New Mountain Finance (NMFC) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Net investment income for Q3 was $0.32 per share, exceeding the $0.30 dividend per share paid on September 30 [8] - Net asset value decreased by $0.22 or 1.6% to $13.20 per share, despite rising interest rates [9][52] - Total investment income increased to $78.1 million, a $5.3 million increase from the prior quarter [55] - Quarterly net investment income was $32.5 million, resulting in a coverage of the dividend [57] Business Line Data and Key Metrics Changes - The portfolio had over $3.2 billion in investments at fair value, with total assets of $3.3 billion and total liabilities of $2 billion [51] - The average yield of the portfolio increased from 10.3% in Q2 to 11.3% in Q3, benefiting from the rising LIBOR curve [45] - The company originated almost $125 million in Q3 in core defensive growth verticals, including software and business services [41] Market Data and Key Metrics Changes - The overall investing environment remains challenging due to higher interest rates and inflation, but corporate direct lending is resilient [25] - The direct lending market continues to gain share from syndicated loans and high-yield bonds, offering price clarity and capital certainty [28] - The weighted average EBITDA of borrowers has increased to over $130 million, indicating stronger financial health [48] Company Strategy and Development Direction - The company focuses on lending to defensive growth businesses, which are less sensitive to economic cycles [17] - The strategy includes avoiding sectors with high volatility and cyclicality, concentrating on acyclical growth sectors [17][19] - The management plans to maintain dividend protection through waiving incentive fees if necessary [11] Management Comments on Operating Environment and Future Outlook - Management expressed optimism about future earnings potential due to the rise in interest rates, which is expected to positively impact quarterly earnings [11][29] - The company remains focused on maintaining high credit quality and is confident in the resilience of its portfolio amid rising rates [75] - Management highlighted the importance of the growth profile of underlying portfolio companies, which provides a cushion against rising rates [73] Other Important Information - The company has never experienced a bankruptcy or missed an interest payment since its inception [10] - The management team has been strengthened with key promotions, including John Kline becoming CEO effective January 1, 2023 [14] Q&A Session Summary Question: Future dividend coverage and strategy - The company intends to operate with a material coverage to the dividend, especially with rising rates [65] Question: Changes in terms and conditions for new originations - The company has not seen significant changes in interest rate floors for new transactions despite higher spreads [66] Question: Impact of rising rates on interest coverage - Management believes the portfolio can maintain adequate interest coverage even with rising rates, citing growth in underlying companies [75] Question: Current trends in portfolio growth - The company reports strong top-line growth trends, with some margin pressure but overall positive performance [80] Question: Software multiples and their impact - The company noted that while public software multiples have compressed, their lending positions remain secure with favorable loan-to-value ratios [84]