New Mountain Finance Corp (NMFC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 New Mountain Finance Corp. earnings conference call. My name is Derek and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Rob Hamwee, Chief Executive Officer. You may proceed.

Thank you and good morning, everyone. With me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital, and Adam Weinstein, CFO of NMFC. Steve is going to make some introductory remarks, but before he does, I'd like to ask Adam to make some important statements regarding today's call.

Thank you, Rob. I would like to advise everyone that today's call and webcast is being recorded.

Please note that they are the property of New Mountain Finance Corp. and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.

I would also like to call your attention to the customary Safe Harbor disclosure in our June 30 press release 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 these statements and projections. We do not undertake to update our forward-looking statements or projections unless required by law.

Any references to New Mountain Capital or New Mountain are referring to New Mountain Capital, LLC, or its affiliates and may be referring to our investment advisor, New Mountain Finance Advisors BDC, LLC, where appropriate.

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, or call us at 212-720-0300.

At this time, I'd like to turn the call over to Steve Klinsky, the Chairman of New Mountain Finance Corp., who will give some highlights beginning on page three of the slide presentation. Steve?

Thanks, Adam. Before turning the call back over to Rob and Adam, I wanted to welcome you all to this first earnings call for New Mountain Finance Corp.

As you know, New Mountain Capital did not sell any shares in the recent public offering. Rather, I and my colleagues bought over 2 million shares personally.

I believe that I was the largest individual buyer in the offering and that I am the largest individual shareholder in the Company today, as well as its chairman. Rob, Adam, and other New Mountain Capital executives were significant buyers in the offering as well. Whatever the size of our holdings might be, we hope to address you in the spirit of fellow shareholders as well as professional managers, and we hope to establish a track record of meeting or exceeding any guidance we might give.

Rob and Adam will go through the details, but I am pleased to report that New Mountain Finance has met or substantially exceeded its guidance so far.

New Mountain Finance's dividend and net investment income for the quarter ended June 30, 2011, are $0.27 per share, substantially exceeding our guidance of $0.20 to $0.25 per share. Importantly, shareholders will receive a full 90 days' worth of that quarterly dividend, even though the IPO was completed on May 19 with just 42 days of the quarter still to go.

The Company's book value on June 30 was $13.98 per share after reserving for this dividend. The record date for the June dividend is August 22, and it is payable on August 31. So a purchaser of shares today will, in essence, receive both the $13.98 book value plus the full $0.27 per share dividend just announced.

In addition, we are also able to announce our dividend for the current quarter ending September 30, 2011. It will be $0.29 per share, ramping upward from the June level, also consistent with the earnings expectations we set. The record date for this dividend is September 15, and it will be paid out on September 30.

The credit quality of New Mountain Finance's loan portfolio has been better than our guidance. We have built our models based on a 3% default rate and a 1% cumulative loss assumption from the date of the IPO. In fact, we have had no defaults or cumulative losses since the IPO and no defaults or losses even since October 2008 when the debt effort began. We also have no debt issues in non-accrual or non-performing status.

New Mountain Finance's pace of new investments is now also running above guidance. The Company invested $88.5 million net of redemptions in Q2, and we invested or committed $140 million net of redemptions over the last 90 days as we finished the IPO in the middle of Q2 and entered Q3.

Targeted yields on these new investments have been consistent with or better than our previously-communicated expectations, and the dislocation of credit markets in recent weeks is making it easier for us to obtain the yields we seek.

New Mountain Finance has also been able to expand its credit line with Wells Fargo for our senior loan fund, or SLF, by $25 million to $175 million, further enhancing a key competitive advantage of our Company.

As we look at macroeconomic conditions more broadly, the financial markets and global economy have been in obvious turmoil in recent weeks with an increased risk of a continuing or renewed recession. We believe the unique advantages of New Mountain Finance's strategy and approach become particularly clear, valuable, and important for shareholders in difficult times such as these.

At New Mountain, we do not try to outguess the ups and downs of the market. Rather, even when economic conditions are strong, we are always trying to prepare for future economic downturns that we expect will inevitably and eventually occur.

For that reason, New Mountain Capital has consistently emphasized investments in acyclical, recession-resistant, defensive-growth industries. These are sectors like repetitive business services and hard-to-replace software companies that can maintain their earnings power even as auto sales or home sales or other cyclical industries fall.

Second, at New Mountain Finance we try to understand companies and industries in a particularly deep, fundamental, and hands-on way. New Mountain Capital itself manages over $9 billion of assets. We have a team of over 50 investment professionals, including over 20 former CEOs, heads of strategy, operating executives, and management consultants. We have ourselves owned, controlled, or operated businesses in many of the same industries where we now extend credit.

Our goal as management is to put the full strength and experience of the $9 billion New Mountain Capital team behind the New Mountain Finance Corp. effort, and to control risk and achieve returns accordingly.

Overall, despite the weakness in the world around us, we are moving steadily forward on the acyclical path and strategy we have set. We believe our defensive growth approach, our consistent focus on risk controls, and our hands-on knowledge of industries, are major reasons why New Mountain Finance has had no losses to date and why New Mountain's private-equity funds have never had a portfolio-company bankruptcy or missed an interest payment in the history of our firm.

We are very pleased with the progress of New Mountain Finance's operation so far, pleased that the Company has outperformed its initial guidance, and very encouraged by the prospects before us.

With that, let me turn the call over to Rob Hamwee, New Mountain Finance Corp.'s Chief Executive Officer.

Thank you, Steve.

I'd like to start with a brief review of NMFC and our strategy. As outlined on page four of our presentation, NMFC is externally managed by New Mountain Capital, the strength and scale of which Steve has described. NMFC takes New Mountain's approach to private equity and applies it to corporate credit with a consistent focus on defensive-growth business models and extensive fundamental research.

Some of the key hallmarks of the defensive-growth business models include acyclicality, sustainable secular growth drivers, high barriers to competitive entry, niche market dominance, repetitive revenue, variable cost structures, and strong free cash flow. With this historically successful business model-focused approach in mind, our mandate since the inception of New Mountain's debt investment program in 2008 has been to target high-quality businesses that demonstrate most or all of the defensive-growth attributes that are important to us, and to do so within industries that are already well researched by New Mountain.

Or, more simply put, we invest in recession-resistant businesses that we really know and that we really like. We believe this approach results in a differentiated and sustainable model that will allow us to generate attractive risk-adjusted rates of return across changing cycles and market conditions.

To achieve our mandate, we utilize the existing New Mountain investment team as our primary underwriting resource. So for instance, when we look at a federal services deal, the team that analyzes the target company is comprised of the same individuals, i.e., the managing director, operating partner, vice president, associate, et cetera, that evaluates, executes, and monitors federal service deals for our private-equity fund.

In addition, we also draw upon the general industry knowledge and experience of a wide range of additional resources, including private-equity portfolio companies' executives and directors.

As outlined on page five, conditions in the credit market have been broadly and increasingly favorable for us as a buyer of credit since our IPO. In addition to reacting to the perception of a worsening economic outlook and the various macro headwinds associated with fiscal structural imbalances here and in Europe on a day-to-day basis, the broader high-yield and leveraged loan markets are heavily impacted by the relationship between the demand generated by fund flows into the market juxtaposed against the supply of new loans and bonds being raised.

In the first quarter of this year, the intersection of significant cash inflows into bond and loan funds, coupled with a dearth of new product, led to a sharp decrease in credit spreads and the wave of lender-unfriendly refinancings and repricings. These trends decelerated and then reversed over the course of the second quarter and early third quarter as fund inflows declined dramatically and in some periods turned negative, while a spike of private equity-fueled M&A financings and recapitalizations flooded the market with new supply.

So, after seeing spreads tighten modestly in the early part of the second quarter, we have seen a general widening of credit spreads since then that have continued through the third quarter. This trend toward widening spreads has been accompanied by increased volatility and declining risk appetites, and has allowed us to deploy capital on increasingly favorable terms.

Over the last few weeks, the downward move across financial markets has obviously accelerated and volatility has increased substantially, signaling a dramatic rise in the perception of risk of future economic weakness. I'd like to make three important points around these developments.

One, New Mountain Capital and, accordingly, NMFC have always been pro-actively focused on defensive acyclical business models avoiding heavily pro-cyclical industries like building products and capital equipment. And so, if the economy does move back into recession, we believe we are very well positioned to continue to have strong credit performance.

Two, our financing is termed out and not subject to traditional mark-to-market margin calls. So even a material change in asset valuations will not impact our ability to continue to access our credit facilities.

And three, we still have significant available capital from our IPO to take advantage of compelling buying opportunities brought about by the current dislocation.

Our single highest priority is to focus on risk control and credit performance, and we believe over time it is the single biggest differentiator of total return in the BDC space. We have therefore put together a few charts to help us communicate with you how we are performing against this most important metric. If you refer to page six, we lay out the cost basis of our investments, both the current 6/30/11 portfolio and our cumulative investments since the inception of our credit business in 2008, and then show what, if anything, has migrated down the performance ladder.

The first step would be if we need to put anything on our internal watch list, downgrading assets from their initial rating of two to a three or a four. The next step would be moving an asset to non-accrual, and the final development would be an actual crystallization of the loss through a restructuring or impaired sale.

As you can see, both for our current portfolio and on a cumulative-since-inception basis, we have had no material negative developments in our portfolio.

To help our shareholders get further visibility into asset-level credit performance and in keeping with our desire to be as transparent with the investment community as we possibly can be, we have created the tables on pages seven and eight. These tables show, for the operating company and SLF, respectively, leverage multiples for all of our material holdings when we entered an investment and leverage levels for the same investment as of the end of the current quarter.

While not a perfect metric, the asset-by-asset trend and leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical, fundamental support for our internal ratings and marks. As you can see by looking at the two tables, leverage multiples are in almost all cases trending in the right direction.

Moving on to portfolio activity, Q2 and Q3 to date have demonstrated our strong sourcing capabilities amid moderate prepayments. Specifically, as seen on page nine, in Q2 we invested in seven new material portfolio companies and had total growth originations of $131 million. Against this, we had prepayments and sales of $42 million and $10 million, respectively. All of the investments, in keeping with our strategy, are in industries and businesses that are well known to us through our historical private-equity activities.

For example, U.S. HealthWorks, a leading national provider of outpatient medical services for work-related injuries and illnesses, operates in a healthcare niche we have studied for many years and where we have strong operating partner expertise. Decision Resources, the leading provider of analytical services and research to the biotech and pharmaceutical markets, is another good example, a company our private-equity fund took a serious look at acquiring.

We continue to be active both in ramping up both the SLF and in acquiring second-lien and unitranche assets for the operating company. Both the levered SLF yields of over 17% and the OpCo unlevered yields of nearly 12% are consistent with our expectations and supportive of our fully ramped NII and dividend target.

Originations and commitments in the third quarter to date have been well ahead of our previously-communicated expectations, driven primarily by attractive market conditions as previously discussed and the ongoing expansion of our lower middle-market sponsored coverage efforts, which have been enhanced by recent additions to our team. As you can see on page 11, we have had $106 million of originations and commitments in the first 40 days of this quarter, as compared to $8 million of repayments. We have another $100 million-plus of opportunities in our near-term pipeline.

In terms of the portfolio review on page 12, I think the key takeaways are as follows. First, we continue to emphasize the middle market as 80% of our portfolio is under $100 million of EBITDA and 85% of the portfolio is in facilities under $300 million in size.

Second, we continue to skew towards first-lien and unitranche assets, but second lien and mezz are increasing as a percentage of quarterly activity.

And third, we maintain a portfolio comprised of companies in the defensive-growth industries like software, healthcare services, and business services we believe will outperform in an uncertain economic environment.

Finally, as illustrated on page 13, we have a broadly diversified portfolio with our largest investment at 6.5% of fair value and the top 15 investments accounting for 56% of fair value.

With that, I will now turn it over to our CFO, Adam Weinstein, to discuss the financial statements and key financial metrics. Adam?

Thank you, Rob.

For more details on our financial results and commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Please turn to slide 14, which shows our structure chart.

As you may recall, and as brief background, our structure was set up similar to an UPREIT structure whereby New Mountain Finance Corp., the public company or PubCo, has no direct operations of its own, and its sole asset is its units of our operating business, OpCo. Today, the other units of OpCo are held by a private BDC, AIV Holdings. This entity holds the predecessor interest of New Mountain's private-equity fund.

Our structure resembles a master feeder structure whereby the financial statements for OpCo flow to PubCo and AIV Holdings pro rata, based on their respective ownership. PubCo, OpCo, and AIV Holdings are all public filers, but the PubCo 10-Q contains all the relevant information.

For the quarter ended June 30, OpCo had a full quarter of operations. However, from a financial statement and tax perspective, the operations of PubCo only began at our IPO pricing date of May 19 and will therefore only reflect the May 19 to June 30 stub period of flowthrough income.

As we discussed on our road show, our deal was priced based on essentially the net asset value of OpCo at March 31, 2011, and so we have calculated and are paying a dividend off of the full quarter's worth of income. PubCo's net asset value per share should always synchronize to the net asset value per unit at OpCo at any given point in time.

Additionally, OpCo owns the equity of a non-recourse vehicle, SLF. As previously described, this vehicle originates lower-yielding first-lien loans, but with greater leverage at two to one. For GAAP and asset coverage purposes, we consolidate this SLF vehicle into the operations of OpCo, but again, the debt of the SLF is non-recourse to OpCo.

I would like to turn your attention to slide 15. On the left side, we show the unconsolidated view of OpCo and the SLF to give you a sense of how we really run our business. We think of returns from the SLF as dividends back to OpCo and our yield on our SLF equity.

The OpCo portfolio has approximately $322 million in investments and its equity of the SLF is about $95 million. We have approximately $78 million of cash and cash equivalents, representing remaining proceeds from our IPO, and about $8 million of other assets, which includes predominantly interest receivable and deferred credit facility costs.

We have about $34.3 million of debt outstanding under the OpCo credit facility, which is $160 million of capacity, and about $29 million of other liabilities, which is mainly made up of about $23 million of outstanding commitments on two investments at 6/30. These have closed and were funded in July.

This gets us to a net asset value of $440.6 million, or $14.25 per share. If you adjust our NAV per share for the Q2 2011 dividend we have declared and are paying at the end of this month, our NAV is $13.98 per share. Our NAV at the IPO, based on the offering price of $13.75, was $13.94 per share.

If you think of the portfolio completely consolidated, as it is reflected in our GAAP financial statements, we have $544.3 million in 47 investments. Approximately $222 million of those are SLF investments and total debt of $161.2 million. Approximately $127 million of that is SLF debt. Our consolidated debt to equity ratio is 0.37 times.

If you think about our investment capacity as of June 30, 2011, we have, A, $44.8 million of cash and cash equivalents less net current liabilities and our Q2 dividend, and B, about $174 million of capacity on our two credit facilities. This gave us about $219 million of dry powder for new investments at the start of the quarter.

On slide 16, we show our consolidated income statement for the full quarter at the OpCo level. One of the things we also discussed in our prospectus and on our road show was that our UPREIT-type structure is designed so that the built-in gains that were in the portfolio at the time of the IPO generally will only be allocated to AIV Holdings and not to PubCo, with the result that the ultimate distribution of those gains to the public shareholders generally will not be taxable to them.

Since we were not able to step-up the assets for GAAP, our income statement will generally show greater amortization than if a step-up had occurred. Therefore on this slide, we show the actual GAAP income statement in the left column, and then adjust as if all the assets were stepped up to fair value at the IPO in the right column.

We use the adjusted income statement as the real barometer of our performance of the portfolio during the period. The adjusted net investment income is what we also used as the basis for calculating our dividend.

We had $11.7 million of interest income, which breaks out as follows -- cash interest income of $10.2 million, PIK income of about $850,000, and net amortization of purchased premiums and discounts and origination fees of about $600,000.

Our interest expense of $1.5 million is broken out to represent about $1.1 million of actual interest expense on our borrowings, $262,000 of non-usage and custodian fees, and about $174,000 of amortization of our borrowing costs. Our management fee of approximately $774,000 is calculated only for the partial quarter and the $504,000 of incentive fees, to be clear, are only calculated based on the adjusted NII, and so the public shareholders are not paying incentive fees on any of the pre-IPO built-in gains or related amortization.

We have capped our direct and indirect expenses in the first year at $3 million, and so our combined amount of professional fees, administration expense, and other expenses are $750,000 for the quarter. These amounts relate to legal costs, audit, Board costs, other expenses, and indirect expenses reimbursable under our administration agreement.

The bottom line is an adjusted net investment income of $8.4 million, or $0.27 per share, which ties to our dividend. The dividend will be paid on August 31, 2011, for holders of record as of August 22.

The realized losses that we show for clarity are mainly a few partial paydowns that occurred at par, but because the value of the underlying investments were held at prices north of par at the IPO date, these are technically shown as realized losses in the adjusted calculation. The unrealized appreciation of $605,000 represents slight appreciation of our investments, offset by the reversal of unrealized depreciation on the paydowns and sales that occurred.

In total, we had a net increase in capital resulting from operations of $8.7 million for the full period. We show the SLF standalone statistics on the bottom of the slide.

Appendix A, which I will not go through here, bridges OpCo's partial period from the IPO date of May 19 to June 30 to PubCo's financial statements by PubCo taking its pro rata piece of those earnings for the stub period, adjusted the same way as discussed earlier as if the assets were all stepped up to fair value at the IPO date.

On slide 17, we show the calculation and derivation of our Q3 dividend, which will be paid on September 30, 2011, for holders of record on September 15. Our incentive fee catch-up provision, after an 8% return, entitles us to 100% of the adjusted NII until we get to a 10% return. After 10%, we split the income 80% to the public shareholders and 20% to the investment manager.

Therefore, what this shows is that if we are anywhere between $8.8 million and $11 million of pre-incentive-adjusted NII, our adjusted NII for Q3 will still be $8.8 million. We are confident in our ability to be within that range and believe, because of our continued ramping of our portfolio, we will be in the upper portion of that range. Since we believe our adjusted NII will be $8.8 million for the third quarter, we have declared a Q3 dividend of $0.29 per share. Rob?

Thanks, Adam. Just picking up on Adam's thread for a moment, while we do not plan to give explicit forward guidance, we are currently confident that, based on portfolio growth to date and incremental near-term opportunities, we will generate NII in excess of our full preference in Q4 and therefore would expect continued quarter-over-quarter NII and dividend growth.

In closing, I would just like to say that we are extremely pleased with our performance to date. Most importantly, from a credit perspective our portfolio continues to be very healthy.

Additionally, we believe we are executing directly in line with the business plan we outlined in our IPO. We have been and continue to be long cash and investment capacity in a market that has become a much better borrower's market over the last few months. We have been able to navigate within this favorable market environment to find attractive opportunities to invest at a faster pace than we originally planned. Consequently, our NII and dividend has ramped ahead of IPO projection, and we expect that trend to continue.

Once again, we'd like to thank you for your support and interest, and at this point turn things back to the operator to begin Q&A. Operator?

(Operator Instructions). Bryce Rowe, Robert W. Baird.

Good morning. Wanted to ask about maybe comparing this period of initial dislocation within the market to what you guys saw in 2008 and 2009 when you did make so many good investments and were able to realize gains there?

And then, a second question would be any guidance that you might have on repayment activity. Obviously, you've seen less repayment activity here in the third quarter, early in the third quarter relative to what you saw in the second quarter.

Yes. Let me take the first one. So despite the fact that we've had obviously very extreme volatility in the market and the wild swings in the equity market, this is, at least so far from a credit perspective, nothing like what we saw in 2008 into early 2009.

Just to put that into context, in the post-Lehman 2008 meltdown that bottomed out in March of 2009, we were seeing very high-quality businesses at reasonable leverage levels with first liens that we could buy in the 60s. Now we're seeing the first liens that were at par at 98 for the new issue paper that's been broadly syndicated, you know, 95 in some instances, and the legacy loans that don't have the LIBOR floors or the covenant protections, et cetera, have fallen from the mid to upper 90s to the high 80s to low 90s.

So, while there has been clearly pricing deterioration, it's not really yet comparable to what we saw in 2008-2009. And the secondary market, while we are starting to sniff out some potential opportunities, are not nearly as compelling or numerous as what we saw and what we took advantage of 2008 -- took advantage of in 2008 or 2009, again sitting here today.

In terms of guidance on repayment activity, you know, it really had ground to a halt. Given again the state of the markets, I think everyone's waiting to see what happens post-Labor Day. Frankly, I'd expect there to be virtually no repayment activity through the rest of the third quarter because you're not going to see anyone launch a deal at this point to do a repayment prior to Labor Day, and then anything that gets launched post-Labor Day probably won't close until towards the end of the quarter or after the quarter end.

So looking out to the fourth quarter, it's obviously hard to say and market dependent, but I think it's going to be a while before you see a confluence of events that brought about such a dramatic spike in prepayments late last year and particularly earlier in this year.

Thanks, Rob. Appreciate it.

Greg Mason, Stifel Nicolaus.

Great, thank you. Guys, could you talk -- on slide nine, where you gave the yields on new investments, could you tell us what the average yield looks like on an unlevered basis from the SLF? I don't know that many people look at the yield on your assets on the levered basis from the SLF.

Yes, sure. Sure, Greg. So the average SLF asset, at least in the current market that we're focused on, is, call it, [L550] to [L650] with plus or minus a 150 floor with a couple of points up front.

So the round yield, pre the impact of the forward curve, is 8%. Post the impact of the forward curve, you're talking closer to 9% on an unlevered basis.

Great. And then, of those seven deals that you outlined, how many of those were kind of done on a primary origination basis versus purchased in the secondary market?

These were all primary deals. We haven't -- we really haven't done anything in the secondary market in the last few quarters.

Okay. And the activity you've done since quarter end, are those also primary-market deals?

Yes. That is, again, virtually all primary-market deals.

Okay, great. And then, can you talk about -- I appreciate you putting the tranche sizes versus what you're investing. How many of these are you taking a lead, a ranger role on, or having a significant influence on structuring the deal?

Yes, so if you look at page nine, and then we'll go to page 11 in a second, but starting with page nine, and I'll just go through them, UniTek. We were really driving that deal as the largest investor in the deal and getting it structured.

SOTERA, we had a meaningful role, but one of maybe two or three who were driving that deal. PAE, largest player. We're really driving, again, the terms on that deal. Similar with DRI, really us and one other drove the terms of that deal. Again on U.S. HealthWorks, it was really us and one other drove the terms.

POREX, not as much. We were a smaller player. And then, Lawson, obviously a completely passive participant in just an attractively-priced deal in a business we knew really, really well.

Moving on to page 11. SRA similar to Lawson. MERITAS, we were the key structure and mover in the second-lien tranche. We were more of a broader club in the first-lien tranche there. IPREO, we were one of three or four guys who really put that deal together in terms of getting that priced and structured.

And then, Company X and Y, and the reason we don't have names there is because those are commitments that are -- signed purchase agreements and signed commitment papers that are binding, but those deals haven't closed yet. And those actually were both deals where, in the first one, we were the only player, obviously, in the sub-paper to obviously structure the entire thing. And then, in the second one, we were one of two players and we really led that structuring with this other player.

Does that help, Greg, give you some sense?

Very great color. Thank you. And then, one last question here on the potential new pipeline of $110 million. Given the dislocations in the market recently, is there any expectations of changes in that, either of deals that fall out or your ability to change the terms before those deals close? How is the recent market impacting that pipeline?

Yes, it has a big, big impact. Things are moving so quickly that we are -- things are coming in and out of the pipeline on almost a daily basis, and the pipeline doesn't reflect the secondary opportunities that we are starting to see.

So I think, on balance, that plus or minus $100 million does reflect a fair assessment of our near-term actionable potential, and obviously not everything in there is going to get executed upon in the next two months. But I do think it's a fair gross number.

My guess is what's in that pipeline, you know the bottoms up, build it up pipeline today, will have more ins and outs than you would see in a typical quarter because of the intense volatility of the market and our desire to be aggressive, frankly, as an owner of a scarce commodity today, which is deployable capital, and get the best possible deals we can get.

Great. Thank you, guys.

Vernon Plack, BB&T Capital Markets.

Thanks. Rob, I'm just trying to get a sense for the deals that you are currently looking at. Could you give me a sense for how much spreads have widened in the past couple of weeks?

Yes, I mean, we were -- there was a deal we were looking at that was initially going to be more of an L plus 850 second-lien opportunity that we're now trying to put something together at more of an L plus 1,150 opportunity. So that's sort of 300 bps, plus a little bit more up front.

So I think 300 to 400 in second lien and mezz land for opportunistic situations. I mean, a lot of people are -- who can are pausing, but if you have a merger you're trying to consummate, you can't pause. You need to try to execute in the current environment, and that's where we're really trying to turn the screws a little bit.

And then, things we've been monitoring that just weren't appealing enough at issue, but now may have broken down five or 10 or 15 points in the secondary market. That would translate into a widening of spreads also in that kind of 300 to 400 level that may make something that was 11% all-in yields now 14% or 15%, and that may make sense for us.

Thanks. That obviously impacts repayments, as you've mentioned, given that spreads have widened to that degree. But you still feel good about just the opportunities that are out there, and there are enough deals where people have to do something where you're feeling pretty good about continuing to originate at a decent pace.

Yes, we are. And clearly, you're going to see a -- assuming we don't get just a tremendous reversal, which with this volatility, anything is possible, I guess, but I clearly think we're going to see less M&A post-Labor Day through the end of the year than we would have thought we'd see a month ago.

That being said, I think that is going be offset by, one, the outflows that we've seen in other sources of capital that are competitive with us. So that will allow us to get a greater market share, if you will, of a greater -- of a smaller market.

And two, just our scale relative to the overall market. I mean, we're dealing in a market that, in good times, there is hundreds of billions; in bad times, maybe even if it's half of that or a quarter of that, for us to deploy $100 million in a quarter is, we don't think, a meaningful barrier.

And finally, if things continue to actually get worse, we're going to make it up on the secondary side.

Okay. And one last question. Have you seen any meaningful change or tone from the banks in the last couple of weeks?

Not really. When you say the banks, are you referring to our particular lender or banks in general?

Just banks in general, banks that are involved in your portfolio companies.

Yes, I would say, and not vis-a-vis our specific portfolio companies because those are loans that are out and done and people are monitoring those, but I would say that the willingness that banks have to fund risk, i.e., we've seen the banks over the last three, four quarters get back into the bridge loan business for the multibillion-dollar deal in a meaningful way, that has gone away.

If you're an M&A shop and a private-equity fund, and you want to do a new deal, banks are saying, we're not extending a bridge commitment even with widened-out caps until we see what the world looks like after Labor Day.

Okay. That's great. Thanks, Rob.

Dan Veru, Palisade Capital Management.

Good morning, gentlemen, and congratulations on the excellent performance, and thank you for the clarity of the presentation. I think the detail has been extremely helpful.

I'm curious, many of my questions have been answered, but specifically on pipeline, I'm wondering if you could -- we've talked a little bit about the U.S. banks. I'm wondering if there is opportunities because of dislocations on the part of the European banks, and if you could kind of give us a little bit more specifics on how your pipeline works, how you gin up new ideas, to the extent you can discuss that? I'm sure some aspects of it are proprietary, but if you could give us a feel for how your deal flow works, that would be very helpful.

Sure. For the first question, in terms of European banks and the impact there, we're not really focused on doing things in Europe or underwriting credit where the issuer is domiciled in Europe.

We have made some -- there are, obviously, European banks -- BNP, SocGen, et cetera, that have U.S. -- meaningful U.S. operations, and to the extent that they are looking to reduce the risk on their balance sheet, we have actually made some calls to see if there are U.S. assets that would be of interest to us that they have. Nothing has come of that as of yet, but never say never. We think it's at least worth asking.

And in terms of more broadly of how we go about ginning up new ideas and filling our pipeline, there were a couple of important sort of routes there. The most important is really the opportunities that flow to us from the research and activities within the private-equity universe we have here. So the private-equity team here is looking at 100 deals a year and not doing 97 of them, let's say.

So, to the extent that 50 of those 97 were deemed to be attractive, but either someone else just paid more than we were willing to pay, or they were attractive but just didn't have quite enough growth to write the equity check but are good debt stories, those are all very interesting opportunities for us and make up a material portion of our pipeline.

Beyond that, we are always in dialogue with the relevant intermediaries who are trying to put together club deals in the middle market, people like GE Capital and others.

And then, the third bucket is we've really been pretty aggressively growing and staffing up our direct-to-sponsor calling effort again in the lower end of the middle market, leveraging our network through our personal relationships in private equity as well to get in front of deals that are too small for our private-equity fund, but still in the same industries that we really, really know and really like.

Great. And as a follow-up, if the -- we've touched on a little bit of this. If there's a little seizing up in the credit markets and refinancing activities really slow down, I would imagine that that's a benefit for a lot of the securities you hold because they stay in place longer than perhaps you had originally modeled. Is that the right way to think about it?

Yes, I think it is. I think to some degree we have call protection on some of our deals, but a lot of them we don't or don't have as much as we'd like. So, to the extent those companies continue to perform, we obviously would like to get paid on our securities as long as possible.

Because I would imagine the CFO is looking to refinance out this piece of paper as quickly as is practically possible.

In some instances, yes; in some instances, no. Again, some instances, we do have meaningful call protection or even not -- non-call periods. And in some instances, we're really working with a sponsor and we're actually helping to try to add some value through our industry contacts and operating executives.

So, there may be a little bit more than just commoditized money and, yes, for 400 basis points they'll make the change, but for 75 basis points they may not.

Great. Thank you very much.

(Operator Instructions). Joel Hawke.

Thanks and good morning. I guess I'm -- a lot of questions have been asked, but I guess the one thing I want to hone in on is given the fact the stock's below book value and it limits the ability to raise equity capital, can you talk about your comfort level with respect to leverage, and perhaps are you thinking maybe you keep more dry powder, given the volatility in the markets? Or do you just put the capital to work and what's kind of the maximum amount of leverage you could run at given the advance rates on your two facilities?

Yes. It's a good question and something we are spending a lot of time thinking about, given how volatile both our stock has been and the BDC space in general has been, as well as the overall opportunity set.

I think we're generally inclined to pursue attractive investments when we see them, as opposed to trying to outguess the market and say, oh, gee, in November we'll be able to get 200 more basis points on equivalent risk because it might be 200 basis points less on equivalent risk. And we are in the business of making attractively-structured, attractively-priced loans to borrowers.

That being said, we're not going to jump all in on one two-week period, either. So we are going to pace ourselves.

And in terms of what our max leverage, we've always talked about sort of targeting between 0.65 and 0.7. We think we've got the availability, either currently or if we need to continue to expand a little bit, we believe we can do that. And that is kind of where we probably cap out.

That's helpful. And then, just the last question is, do you -- when you look at first lien versus non-first lien today, where do you think there's more value in terms of a risk-adjusted basis? And by non-first lien, obviously I mean second lien, unitranche, mezz versus -- it seems like you guys did a lot of still staying up the balance sheet here early on in your public life.

Yes. Part of that is ramping up the SLF, which obviously has sort of a finite capacity which we are pretty much bumping up against now. And we were fortunate enough to have that ramp-up occur in a marketplace where we could find some very attractive opportunities.

So we really are continuing -- and you can see it a little bit in the -- in what we've shown what we've done in the third quarter so far, a little bit more weighted towards mezz and second lien. And I think we'll continue to see that as we ramp up the main balance sheet a little bit more.

And from a relative value perspective, it's hard to generalize from -- across broad layers of the capital structure. We're, again, really just focused on finding the businesses that really make sense for us and that we think will perform in tough economic conditions, and then executing on an opportunity in that business wherever there may be an opportunity.

So I think there's pockets of evaluation in all sectors of the capital structure in this turmoil, and you just -- you have to just be extra-careful about the types of businesses that you underwrite now.

Thanks a lot. Congratulations on a good first quarter, Rob.

Thank you. I appreciate it.

At this time, I'm showing no further questions in queue. I would like to turn the call over to Mr. Steve Klinsky, Chairman of the Board, for any closing remarks.

We just want to thank you all for joining us on this call, and we're pleased we're off to a strong start. We hope to continue in that spirit and we look forward to future calls. So, thank you all very much.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.