Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adjusted net investment income for the quarter was $0.36 per share, exceeding the regular dividend of $0.32 per share.
- Net asset value per share remained stable at $12.74, with only a minor decline of $0.03.
- The company announced a sixth consecutive variable supplemental dividend payment.
- New Mountain Finance Corp (NMFC, Financial) plans to permanently reduce its base management fee to 4%.
- The internal risk ratings of the portfolio improved, with 97% of the portfolio rated green.
Negative Points
- The market for second lien loans remains tight, with spreads being unattractive.
- The value of certain investments, such as Northstar and Edmentum, declined during the quarter.
- Non-accrual investments represent 1.4% of the portfolio, with some older vintages still on non-accrual.
- The company faces potential earnings pressure if base rates decrease.
- Sponsor-backed M&A activity remains below normal levels, with a more significant pickup expected in 2025 rather than the second half of 2024.
Q & A Highlights
Q: Was there any ATM capital raise below NAV, and what should we expect if the stock reaches NAV again?
A: John Kline, President and CEO: When we issue shares on our ATM program, we ensure the company nets NAV. We paid small subsidies to ensure this. We aim to grow NMFC and see a significant opportunity to expand our direct lending franchise. If the stock trades well, we will continue to utilize the ATM program.
Q: Can you clarify the color ratings provided, specifically regarding Transcendia?
A: Laura Holson, COO: When a portfolio company restructures, we reset the color mapping. Transcendia was not green last quarter; it was likely orange. Post-restructuring, we reset expectations and underwriting cases, so it is now green.
Q: Can you provide details on the one-time dividend and the elevated other income line?
A: Kris Corbett, CFO: The one-time dividend received was approximately $2 million. The uptick in other income was due to increased portfolio velocity and originations during the quarter.
Q: Will swapping fixed-rate unsecured debt to floating be an ongoing strategy?
A: Laura Holson, COO: We swapped our investment-grade bond issuance from fixed to floating rate based on the current interest rate environment. We expect to continue this strategy but will evaluate on a case-by-case basis.
Q: What is the outlook for activity in the back half of the year, and how is second lien activity trending?
A: Laura Holson, COO: Despite a potentially slower M&A environment, we remain active due to our incumbency position and portfolio activity. We expect continued second lien activity but at a potentially slower pace.
Q: What could make second lien debt more appealing in the market?
A: John Kline, President and CEO: Second lien debt is currently out of favor due to the popularity of unitranche and preferred tranches. Competitive pricing in the larger syndicated market also makes second liens less attractive. However, market conditions can change, and we remain open to investing if value improves.
Q: How do you manage PIK income in new origination activity?
A: John Kline, President and CEO: We invest in high-quality direct lending credits, accepting partial PIK features as a market standard. We aim to reduce overall PIK in the portfolio by exiting older 100% PIK positions over the next year.
Q: What drove the high level of origination activity this quarter?
A: Laura Holson, COO: Most of the activity was M&A-driven, with some opportunistic refinancing and add-on investments within our portfolio. This reflects our strategy of lending to well-performing companies we know well.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
