New Mountain Finance Corp (NMFC) 2014 Q1 法說會逐字稿

Good morning and welcome to the New Mountain Finance Corporation first-quarter 2014 earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Rob Hamwee, Chief Executive Officer. Please go ahead.

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

Thank you, Rob. I would like to advise everyone that today's call and webcast are 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 also like to call your attention to the customary Safe Harbor disclosure in our May 7, 2014, press release and on page 2 of the slide presentation 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 those 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 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'd like to turn the call over to Steve Klinsky, the Chairman of NMFC, 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 Dave, I wanted to welcome you all to New Mountain Finance Corporation's first-quarter earnings call for 2014. Rob and Dave will go through the details, but I am once again pleased to present the highlights of another strong quarter for New Mountain Finance.

New Mountain Finance's pro forma adjusted net investment income for the quarter ended March 31, 2014, was $0.37 per share, above our initial guidance of $0.33 to $0.35 per share. This more than covers our previously announced Q1 dividend of $0.34 per share. The Company's book value on March 31 was $14.53 per share, which is up $0.15 from last quarter, and once again represents a new high for the Company.

We are also able to announce our regular dividend for the current quarter ending June 30, 2014. The regular dividend will again be $0.34 per share, consistent with our previously communicated view that we have reached a fully ramped, steady-state dividend level. The credit quality of the Company's loan portfolio continues to be strong, with once again no new loans placed on nonaccrual this quarter.

We have had only one issuer default since October 2008 when the debt effort began, representing less than 0.3% of cumulative investments made to date. The Company invested $158 million in gross originations in Q1 and $118 million net of repayments. Targeted yields on new investments continue to be consistent with our previously communicated expectations. Our portfolio continues to emphasize positions in recession resistant, acyclical industries, pursuant to New Mountain's overall strengths and strategy.

We continue to be very pleased with the progress of New Mountain Finance to date, and we are pleased to address US fellow shareholders as well as management. With that, let me turn the call back over to Rob Hamwee, NMFC's Chief Executive Officer.

Thank you, Steve. As always, I'd like to start with a brief review of NMFC and our strategy. On page 5 we have provided some key financial highlights. As outlined on pages 6 and 7 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm, with more than $12 billion of assets under management and approximately 100 staff members, including over 60 investment professionals.

Since the inception of our debt investment program in 2008, we have taken New Mountain's approach to private equity and applied it to corporate credit with a consistent focus on defensive growth business models and extensive fundamental research within industries that are already well known to 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. Additionally, I would note here that are public float is now nearly $750 million, up from $150 million at IPO.

Turning to page 8, you can see our total return performance form our IPO in May 2011 to May 5, 2014. On page 9 you can see the dollar attribution of returns by year and cumulatively since our IPO. As you can see from this slide, we have generated the significant majority of shareholder return through our regular dividend but have also generated meaningful positive return in the other three categories. We continue to be very pleased with both our absolute and relative return performance.

As outlined on page 10, credit spreads have recently been generally stable as limited market volatility is offset by modest fund outflows from a number of market participants. We continue to see significantly elevated credit spreads in smaller, less liquid credit.

Given the continued focus in the market on the possibility of future short-term and long-term rate increases, we wanted to highlight NMFC's defensive positioning relative to this potential issue. As you can see on page 11, 86% of our portfolio is invested in floating-rate debt. Therefore, even in the face of a material rise in interest rates, assuming a consistently shaped yield curve, we would not expect to see a significant change in our book value.

Furthermore, as the table at the bottom of the page demonstrates, a meaningful rise in short-term rates will generally increase our NII per share, with the only exception being a modest rise having a slightly negative impact as the cost of our borrowings rise while our interest income does not initially go up, given the presence of LIBOR floors on our assets.

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 12, we once again lay out the cost basis of our investments with the current 3/31/14 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.

In Q1, once again no new assets had negative credit migration. We continue to have one SLF asset with a cost of $13.4 million and a fair market value of $8.5 million, that previously migrated from an internal rating of 2 to an internal rating of 3, indicating operating performance materially below our expectations, but no near or medium-term expectation for nonaccrual.

Since the inception of our credit efforts in 2008, we have made investments of over $2.5 billion in 132 portfolio companies -- of which only one, representing just $6 million of cost, has migrated to nonaccrual. Over 99% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale.

Pages 13 and 14 show leverage multiples for all of our holdings above $7.5 million when we entered in 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 agree 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 roughly flat or trending in the right direction.

Turning to page 15, we continue to work diligently with the SBA to finalize the licensing process. We currently expect to receive the license sometime in the next three months. The chart on page 16 helps track the Company's overall economic performance since its IPO. At the top of the page we show how the regular quarterly dividend is being covered by net investment income. As you can see, we continue to more than cover 100% of our cumulative regular dividend out of NII.

On the bottom of the page we focus on below the line items. First, we look at realized gains and realized credit and other losses. As you can see looking at the row highlighted in green, we have had success generating real economic gains nearly every quarter through a combination of equity gains, portfolio company dividends, and trading profits. Conversely, we've had only one material realized loss, representing the realized default loss of $4.3 million on the API in 2013.

Beyond that, the numbers highlighted in orange show that we are not avoiding nonaccruals by selling poor credits at a loss of prior to actual default. The net cumulative impact of this success to date is highlighted in blue, which shows cumulative net realized gains of $23.4 million since our IPO.

Next, we look at unrealized appreciation and depreciation. As you can see highlighted in gray, we have cumulative net unrealized appreciation of $26.3 million. Finally, we combined net realized with unrealized appreciation to derive the final line of the table, which in the yellow box shows a current cumulative net realized and unrealized appreciation of nearly $50 million.

The point here is to show that, on both a realized and combined realized/unrealized basis, we have consistently and methodically more than offset any credit losses or impairments with below the line gains elsewhere in the portfolio. In fact, by this methodology, we have now built a $50 million cushion to offset any future credit losses, some of which we have paid out as special dividends.

While market-driven volatility around unrealized appreciation and depreciation may cause the bottom line number to vary, over time to economic gains and losses will accumulate in the realized bucket, where we will strive to retain the positive balance.

Moving on to portfolio activity as seen on page 17, we had another active quarter for originations in Q1. We made significant investments in nine portfolio companies and had total gross originations of $158 million. Repayments in Q1 were modest, totaling $41 million. Since we attempt to run the business close to fully levered, we funded some of the originations with asset sales of $61 million, resulting in net originations of $57 million.

As shown on page 18, we have had an active start to Q2 with originations and commitments of $87 million.

Pages 19 and 20 show the impact of Q1 investment and disposition activity on asset type and yields, respectively. Both asset originations and repayments were weighted towards first lien investments. Yields on originations were 100 basis points higher than those in disposals, and 60 basis points lower than the portfolio as a whole. The net impact is that portfolio yield overall is effectively unchanged at 10.9%.

As you can see, we continue to find attractive opportunities to deploy capital. We reached our target leverage level in Q1, so we funded incremental originations through opportunistic sales of lower yielding assets. As we continue to see strong origination activity in March and April, we raised equity capital in early April to provide funding for these opportunities. We retain our commitment to running the Company at an optimized leverage level, and accordingly the equity raise has already been largely deployed or committed.

In terms of the portfolio review on page 21, the key statistics as of 3/31 look very similar to 12/31. The asset mix remains roughly evenly split between first lien and non-first lien. As always, we maintain a portfolio comprised of companies in the defensive growth industries like software, education, business services, and health care, that we believe will outperform in uncertain economic environment.

Finally, as illustrated on page 22, we have a broadly diversified portfolio with our largest investment at 3.9% of fair value and the top 15 investments accounting for 46% of fair value, consistent with past quarters.

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

Thank you, Rob. For more details on the financial results in today's commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Before we turn to slide 23, I want to remind everyone that following the private sale by New Mountain's private equity fund, AIV Holdings, we are in the process of collapsing our structure into one that is more straightforward from an operational and financial reporting perspective. The anticipated structure is provided as a reference in Appendix B of the presentation.

As a quick update, AIV Holdings was legally dissolved on April 25, 2014. On Tuesday our shareholders approved the election to withdraw the BDC election for New Mountain Finance Holdings, LLC, and approved the new investment advisory and management agreement with NMFC. Going forward, NMFC, the sole remaining BDC, will be the new operating company.

Now, I would like to turn your attention to slide 23. The portfolio had just under $1.2 billion in investments at fair value at March 31, 2014; cash and cash equivalents of $13 million; and total assets of just over $1.2 billion. We had total debt outstanding of $487 million on our two credit facilities, which had $495 million of total capacity.

Net asset value of $697.1 million, or $14.53 per share, was up $0.15 from the previous quarter largely due to realized and unrealized gains, net of the capital gains incentive fee, of approximately $0.12 per share, and adjusted net investment income for the quarter exceeding our dividend by $0.03 per share.

As of March 31, our debt to equity ratio was 0.7 to 1. As a reminder, our credit facilities covenants are generally tied to the operating performance of the underlying businesses that we lend to rather than the marks of our investments at any given time.

On slide 24, we show the historical NAV per share and leverage ratios, which highlights the upward trend in NAV per share since inception and leverage ratios broadly consistent with our target leverage of between 0.65 to 0.75 to 1.

On slide 25, we show our quarterly income statement results. We believe that our pro forma adjusted NII -- which excludes excess amortization associated with predecessor investments, the capital gains incentive fee, and a nonrecurring YP distribution -- is the better measure of our quarterly performance. This slide highlights that while realizations and unrealized appreciation, depreciation can be volatile below the line, we continue to generate stable net investment income above the line.

Focusing on the quarter ended March 31, 2014, we earned total investment income of approximately $30.7 million. This represents an increase of $2.4 million or 8.5% from the prior quarter, largely attributable to an increased asset base as well an increase in dividend income. Total net expenses of $13.1 million increased $1 million or 8.3% due to an increase in the incentive fees and management fees associated with the higher NII and asset growth, as well as an increase in interest expense associated with the higher average debt balance.

This results in first-quarter pro forma adjusted NII of $17.6 million, or $0.37 per weighted average share, which is the high-end of our updated guidance provided on April 7, 2014, of $0.35 to $0.37 per share and more than covers our Q1 regular dividend of $0.34 per share.

Shifting to below the NII line, we had adjusted net realized gains of $2.9 million, largely driven by the sale of five investments and material repayments on four investments. Adjusted unrealized gains of $5 million were primarily driven by higher marks on the broader portfolio. As a result of the net realized and unrealized gains in the quarter, we increased our capital gains incentive fee accrual by approximately $1.6 million. In total for the quarter ended March 31, 2014, we had a net increase in members' capital from operations of $23.9 million.

As slide 26 demonstrates, our total investment income is predominantly paid in cash. Though the amount of prepayment fees vary from quarter to quarter based on repayments, our historical earnings have consistently shown some material prepayment fee income. Therefore, we show total interest income as a percentage of total investment income, both with and without prepayment fees, which is one measurement of the stability and predictability of our investment income.

Turning to slide 27, as briefly discussed earlier, our pro forma adjusted NII for the first quarter clearly covered our Q1 dividend. Given our belief that our fully ramped run rate NII will continue to fall in the previously declared expected range of $0.33 to $0.35 per share, our Board of Directors has declared a Q2 2014 dividend of $0.34 per share, in line with the past eight quarters. The Q2 2014 quarterly dividend of $0.34 per share will be paid on June 30, 2014, to holders of record on June 16, 2014.

At this time, I would like to turn the call back over to Rob.

Thanks, Dave. Well, once again we do not plan to give explicit forward guidance. It continues to remain our intention to consistently pay $0.34 per share on a quarterly basis for future quarters so long as the adjusted NII covers the dividend, in line with our current expectations.

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). Greg Nelson, Wells Fargo Securities.

I saw that portfolio sales were a little bit higher this quarter. Was there something in particular? I saw that also repayments were down, or were you guys trying to churn the assets a little bit more and get out of some positions and into higher yielding ones?

A little bit of that and a little bit of just the originations relative to the repayments left us in a position where we had the luxury of really choosing -- comparing new originations to the lower-yielding assets in the portfolio. So, it was a function of our general previous position of running fully levered, so we don't run with a lot of slack in the system. Our slack really is the degree to which we have liquid assets that are sometimes more -- a little lower yielding. So, it was an opportunity to both deploy capital into new, attractive investments and just high-grade the portfolio a little bit.

Great. And off of that, on the margin, assets have been going a little bit towards second lien. You mentioned that rates -- you've seen yields stabilize. Do you think we'll continue to see this on the margin shift towards second lien?

Yes, we didn't really see the shift right this quarter. We were more first lien from an origination standpoint and than second lien. I think that's to some degree idiosyncratic as opposed to a function of the marketplace. I think we are very comfortable that over the long-term the portfolio will be structured in that kind of 50-50, plus or minus 10% in either direction. So, if you look at the pipeline for Q2 so far, the biggest investment in that pipeline -- in our pipeline of commitments and executed deals -- is first lien.

So we're still seeing good opportunity sets in both first lien and non-first lien, so I wouldn't expect that mix to vary meaningfully in the coming quarters.

Great. That's good color. And then on the SBIC license, it's great to hear that it could come over the next three months. If you are stock price is trading below NAV, do you think you'd be able to fund the facility with liquidity generated from the portfolio?

Yes. As always and consistent with the most equity raise we do, we are fully committed to not raise equity below NAV, full stop. So we will either fund it with equity raised at NAV or fund it with liquidity from the portfolio.

Perfect. Thanks for taking my questions.

Arthur Winston, Pilot Advisors.

My first question is, given the continued raise of equity capital and selling more shares, assuming no deterioration in credit conditions and no adverse fluctuations in interest rates -- and then interest rates don't hurt you too much, can we assume that despite higher shares that $0.34 a share would be the baseline for the dividend? And then any increase in dividend would come from special dividends based on capital gains, et cetera?

Yes, I think that's a fair assumption. Look, we're always evaluating do we have an opportunity to move the dividend up. I think as you've seen just from our results, we'd rather under promise and over deliver a little bit and make sure we cover that dividend and hopefully have a few cents left over. And then on top of that we have the history of paying special dividends from below the line gains. So, yes, the answer is yes. $0.34 is our focus for the immediate future.

Can you give some way for a shareholder to predict the future sales of shares? And again, we appreciate that you didn't go below the net asset value to the shareholder. That was terrific. But what's going to determine, are we going to sell 4 million shares every other quarter? What are the determinants of all these share sales?

Yes, in a strange way it's pretty simple. Right? The determinant for us is strictly a function of the attractive opportunity set that we believe is accretive to the portfolio, less repayments and what we deem to be appropriate sales, not opportunistic sales -- gives us a balance. And that balance is negative or zero, we will not raise equity capital. If that balance over time becomes meaningfully positive, we need to raise equity capital just mathematically to fund that balance.

So we take the approach, [like I said], differently. We raise equity capital when we need it, not just because we can. And I think we've now, in our fourth year as a public company, demonstrated that time and again and we continue to, first, use our balance sheet from a leverage perspective because that's obviously a lot cheaper. And then we -- equity raises is effectively the plug for the difference between our originations and our repayments.

Understood. In my last question is, there's been some discussion that certain indexes, like some Russell Index and some S&P, are going to sell shares in our Company at a certain date because of certain accounting conventions that they're not so happy with. Could you throw some color -- educate the more naive shareholders of what this is all about?

Yes, what it boils down to is that the regulatory bodies have come out with some guidance recently that the mutual fund complexes would need to add into their disclosed expense ratios their pro rata share of expenses from vehicles like ours. We think that is somewhat silly because, look, instead of paying 30 people salaries, we pay a lump sum management fee to an advisor that does all the work that those 30 people would be doing.

So, why the regulators view that differently than just having a traditional employee base -- it's just insourcing versus outsourcing; you get to the same place. And why one is deemed to be appropriate to pick up at the mutual fund level as an expense doesn't make a lot of sense to us. And we're trying -- we and the rest of the industry are trying to explain that to the regulators. But for now, the impact of that ruling is such that the index funds in particular, which are very focused on their reported expense ratio, are under pressure to not have that number go up at all.

So they are lobbying the relevant underlying indexes that they track to exclude -- as long as this regulatory position is in place -- to exclude those entities like ourselves that would be picked up in that regulatory promulgation. So, it's unfortunate. We are hopeful that, over time, we can reverse that position because we don't think it's a position with a lot of merit. But for now that's the crux of the issue.

Can you get -- ballpark how many shares may be thrown on the market if this doesn't change?

Yes, no, I think it's -- the number that I've seen is that we're talking about roughly 8% of the capitalization of the industry. Now, I don't think this will quote-unquote be thrown on the market. At a point in time I think we've obviously seen this sector under a fair bit of pressure sense this first came out. The market -- it is a forward discounting mechanism, so my sense is that we've actually seen the relevant pressure already. But that's speculation, not certainty.

Is ours more than 8%, or more or less in line with the 8%, do you think?

We believe we're roughly in line; maybe a little bit less.

Thank you very much for answering my questions, and thank you for excellent disclosures.

Casey Alexander, Gilford Securities.

Thank you for taking my questions. As it relates to the ruling that may be forthcoming, just in your opinion, is it going to make it more difficult and change the nature of your ability to raise capital through equity offerings?

I don't think so. I think it's more transient than it is -- assuming it stays, and again I'm hopeful that it doesn't stay, but assuming it stays, I think there's some dislocation as shares transition. But we are always talking to new institutional investors who are not at all exposed to this, so I think it's more about a little bit of pain surrounding a transition in the base. But I don't think it has any meaningful long-term impact on the ability of the industry to raise capital or the ultimate long-term trading levels of the securities.

Well, I would agree with you that there's a level of equilibrium where institutions that just care about making money and don't care about their expense ratios will start to take up the slack, but I was just wondering if you -- it's hard to know where that's going to be. If that's going to be above or below the NAV line. It's going to be interesting to watch.

In relation to your structure collapse, since I'm not a lawyer and haven't deeply analyzed your previous structure, there's a lot of language in here about withdrawing as a BDC. Are those just subsidiaries that are withdrawing as a BDC and New Mountain Finance will still be run as a BDC to parent company? Or is there something changing about your overall structure from the parent company level?

There is nothing changing substantively for our shareholders. The relevant entity is a BDC, will be a BDC, and will get all the benefits of being a BDC.

Okay.

This is very, very much a technical fix to a legacy issue we had from our IPO, when we contributed a portfolio that had a lower tax basis, so we had to have a complicated, multi-BDC structure to deal with the tax issues. And now that the legacy portfolio investors have fully exited their shares, we are allowed per the SEC and the tax regulations to just collapse that three-tiered BDC structure that added complexity and expense to our lives. And so this has absolutely no substantive impact on any shareholder or how we feel about the business, and in fact just simplifies our reporting and reduces the expenses associated (multiple speakers).

All right, great. That's what I thought, but I just wanted to be sure.

Yes, no, I'm glad you clarified that.

From a housekeeping standpoint, do you happen to have handy there what your portfolio composition is from the standpoint of fixed rate versus floating rate?

Yes, we actually have a slide in our presentation, on page 11, that shows floating rate is 86% and fixed rate is 14%.

All right, thank you. I'm not on the slide deck, so I appreciate that. I think that's all of my questions. Thanks very much.

Greg Mason, KBW.

First, wanted to talk about the voluntary waive of the professional and admin expenses, the cap that you guys have employed. It's been very beneficial to shareholders. I think in 2Q of 2012 it went up to $3.5 million annually. Last second quarter it went up to $4.25 million annually, cap. Is your thought process to keep the cap going? And will there be another step up here in 2Q of 2014? And any thoughts of what that could be?

So, Greg, we've gotten to the point, given our scale, where we no longer need the cap to maintain what we've always talked about, which is a roughly $0.10 per share overhead burden. So obviously at our smaller size that would've been a much bigger number per share, and so the managers stepped in and helped to reduce that to that kind of $0.10 we always talked about.

But now we've gotten to the scale where the math just works on its own. So, we're actually stepping out from the cap as of this quarter, right?

Yes. Q2 there will be no cap.

Yes, so it's uncapped now, but consistent on a per share basis with where we've always been. And at some point the operating leverage will start to kick in.

So if I look at the first quarter, for example, with the cap your actual expenses were close to $1.1 million, but excluding the cap, the reported professional and admin expenses were about $1.8 million, so about $700,000 higher before the fee waiver. Is that $1.8 million kind of a run rate we should be thinking about?

No. In fact, I'll let Dave explain a little bit of the variance there.

Yes, no. So, as is disclosed in the Q, a component of that is the indirect expenses, which historically from IPO have always been subsidized by the manager. And as disclosed I think on our last call, the expectation was the manager allowed the discretion and it's expectation in the near term is that the [manager] will continue to subsidize the indirect expenses.

On the direct expenses is what Rob's referring to as far as our $0.10 per shares outstanding target. And I think you'll see in Q1, that was a little higher. Obviously, we've had a lot of the work done as you can see. And all the legal disclosures with the structure collapse, and so that's a large driving force of just general legal and professional fees, to be able to get to the shareholder vote for this past week to collapse the structure.

But I think, Greg, maybe I should have been more clear. So, while we are not prospectively going to subsidize the direct expenses, we are effectively subsidizing by not allocating indirect expenses the way most of our peers do, and the way that we certainly can. So there's an indirect subsidy there. And then the second part of your question is, there are some one-time things in Q1. So the short answer is, yes, we believe that we will -- that they get that $0.10 or so, will fully cover the direct expenses.

Okay, great. And then with the positive comments about a potential SBIC license, how many of your legacy assets that you've done would fit into the SBIC license? And what's the timeframe as you look at the pipeline opportunities to really build that up and make that a meaningful part of the business?

Yes, when we thought about the whole SBA process last year, we back tested what we'd done just to get a sense of -- without making any changes to our approach. And about 50% of what we've done historically will fit. So, we feel pretty good about our ability to pretty rapidly populate the SBA capital prospectively.

Obviously this may look different in the future, but that's -- given the scale of our originations and given that percent, even if it moves somewhat, you can do the math and get a quick sense that we feel that we can populate it pretty quickly. And so, we look forward to ramping that up in real time once receiving the license.

Okay, great. And I think obviously you guys have targeted leverage of 0.7-ish debt to equity. Would you still be looking at that purely on a regulatory basis, meaning the SBIC debt will be additive to your targets?

Yes, absolutely. We are comfortable running on an actual basis higher than 0.7. The 0.7 is really constrained. And we always said sort of 0.65 to 0.75, so we feel like we can take that up to that 0.75 level. But yes, that would be excluding the SBA, because we view the constraint as the regulatory bar and having some delta to that as opposed to our ability to run the business with more leverage.

All right, great. Thanks, guys. I appreciate it.

Bryce Rowe, Robert Baird.

Rob, you made a comment -- I was actually going to ask the question that Greg just asked, but I do have of follow-up related to the Russell. I'm sorry to beat a dead horse here. You talked about being hopeful that there might be some change to what has already been said in terms of Russell eliminating BDCs from the indexes. Have you had direct contact with the SEC or with Russell that would make you hopeful? Or is it more just the industry effort to reverse the decision?

It's really more the latter. Yes, the industry effort. I don't have any explicit information beyond that. So I think it's the industry effort with the -- and trying to be objective and taking a step back and it doesn't seem to be a sensible position, so we're hopeful that at some point logic will prevail.

Okay. Thanks, Rob. Appreciate it.

(Operator Instructions). J Roger, Janney Capital Management.

I guess first off, the way I understand it, your original structure was set up so that new shareholders would have a stepped-up cost basis in the assets that you guys bought back in 2008 and 2009 at a significant discount. With the collapse of that structure, is there any tax impact to shareholders? Obviously a lot of those assets have been moved out of portfolio.

Yes. There's virtually no assets -- not virtually none. There's very little assets left that have that old basis. So the short answer is nothing material.

Okay, great. And then originations have been the high in both the last quarter and quarter to date, but I was wondering if you guys could comment on the broad private equity M&A environment, general attractiveness of the current market, and what you're seeing now directionally, and how active you think 2014 might be.

This is Steve Klinsky, so why don't I take that. For New Mountain's own private equity efforts we've had a very good period where we just bought three companies recently and we are quite active and happy with what we are acquiring. But it's really driven by proactive industry deep dives that we've done in specific sectors and things unique to our firm.

So I feel good about ourselves. As far as the private equity in general, it's hard for me to comment. There is still a lot of liquidity in the system and a lot of buyers, so I think the key is that firms that have specialties or proactive efforts or differentiated can still be in very good shape. And if you're just a commodity auction player, it's probably a difficult time. But I think it's kind of a firm by firm analysis.

Yes, just to add, to that from a marketplace perspective in terms of what we're seeing in terms of our flow that obviously is largely driven by M&A private equity activity, it remains pretty good. I think the bigger issue for us is pricing and terms, and that's where we have to be just incredibly selective. And that's what we've been.

Yes, there's certainly a good number of properties for sale or available to buy, and the question for a private equity firm is to just not overpay and for a lender is to be careful on credit quality.

Okay, great. And are you guys seen any improvement in a leverage or terms? There's talk about, as you guys mentioned earlier, fund flows out of the syndicated loan market. Are you seeing better terms recently?

Yes, I would say at a minimum we've seen a halt to spread compression in that part of the market. And I would argue that we've probably seen a modest uptick in quality of rate and terms, based on that technical factor. But I wouldn't call it a wholesale change. I think most importantly for us is we continue to see the smaller deal, less liquid end of the market as a relatively protected niche where there's the ability to drive terms to the lender's favor. And obviously that to some degree benchmarks off of the broader market. But there just does to be a tremendous premium put on scale and liquidity and the correlate to that is that means you can get paid for being a permanent capital vehicle that doesn't worry so much about liquidity.

Okay, that's great. Thanks a lot.

This concludes our question-and-answer session. I would like to turn the conference back over to Rob Hamwee for any closing remarks.

Great, thank you. And just want to thank everybody for your ongoing interest and support. And we look forward to talking again next quarter. And obviously in the interim people always free to call us directly. So, thanks again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.