New Mountain Finance Corp (NMFC) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter New Mountain Finance earnings conference call. My name is Jennifer, and I will be your coordinator for today.

At this time all participants will be in a listen-only mode and we will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to today's host, Mr. Rob Hamwee, CEO. Please 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 would 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 Corporation 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 like to call your attention to the customary Safe Harbor disclosure in our November 14, 2011, 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 Adviser, New Mountain Finance Advisers 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 would like to turn the call over to Steve Klinsky, the Chairman of New Mountain Finance Corporation, who will give some highlights beginning on page 4 of the slide presentation. Steve?

Thanks, everybody. Before turning the call back over to Rob and Adam I wanted to welcome you all to New Mountain Finance Corporation's third-quarter earnings call. Rob and Adam will go through the details, but I am pleased to report that New Mountain Finance continues to meet or exceed the expectations we laid out for investors in our initial public offering.

New Mountain Finance's net investment income for the quarter ended September 30, 2011, is $0.29 per share, consistent with our previously announced Q3 dividend of $0.29 per share. The Company's book value on September 30 was $13.32 per share, primarily reflecting a modest decline in the marks for our holdings based on a general weakness in credit markets as of September 30. There has been some meaningful rebound in asset prices since then.

In addition, we are also able to announce our dividend for the current quarter ending December 31, 2011. It will be $0.30 per share, continuing to ramp upward from the September level. The record date for this dividend is December 15, and it will be paid out on December 30.

The credit quality of New Mountain Finance's loan portfolio continues to be better than our guidance. As a reminder, we built our models based on a 3% assumed default rate and a 1% annual 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.

New Mountain Finance's pace of new investments also ran above guidance in this quarter. The Company invested $148 million net of repayments in Q3. These investments, coupled with additional investments made since quarter end, mean that our IPO proceeds are now fully deployed and our target leverage ratio has been achieved.

This pace of investment is well ahead of our IPO schedule. Targeted yields on these new investments have been consistent with or better than our previously communicated expectations. Our portfolio continues to be positioned in recession-resistant, acyclical industries, pursuant to New Mountain's overall strengths and strategy.

Just to remind everyone, we, as management, were very significant buyers of shares personally in the IPO and we have continued to add to our position since the offering. We are pleased with the progress of New Mountain Finance to date, and we are pleased to address you as fellow shareholders as well as management.

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

Thank you, Steve. I would like to start with a brief review of NMFC and our strategy. As outlined on page 5 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm with approximately $9 billion of assets under management and over 85 staff members.

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 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 utilized 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 that evaluate, execute and monitor 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 company executives and directors.

As outlined on page 6, conditions in the credit markets meaningfully deteriorated throughout the third quarter, reaching a nadir on October 3. Since then, there has been a significant rebound, although volatility remains elevated. While expectations for domestic economic growth may have modestly improved, events in Europe have dominated investor sentiment and largely driven market performance. Widening credit spreads have allowed us to continue to deploy our capital on very attractive terms.

Given increased market volatility and economic uncertainty, I would like to re-emphasize that New Mountain Capital, and accordingly NMFC, have always been proactively focused on defensive, acyclical business models, and that our financing is termed out and not subject to traditional mark-to-market margin calls.

Our single highest priority continues to be our focus on risk control and credit performance, which we believe over time is the single biggest differentiator of total return in the BDC space. If you refer to page 7, we once again lay out the cost basis of our investments, both the current 9/30/11 portfolio and our cumulative investment 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 to a 3 or a 4. The next step would be moving an asset to nonaccrual, and the final development would be an actual crystallization of a 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 non-accruals or losses. However, we did put one of our smallest first-lien investments on our watch list as a 3 in the quarter, as the underlying business encountered some regulatory headwinds, which have led to company underperformance in the current quarter and significant business uncertainty looking ahead. This position at cost is less than 1% of our total portfolio.

To once again help our shareholders get further visibility into asset-level creditor performance, and in keeping with our desire to be as transparent with the investment community as we possibly can be, we have updated the tables on page 8 and 9. 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 in leverage multiples 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, and even more importantly, no single company has had a material increase in leverage multiple that would indicate the enterprise value cushion we originally underwrote has deteriorated in a meaningful way.

Since last quarter, the weighted average variances have improved modestly, from positive 0.2 to positive 0.3 for OpCo and from positive 0.3 to positive 0.4 for the SLF.

Moving on to portfolio activity, Q3 originations continued to demonstrate our strong sourcing capabilities. Specifically, as seen on page 10, in Q3 we invested or committed to invest in seven new material portfolio companies and had total gross originations of $160 million, up from $131 million in Q2. Given market conditions, we had modest prepayments of $12 million, a sharp decline from the $42 million of repayments in Q2, and made opportunistic sales of $19 million.

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, Meritas, an operator of market-leading K-12 private schools, was analyzed using our extensive network of education investment resources that have been a hallmark of New Mountain since the inception of our firm.

In the case of Global Knowledge, the market leader in outsourced corporate IT training, we were able to bring tremendous diligence resources to bear, and it is a great case study as to how we leverage the New Mountain platform for the benefit of our sponsor customers and, ultimately, NMFC.

Specifically, one of New Mountain's private equity portfolio companies, which is one of the largest resellers of information technology equipment, provided tremendous insight into Global Knowledge's largest customer and their approach to outsource training. Additionally, a member of New Mountain's management advisory board was able to put us in contact with the head of training at the third-largest customer of Global Knowledge. Finally, the executive that the sponsor brought in to assist in their diligence and become Chairman of the company was an individual New Mountain had worked with on a number of prior acquisition opportunities and had great trust and confidence in.

As you can see on page 11, in keeping with our strategy of migrating the portfolio over time to more junior securities, the origination mix for Q3 was weighted towards second-lien debt, while sales and repayments were exclusively first-lien assets.

Moving on to page 12. Originations in the fourth quarter to date of $56 million are the consummation of transactions largely structured and negotiated in September, and therefore reflect a very attractive risk/reward paradigm that prevailed in that time period. While repayments so far in Q4 have been de minimis, we made some opportunistic sales of lower yielding first-lien paper as the market rallied recently. So our quarter-to-date net originations less sales are $38 million.

Our pipeline remains robust, and based on our recent success in ramping the portfolio, we are able to be incredibly selective in what we pursue.

We have added page 13 to the presentation this quarter to help everyone understand the significant ramp-up in the portfolio and how it has been funded. As you can see in the yellow highlighted box at the top of the page, we began the third quarter with a $544 million portfolio at fair market value, $45 million of cash and equivalents including net short-term receivables, and $161 million of borrowings under our two credit facilities.

Over the course of the third quarter we invested $130 million of net originations less sales. $50 million of the $130 million wasn't funded until the fourth quarter, so it was removed for purposes of deriving the 9/30 balance sheet number.

Finally, we had realized gains, PIK and discount accretions offset by $20 million of unrealized mark-to-market depreciation, resulting in a 9/30 fair market portfolio value of $604 million.

As you can see in the light blue box off to the right, the $81 million cash portion of this $60 million quarterly increase was funded by an $18 million drawdown in our cash and $63 million of borrowings under our credit facility, such that we ended Q3 with $27 million of cash and equivalents, including net short-term receivables, and $225 million drawn on our credit facilities.

Moving back to the lower left quadrant of the page, you can see that subsequent to the end of the third quarter, we funded the $50 million of unfunded Q3 commitments and have had $38 million of incremental net originations less sales. The $88 million of cash needed to fund this activity has come, as seen in the pink shaded box, from drawing down on our cash by another $24 million to $3 million and borrowing another $64 million, increasing our total current borrowings to $289 million. Therefore, our pro forma debt-to-equity is within our target range at approximately 0.7 to 1.

From this fully ramped position we expect to drive future earnings and dividend growth by continuing to opportunistically rotate out of generally lower-yielding first-lien assets into more junior assets to, over time, reach our previously articulated long-term steady-state mix of approximately 50% first lien, 50% junior securities.

Finally, we are currently exploring options to raise additional equity capital in a way that will not be priced below current book value, although regulatory restrictions preclude us from going into any more detail at this point. We will only raise additional equity capital if it can be done on a shareholder-friendly basis, and in the interim, and for the foreseeable future, we expect to find our future originations primarily by monetizing existing lower-yielding assets.

In terms of the portfolio review on page 14, the key takeaways are similar to last quarter. First, we continue to emphasize the middle market as 79% of our portfolio is under $100 million of EBITDA and 84% of the portfolio is in facilities under $300 million in size.

Second, we continue to skew towards first-lien and unit trench assets, but second-lien and mezz are increasing as a percentage of quarterly activity as just discussed. And third, we maintain a portfolio comprised of companies in the defensive growth industries, like healthcare, services, and software, that we believe will outperform in an uncertain economic environment.

Finally, as illustrated on page 15, we have a broadly diversified portfolio, with our largest investment at 5.3% of fair value and the top 15 investments accounting for 54% of fair value, down from 56% in Q2.

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.

Before we turn to slide 16, I wanted to mention that we've included a structure chart as Appendix A in the presentation, and so I will only spend a minute reviewing our structure as a brief refresher.

Our structure was set up similar to an UPREIT structure, whereby the public company, 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. Our structure is a master feeder whereby the financial statements for OpCo flow to PubCo and AIV Holdings pro rata, based on their respective ownership. All discussion throughout this call and presentation, our investments, performance, et cetera, is focused on OpCo and its operations.

Additionally, OpCo owns the equity of a nonrecourse vehicle, SLF. This vehicle originates lower-yielding first-lien loans, but with greater leverage at 2 to 1. For GAAP and asset coverage purposes, we consolidate this SLF vehicle into the operations of OpCo, but again, the debt of the SLF is nonrecourse to OpCo.

Now I would like to turn your attention to slide 16. On the left side, we show the unconsolidated view of OpCo and the SLF to give you a sense of how we think of our business. We think of returns from the SLF as dividends back to OpCo, and therefore separately measure our yield on our SLF equity. The OpCo portfolio has approximately $353 million in investments and its equity of the SLF is about $85 million.

We have approximately $18.4 million of cash and cash equivalents, and about $18.9 million of other assets, which includes $6.8 million of receivables from unsettled securities sold; $6.8 million of interest receivable, much of which was paid in early October; $3.8 million of deferred credit facility costs that are getting amortized over the life of our credit facilities; and $1.5 million of other assets, which is made up of receivables from affiliates and some prepaid expenses.

We have about $57.9 million of debt outstanding at September 30 under the OpCo facility, which has $160 million of capacity, and have recently gotten additional flexibility in that credit facility to get an advance rate of 67% on certain first-lien assets and 45% on certain non-first-lien assets. Now we have the ability to get advanced rates of 25%, 45% or 67% on certain assets in this OpCo facility.

We have about $5.2 million of other liabilities, which is made up of $2.7 million of payables to affiliates for management incentive fees, $1.2 million of interest payable, and $1.3 million of vendor payables for various expenses.

This all gets us to a net asset value of $411.9 million or $13.32 per share versus the June 30 NAV of $13.98 per share. The decrease in our NAV of $0.66 is driven almost entirely by mark-to-market unrealized losses, which I will describe further in a moment.

If you think of the portfolio completely consolidated as it is reflected in our GAAP financial statements, at September 30 we have $604.3 million in 50 investments, approximately $251 million of those are SLF investments, and total debt of $224.5 million, approximately $167 million of that is SLF debt. Our consolidated debt to equity ratio at 9/30 is 0.55 to 1.

On slide 17, we show our consolidated income statement for the full quarter at the OpCo level. One of the things we had also discussed was that our UP-BDC structure was put in place to make sure that the built-in gains that were in the portfolio at the time of the IPO were only allocated to AIV Holdings, therefore not burdening the public shareholders with any of those taxable gains or increased accretion on the predecessor investments over time.

Since we were not able to step up the assets for GAAP, our income statement will generally show greater accretion than if a step up had occurred. Therefore, on this slide we show the actual 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 to judge our performance of the portfolio during the period, and it is also the basis for calculating our dividend.

We have $13.7 million of interest income, which breaks out as follows. Cash interest income of $12.4 million, PIK income of about $860,000, and accretion of about $460,000. Our interest expense of $1.7 million is broken out to represent about $1.2 million of actual interest expense on our borrowings, $232,000 of non-usage and custodian fees, and about $230,000 of amortization of our upfront borrowing costs.

Our management fee of approximately $1.9 million is higher than last quarter, mainly due to the pro-rated period calculation used for the second quarter. And we had approximately $701,000 of incentive fees. To be clear, the incentive fees are only calculated based on the adjusted NII, and so the public shareholders are not paying incentive fees on any of the built-in gains or related accretion.

We have capped our 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 and tax, Board costs, other expenses, and indirect expenses reimbursable under our administration agreement. The bottom line for the third quarter is adjusted net investment income of $8.8 million or $0.29 per share. This ties to the dividend paid on September 30, 2011, for the third quarter.

The unrealized depreciation of $20.1 million represents a pretty broad, across-the-board reduction in market prices, and for our portfolio it represented about 3.5% on our average investment balance during the quarter. Outside of the one small asset previously discussed that moved down to a rating of 3 and where the mark on that one asset went from 93.5 to 32.5, representing $2.7 million of our unrealized loss, we do not believe any of the unrealized depreciation is performance related.

An overwhelming majority of the portfolio companies by number held at 6/30 decreased in valuation by no more than 6%, and a handful decreased in value between 6% and 15%, averaging to the 3.5% reduction in market value overall that I just mentioned a moment ago.

In addition, since September 30 our marks have rebounded significantly with the broader rebound in market pricing generally. We estimate that we have made back approximately 40% to 50% of the total third-quarter unrealized depreciation in the last six weeks, but clearly understand that that the markets and pricing environment still remain incredibly volatile.

In total, for the quarter ended September 30, we had a net decrease in capital resulting from operations of $11.3 million. I want to point you to Appendix B, which I will not go through here, but it takes OpCo's income statements for the quarter and bridges it to PubCo's piece of those earnings.

On slide 18, we show how we calculate and derive our Q4 dividend of $0.30 per share, which will be paid on December 30, 2011, for holders of record on December 15. As we discussed on our Q2 earnings call, we believed that for the third quarter we would be in the catch-up band, which meant that our pre-incentive adjusted NII would be somewhere between $8.8 million and $11 million. Our actual number was $9.5 million, which was a 6.4% increase over the June 30 number.

For the fourth quarter, we estimate that we will be somewhere in the range of $11.4 million and $11.8 million of pre-incentive adjusted NII, although this is simply an estimate and could materially change. This range would imply approximately a 20% to 24% increase over our third-quarter number. This increase comes mainly from the continued ramp of our portfolio and optimization of our assets.

Our incentive fee catch-up provision, after an 8% annual 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. Our adjusted NII post incentive fees will not increase as dramatically during the fourth quarter, as we are still in the catch-up period. However, what this does show is that it is our expectation that we will break through the top end of the catch-up range in the fourth quarter.

Since we believe our adjusted NII post incentive fees will be somewhere between $9.1 million and $9.4 million for the fourth quarter, we have declared a Q4 dividend of $0.30 per share.

At this time we do not believe that we will have to declare any special dividend before year-end in order to be in compliance with the RIC distribution rules, as we believe we have adequately distributed estimated taxable income. However, we are continuing to analyze. Rob?

Thanks, Adam. Well, once again, we do not plan to give explicit forward guidance, having used the recent market dislocation to fully invest our IPO proceeds and effectively ramp the portfolio. And with our ongoing asset optimization efforts, we would expect continued NII and dividend growth in Q1 2012 relative to Q4 2011.

In closing, I would just like to say that we continue to be extremely pleased with our performance to date. Most importantly, from a credit perspective our portfolio continues to be very healthy. Once again, we would 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) Joel Houck, Wells Fargo.

First question is -- has to do with available capacity. So on your current cash to debt capacity, we estimate that you had roughly $120 million of available capital at the end of the quarter, but you have also funded $80 million on a net basis in fourth quarter. So can you talk a little bit about how you plan to fund investment growth past the current quarter, particularly given that the stock is still slightly below NAV?

Yes. We are going to continue, Joel, to rotate out of some of the very high quality first-lien assets that are yielding 7.5% to 8.5% that we can, even in this environment, exit at par, or very close to par, and use those proceeds for the foreseeable future to fund the ongoing origination effort.

Clearly, at some point we are going to need to raise equity capital, and as I mentioned, we are exploring some alternatives, but we are very comfortable that we can fund what we want to originate for the foreseeable future by rotating and monetizing existing assets.

Can you remind us what the rough size of that senior portfolio that you're going to rotate out is today?

If you look on page 14, you can see that we still have 63% of our assets, and this is as of 9/30. That hasn't really changed from a mix perspective very much. So 63% of $604 million -- so we still have close to $400 million of first-lien assets.

Okay. All right, that is helpful. Then the second question on credit quality, obviously, it has been good. There is no non-accruals. The ATI investment is small, but we see you guys wrote it down at 33% of cost. Can you talk about the prospects for that investment going forward, and whether or not it is a candidate for non-accrual?

Yes, look, it is definitely a candidate. It is dealing with a very unfriendly regulatory regime, and it is a very fluid situation. They did pay their 9/30 senior interest. Whether they pay their 12/31 senior interest, we will have to see. But it is clearly a candidate.

Then I guess a follow-up to that is, obviously, contractual payments are important. With respect to placing it on non-accrual, is there some level of business disruption that you -- that might occur -- you would put something on nonaccrual before it missed a payment, or does it have to miss a payment to be put on non-accrual?

It doesn't have to miss a payment, but we want to have reasonable certainty as to something missing a payment, in which case we clearly will move to non-accrual.

I think right now, again, the situation is fluid enough that, particularly as we were compiling the financial statements in October, we -- and still sitting here today -- we believed it was prudent to move it to a 3 and to mark it down significantly, as you said, but wait to see how things played out over the course of the quarter before moving it to non-accrual.

Okay, thank you very much, guys.

Greg Mason, Stifel Nicolaus.

In the subsequent events, I think you mentioned that you increased the advance rates, looks pretty significantly, for the holding credit facility on the advance rates you get for first and second. Can you talk about your reasoning for negotiating that? And how does that impact the business model going forward?

Greg, it really was more about just giving us incremental flexibility as we -- and how we utilize the SLF, and what the mix of assets is. So we have had a very good partnership over the years with our lending partner, Wells Fargo, and this was something we were able to do to give us that incremental flexibility that really didn't cost us anything.

So we will see how much we utilize it going forward, but we felt it was prudent to have as much flexibility as possible. And, particularly, that -- and, obviously, these are -- when they give us that 45% on certain non-true first liens, we are originating some very low leveraged second liens, so two of the second liens we originated in Q3, for instance, had attachment points, meaningfully inside of 4 times on the outside.

So they would attach in the 1.5 range and then stretch out to the 3.5 range, let's say. Those look a lot more like, kind of, second out first liens, so Wells was comfortable giving us some increased leverage at their discretion on those types of assets. And, again, for us to have more flexibility around the borrowing base is of value. So we were able to structure that, and we think it is a great positive for the Company going forward.

Great. Then to talk about the underlying movements for the performance of your portfolio companies, we very much appreciate the leverage multiples on slide 8 and 9 so we can see that EBITDA levels aren't deteriorating. But as your companies are looking on budgeting for next year and how they feel about the business climate, can you give us some more qualitative perspectives on how your companies are doing?

Absolutely. We are, frankly, pleasantly surprised. The proof will be in the pudding. Anyone can put together a budget or at this point make some qualitative statements about how their budgeting process is going, and I think it, to some degree, reflects the types of businesses that we invest in. But the earnings prospects, generally, for the portfolio and for the specific companies within the portfolio, are quite bright, frankly.

Now, you know, if we have a complete implosion in Europe next week, presumably that could change, although the vast majority of our companies derive their revenues domestically, although they have meaningful overseas operations in some cases. But we are, right now, hearing very -- almost across the board, hearing people talk about meaningful single-digit top-line growth and margin stability or expansion.

Great. Thank you, guys.

(Operator Instructions) Vernon Plack, BB&T Capital Markets.

Rob, I just wanted to talk a little bit more. I think you answered this with Greg's question regarding leverage ratios, and you brought up some examples of some second-lien assets, second-lien investments with considerably low leverage levels.

Can we expect, as you rotate the portfolio, that most of your new investments will probably go in somewhere around 4 times?

I wouldn't want to say that, just because we are somewhat I don't want to say agnostic about absolute leverage multiples. Obviously, lower is better. We are more focused on leverage levels relative to our evaluation of enterprise value, given our private equity heritage.

So there are some great businesses that appropriately trade at 12 times EBITDA, because there is no CapEx, they are growing at 15% through the Great Recession, and they have got negative working capital. All kinds of things that we value very highly.

Would we lend higher than 4 times to that business? And if we know the business very well, yes, we would. So we are not going to put ourselves in sort of a leverage box. We are really focused on -- to the extent we know a business really well, like it a lot through that knowledge, and then on top of that if there is very high enterprise value associated with that business, we are willing to be, you know, not imprudent, but we are willing to be -- we are willing to work with our sponsors to get the right position in the right deals for us.

No, I understand that. I just want to make sure that the characteristics per se haven't changed, and I don't think they have. But, let's say, next quarter you talk about your new originations and the leverage on all of those are around 6 times, then you will get, obviously, questions from us saying, hey, are you taking on a -- is the risk profile of the portfolio changing materially? So, I don't suspect that it is, but just wanted to --.

Yes. And I wouldn't expect that. But again, when we think about the risk profile, obviously, leverage levels is one important driver. But to us even more important is the business and the industry of the business and how well we know that industry and that business.

Okay, thanks very much.

J.T. Rogers, Janney Montgomery Scott.

Want to get an idea of your view of the health of the M&A market right now. Demand, obviously, has been really healthy so far, but just want to get an idea of what you're seeing going forward and then maybe what competition looks like.

Sure. I think we have got some really good insights into the M&A market, not just from our activity at NMFC, which provides us with substantial insight, but obviously, even more so through the activity of New Mountain and the fund there.

And I think the consensus is that we had a very robust market through Q3, although it tailed away a little bit towards the end of Q3. Things have clearly slowed down here in the fourth quarter, but that we are hearing of a meaningfully building pipeline that we would expect a significant pickup in activity in the first quarter, based on what we are seeing on our private equity side, as well as some conversations we are having on the NMFC front.

Now that is all contingent on not having the debt markets re-implode, for lack of a better word. But at the levels they are at now, or even a little worse from here, there is definitely a lot of pent-up demand, both to monetize investments from sponsors as well as deploy capital from sponsors. So we are cautiously penciling out a pretty robust first quarter and first half of next year for our planning purposes.

In terms of competition, look, it is always a competitive environment, but I do think the trends that we have all been seeing for some time now in terms of the banks not getting involved in non-investment grade credit or much less involved than they had been; the CLOs being just a much smaller and probably decreasing presence as their reinvestment periods end and as they have trouble fitting in seven-year assets into their existing structures.

We like the competitive environment right now. We think it is, if anything, it is skewed towards us as a buyer. And then we try to further skew that balance by being a value-added diligence partner for our sponsor customers, which allows us to not have to compete solely on pricing and terms.

Okay, great. Thanks a lot.

(Operator Instructions) There are no further questions at this time. We will now turn the call back over to Mr. Rob Hamwee, CEO, for closing remarks. Please proceed.

Great. Thank you, operator, and thank you, everyone, for joining us today. We look forward to talking again at the next quarter's call. And thank you all for your interest and support. Bye-bye.

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