New Mountain Finance Corp Q4 FY2023 earnings call

Key Points:

• Fourth quarter financial results were in line with preliminary estimates. Adjusted net investment income was $0.40 per share, covering the regular dividend.
• Net asset value per share decreased slightly to $12.87, excluding the special dividend impact, showing stable credit performance.
• Issued a $300 million five-year investment-grade bond on February 1st. Team expanded to 245 members with specialties in defensive growth sectors like life science supplies, healthcare IT, etc.
• Portfolio credit performance was stable with 95% rated green. Had positive credit movements with pay downs and migrations to green. Originated $142 million of assets in Q4, with $257 million in repayments/sales, deleveraging towards 1x to 1.25x debt-to-equity range.

Adjusted net investment income for the fourth quarter was $0.40 per share, covering the $0.32 per share regular dividend paid in December. Net asset value per share decreased slightly to $12.87. The portfolio is 88% floating rate and 12% fixed rate on assets, with liabilities at 59% fixed rate and 41% floating rate. Approximately 68% of investments are senior in nature, second lien positions decreased from 17% in the prior quarter to 15% in Q4. Adjusted net investment income exceeded the regular dividend by $0.08 per share. For the year, total dividends were $1.53 per share, representing an annual distribution yield of over 12%.

Forward-Looking:

• Expect to generate a variable supplemental dividend of at least $0.02 per share in the second quarter of 2024. Confident in continued strong performance of the portfolio. Anticipate deal flow to increase in coming quarters, which should be supportive of good spreads in the market.

Risks:

• Deal flow is currently lower than desired, which could impact spreads. Market volatility and economic uncertainty pose potential risks to credit performance.

Q: Wanted to start by asking about the potential use of swaps to reduce the asset sensitivity of the balance sheet?

A: Explored on the liability side, but not economic on the asset side. We are looking at it for the recent investment grade bond issuance on the liability side.

Q: Thoughts on the direction for the weighted average yield for the portfolio over the course of 2024?

A: Spreads are tighter now, deal flow expected to increase. New originations have good spreads, and repayments of second liens present an opportunity to originate new first lien and unitranche loans with good spreads while reducing portfolio risk.

Q: Outlook for the leverage profile?

A: Target is 1x to 1.25x on a statutory basis, comfortable within that range. Deal flow has been low currently, but expected to pick up in coming quarters.

Q: Commentary on improved internal risk ratings?

A: Two specific names moved to the green category this quarter, one recovering from supply chain issues and another with improved business performance. Reflects the defensive growth strategy and resilient nature of underlying businesses.

Q: Guide for next quarter and what's driving the lower guide?

A: Lower guide due to margin factors like repayments reducing average leverage, loss of income from Careismatic Brands and Haven, higher leverage cost, and lower deal flow velocity. But still confident in the outlook.

Q: Details on Haven monetization and its impact?

A: Special dividend from Haven gains, tax related items, with minor impact on net investment income this quarter.

Q: Thoughts on the net lease portfolio and origination opportunities?

A: Well-positioned with long-term leases, high tenant quality, fixed rate debt, and 2-3% escalators. Not actively originating new properties in NMFC, but the portfolio is valuable and a source of income and potential principal gains over time.