughly consistent with the prior [indiscernible] at approximately 97% green rated.

Similar to prior quarter, we have no companies rated red and importantly, we had only $17,000,000 of fair market value or one company moved negatively on our risk rating scale. Our most challenged names marked orange represent only 1.2% of MMFC's fair market value making them a negligible part of our portfolio. The updated heat map is shown in its entirety on Page 12. With 97% of our assets rated green. We believe our portfolio is well positioned The vast majority of our investments continue to experience both top and bottom line growth consistent with our underwriting. Turning to Page 13, we provide a graphical analysis of NAV changes during the quarter resulting in a book value of $12 point five five dollars 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 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 14 addresses MFC's non accrual performance. On the left side of the page, we show the current state of the portfolio where we have approximately $3,100,000,000 of investments at fair market value, of which only $38,000,000 or 1.2% of the portfolio is currently on non accrual. We show these statistics pro form a for the Unitek transaction after which New 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 $10,100,000,000 of investments while realizing [indiscernible] of $67,000,000 This represents an average annualized net realized loss rate of approximately 12 basis points since IPO. On Page 15, we present MFC's consistent and compelling returns over the last thirteen plus years. Cumulatively, NMFC has earned nearly $1,400,000,000 in net investment income while generating only $67,000,000 of cumulative net realized losses and only $49,000,000 of cumulative net unrealized depreciation resulting in over $1,200,000,000 of value created for shareholders. I will now turn the call over to our Chief Operating Officer, Laura Holsen, market environment and provide more details on NMFC's quarterly performance.

Thanks, John. 2024 concluded in similar fashion to the rest of [indiscernible] With episodic new deal activities. Spreads have tightened over the last twelve to eighteen months as we've been in a less active deal flow environment and the syndicated market has been aggressive. That said, believe direct lending remains an attractive asset class in today's market. Have consistently found opportunities in our defensive growth verticals where we can make loans that attach at $1.01 in the capital structure at 9% to 10% unlevered returns. Deal structures remain compelling with significant sponsor equity contribution, representing the vast majority of the capital structures. We continue to expect an increase volume of M and A activity in 2025 for the reasons we've previously discussed including the magnitude of dry powder for private equities, 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-twenty twenty one deals that we expect sponsors are focused on exiting. Counter to the expected pickup in M and A activity is a back 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're as well positioned as we can be However, credit selection remains critical particularly as there is minimal pricing and structural differentiation between [indiscernible] Page 17 presents an interest rate analysis that provides insight into the effective base rates on MFC's earnings. The NMFC loan portfolio is 86% floating rate 14% fixed rate while our liabilities are 49% floating and 51% fixed rate. Pro form a for the 2022 convert and 2021 unsecured [indiscernible] towards 74% floating and 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 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 twenty twenty five. Both of which represent opportunities to hopefully refinance at lower rates.

Moving on to Page 18, In Q4, we originated $33,000,000 of assets, offset by $218,000,000 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 a strategic as well as two second lien assets.

While I've mentioned the challenges of spread compression in direct lending, these market environments can be beneficial for derisking. We've 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 didn't warrant a repricing or New 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 19, similar to last quarter, approximately 75% of our investments 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 position 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 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 20 shows that the average yields of NMFC's portfolio increased to 11% for Q4 primarily due to the higher for longer shift in the forward sulfur 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 21 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 $184,000,000 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 New opportunity maps against our defensive growth criteria, and internal Newmont 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 1.8x this quarter. We've seen sponsors continue to proactively support company liquidity and continued M and A activity.

This is a great indication that our portfolio consists of companies that are performing well and are able to attract additional investment in healthy valuations. Finally, as illustrated on Page 22, we have a diversified portfolio across 121 portfolio companies. Excluding our investments in the SLPs and net lease funds, the top 10 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, Chris Corbett to discuss our financial results. Thank you, Laura.

For more details, please refer to our quarterly report on Form 10 ks that was filed yesterday with the SEC. As shown on Slide 23, the portfolio over $3,000,000,000 of investments at fair value on December 31 and total assets of $3,200,000,000 with total liabilities of $2,000,000,000 of which Net asset value of approximately $1,400,000,000 or $12.55 per share was down slightly compared to prior quarter. At quarter end, our statutory debt to equity ratio was one spot one:five:one and one spot: one:one New available cash on the balance sheet which is in the middle of our target range of one to 1.25 times. On Slide 24, we show our quarterly income statement results. For the quarter, we earned total investment income of $91,000,000 or 2% decrease over prior year Total net expenses of $57,000,000 decreased 9% versus 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 25, we earned total investment income of $371,000,000 for the year which represented a decrease of 1% over the prior year Total net expenses of $225,000,000 increased 4% over the prior year Slide 26 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, positioned 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 execute on their strategic growth plans.

Turning to Slide 27, the red line shows the coverage of our regular dividend. For Q1 twenty twenty five, our Board of Directors has again declared a dividend of $0.32 per share. On Slide 29, we highlight our various financing sources and diversified leverage profile.

Taking into account SBA guaranteed debentures, we have $3,000,000,000 of total borrowing capacity with $1,100,000,000 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 $244,000,000 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 and from approximately 40% at 12/31/2023 to 50% at 12/31/2024 to more closely match our floating rate assets. While during the same period increasing our unsecured debt [indiscernible] unsecured debt percentage from 51% to 79%, a 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%. [indiscernible] Finally, on Slide 30, we show our leverage maturity schedule.

We continue to ladder our maturities and have sufficient liquidity to manage upcoming maturities in 2025 and early twenty twenty six. 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. We are pleased to have a strong start to 2025 with the UNITEX sale as an important catalyst. Credit quality remains good Our portfolio is more senior than ever before. 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 and A. Operator? Thank you. We will now begin the question and answer session. And your first question today will come from Robert Dodd with Raymond James. Hello, everybody, and congrats on the quarter, particularly Unitek. Tech.

So, well, at the quarter end. On Unitec, Verkana, I realize you said there'd be more more details on the Q1 call, but at the exit valuation of Unitek, not exit, but partial realization, How does that enterprise value stack up with the enterprise value used to inform the mark at Q4.

Sure. As Steve mentioned, it's modestly higher but overall, the big picture would be it would be in line to modestly higher.

Got it. Got it. Thank you. And then on on one of the other themes, I think in the prepared remarks, I think it was I said that there's some uncertainties in the market, maybe Maybe it's going to slow activity a little bit in the near the early part of 2025 and that's kind of a recurring theme from new competitors this quarter. In that in light of that potentially, how comfortable do you still feel about [indiscernible] your pick exposure as we go through the year? So I'm just trying to get a target, but It's partly informed by the fact that you thought it would be 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 when we think about the opportunity to reduce some of the PIK positions, I think we will have will be able to show some progress based on what we're seeing on the Q1 call. So we feel good about it. And beyond Q1, we'd be opportunistic that we can continue to work down pick positions. So I wouldn't say the market environment has changed our view or our outlook for for that strategic goal.

Got it. Got it. Thank you. And then just I mean in terms of allocation, I know you talked you want to increase senior, which is obviously first lien, loan funds net lease. Would you is the expectation you keep the mix between those three the same or is there one of those areas in particular you'd like to increase New, I think it's safe to say that we would within that category, the mix stay the same.

Got it. Thank you. And then just overall any kind of market spreads do look like they may be leveled out, but do you think that is that a temporary thing or are things kind of recalibrate? Or do you think we're at kind of the bottom on like for like, but it's obviously a trend where you work in the market. But what are your thoughts on that going through And then just tied to that, how much 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 kind of repricing activity.

Yes. On the first point around spreads, we do feel like they have stabilized. I mean, we're seeing unitranches now for high quality companies in the 450,000, 475,000 to 500 area depending on on all the circumstances. And to be honest, they've been hovering there for a while. So we haven't seen meaningful movement. I think to the extent that M and A picks up the way we expect it to, we would hope and expect the spreads to pick back up alongside that. But we don't we have not seen material further pressure downward and and we feel reasonably confident that we will not particularly as M and A 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, a lot of our sponsor clients are pretty sophisticated. They have capital markets teams that are really mining 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. Sure. 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 Klein for any closing remarks. Has now concluded. Thank you for attending today's presentation. You may now disconnect.