New Mountain Finance Corp (NMFC) 2016 Q4 法說會逐字稿

Good morning and welcome to the New Mountain Finance Corporation fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Rob Hamwee, CEO, New Mountain Finance Corporation. Please go ahead.

Thank you. Good morning, everyone, and welcome to New Mountain Finance Corporation's fourth-quarter earnings call for 2016. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; John Kline, President and COO of NMFC ; and Shiraz Kajee, CFO of NMFC. Steve Klinsky is going to make some introductory remarks but before he does I would like to ask Shiraz to make some important statements regarding today's call.

Thanks, Rob. Good morning, everyone. Before we get into the presentation, 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 February 28 earnings press release.

I would also like to call your attention to the customary Safe Harbor discussion in our 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 to by law.

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. At this time, I'd like to turn the call over to Steve Klinsky, NMFC's Chairman, who will give some highlights beginning on page 4 and 5 of the slide presentation. Steve?

The team will go through the details in a moment, but let me start by presenting the highlights of another strong quarter for New Mountain Finance. New Mountain Finance's adjusted net investment income for the quarter ended December 31, 2016 was $0.34 per share, in the middle of our guidance of $0.33 to $0.35 per share and once again covering our Q4 dividend of $0.34 per share. New Mountain Finance's book value was $13.46 per share as compared to $13.28 per share last quarter, an $0.18 increase per share.

We're also able to announce our regular dividend for the current quarter, which will again be $0.34 per share, an annualized yield in excess of 9% based on Monday's close. The Company invested $222 million in gross originations in Q4 and had $169 million of repayments in the quarter, maintaining a fully invested balance sheet.

During this quarter, we completed the ramp of our second senior loan program. And in January we received a green light letter for our second SBIC license. These areas along with our net lease vehicle continue to be differentiated value drivers for NMFC.

I and other members of New Mountain continue to be very large owners of our stock, with aggregate ownership of 8.6 million shares, approximately 12% of total shares outstanding. In summary, we are pleased with NMFC's continued performance and progress overall. With that, let me turn the call back over to Rob Hamwee, NMFC's CEO.

Thank you, Steve. Before diving into the details of the quarter, as always, I'd like to give everyone a brief review of NMFC and our strategy. As outlined on page 6 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm. 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 allows 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.

Turning to page 7, you can see our total return performance from our IPO in May 2011 through February 24, 2017. In the nearly six years since our IPO, we have generated a compounded annual return to our initial public investors of 12.3%, meaningfully higher than our peers in the high-yield index and well over 1,000 basis points per annum of a relevant risk-free benchmark.

Page 8 goes into a little more detail around relative performance against our peer set, benchmarking against the 10 largest externally managed BDCs that have been public at least as long as we have.

Page 9 shows return attribution. Total cumulative return continues to be driven almost entirely by our cash dividend, which in turn has been more than 100% covered by NII. As the bar on the far right illustrates, over the nearly six years we have been public, we have effectively maintained a stable book value inclusive of special dividends, while generating a 10.4% cash-on-cash return for our shareholders, fully supported by net investment income. We are very happy to be able to deliver this performance over a period of time where risk-free rates have been effectively zero and will strive to continue this performance.

We attribute our access to, one, our differentiated underwriting platform; two, our ability to consistently generate the vast majority of our NII from stable cash interest income in an amount that covers our dividend; three, our focus on running the business with an efficient balance sheet and always fully utilizing inexpensive, appropriately structured leverage before accessing more expensive equity; and, four, our alignment of shareholder and management interest. Our 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 10, we once again lay out the cost basis of our investments, both with the current portfolio and our cumulative investments since the inception of our credit business in 2008, and then show what has migrated down the performance ladder. Since inception, we have made investments of nearly $4.3 billion in 194 portfolio companies, of which only 7, representing just $93 million of cost, have migrated to nonaccrual, and only 4, representing $42 million of cost, have thus far resulted in realized default losses. This $42 million figure reflects 87% of the Transtar position classified as a realized loss. Approximately 99% of our portfolio at fair market value is currently rated one or two on our internal scale.

Page 11 shows leverage multiples for all of our holdings above $7.5 million when we entered an investment, and leverage levels for the same investment as of the end of the current order. While not a perfect metric, the asset by asset trend in 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 table, leverage multiples are roughly flat or trending in the right direction, with only a few exceptions. The two loans that show negative migration of 2.5 turns or more are both names we have been discussing for a number of quarters. The first is Transtar where restructuring plans are almost complete, and we anticipate receiving a cash payment consistent with our mark in the next few months. The second is Sierra Hamilton where restructuring talks have commenced, and where we expect to have a more fulsome update next quarter.

The chart on page 12 helps track the Company's overall economic performance since its IPO. At the top of the page we show the regular quarterly dividend as being covered out of net investment income. As you can see, we continue to more than cover 100% of our cumulative relative 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've had success generating real economic gains every year through a combination of equity gains, portfolio Company dividends, and trading profits.

Conversely, realized losses, including default losses, highlighted in orange, have been smaller and less frequent and show that we are typically not avoiding non-accruals by selling poor credit at a material loss prior to actual defaults. We have suffered our first significant realized loss, since our IPO, with Transtar, but despite that continue to have a net cumulative realized gain of $10 million, highlighted in blue.

Looking down the page, we can see that cumulative net unrealized depreciation, highlighted in gray, stands at $29 million, and cumulative net realized and unrealized loss, highlighted in yellow, is at $18 million, an improvement of $11 million from last quarter. I will now turn the call over to John Kline, NMFC's President, to discuss market conditions and portfolio activity. John?

Thanks, Rob. As outlined on page 13, the credit markets have performed very well since our last call. All of the positive trends that our market exhibited in 2016 have continued in 2017. Many investors are optimistic about the economy and have shown a strong desire for enhanced yields. As a result, we have seen consistent fund flows into leverage credit, a gradual tightening of CLO financing spreads.

While deal activity was very strong in Q4, it has ebbed in January and February, which is often a seasonably week period for our market. Fortunately, we have seen significantly more deal opportunities in late February and expect to be busy in the coming months.

While we do see pressure on spreads in our markets, we continue to find investment opportunities that are consistent with our credit standards. Additionally, we believe that our differentiated access to deal flow within our targeted defensive growth sectors will continue to serve us well in this competitive market.

Turning to page 14, NMFC continues to be well-positioned in the event of future rate increases as 92% of our portfolio is invested in floating rate debt. Meanwhile, we have locked in over half our liabilities at fixed rates to ensure attractive borrowing costs over the medium term.

Three-month LIBOR has increased to 105 basis points, which is roughly equal to the average LIBOR floor on our floating-rate assets. As the chart at the bottom of the page shows, given our investment portfolio and liability mix, NMFC will meaningfully benefit from any increase in short-term rates going forward.

Moving on to portfolio activity, as seen on pages 15 and 16, consistent with the good market environment, we saw robust new origination activity in Q4. Total originations were $222 million offset by $169 million of repayments and $25 million of sale proceeds, yielding net investment of $27 million. Our new originations consisted of new platform investments, select add-on investments to existing portfolio companies, and continued investment in the SLP II and in our net lease real estate entity.

Since the end of the quarter, despite the sluggish deal environment, we have continued our strong investment pace with $136 million of new investments offset by $62 million of sales and repayments, yielding net investment of $74 million. Based on our pipeline of both committed and anticipated deals, we expect to maintain our solid new investment momentum into the final month of the quarter.

Turning to page 17, we show that for the full-year 2016, we have maintained positive net origination despite being somewhat capital constrained for the better part of the year. We were able to slightly grow our asset base while investing in new assets that are very consistent with our historical yield and credit quality standards.

Page 18 shows that during the quarter our originations were fairly evenly weighted between first-lien and non first-lien assets. Meanwhile, sales and repayments were almost entirely non first lien, including a successful exit of our investment in Crowley Holdings' preferred stock, which was our second largest position at the end of Q3.

Asset yields, as shown on page 19, ticked up from 10.4% in Q3 to 11.1% in Q4, which is due to a material shift upward in the forward curve after the November elections. Pro forma for that shift in the forward curve, our portfolio yields were roughly flat with the third quarter.

On page 20 we show a balanced portfolio across our defensive growth-oriented sectors and a healthy mix between first-lien and second-lien investments. On the lower right it is important to note that the vast majority of our portfolio continues to perform at or above our expectations.

Finally, as illustrated on page 21, we have a broadly diversified portfolio, with our largest investment at 4.5% of fair value, and the top 15 investments accounting for 39% of fair value. With that, I will now turn it over to our CFO, Shiraz Kajee, to discuss the financial statements and key financial metrics. Shiraz?

Thanks, John. For details on our financial results and today's commentary please refer to the Form 10-K that was filed last evening with the SEC. Now I would now like to turn your attention to slide 22. The portfolio had approximately $1.6 billion in investments at fair value at December 31, 2016, and total assets of $1.66 billion. We had total liabilities of $717.4 million, of which total statutory debt outstanding was $589 million, excluding $121.7 million of drawn SBA-guaranteed debentures.

Net asset value of $938.6 million, or $13.46 per share, was up $0.18 or 1.4% from the prior quarter. As of December 31, our statutory debt-to-equity ratio was 0.63 to 1. As John mentioned, we have made almost $74 million of net investments in Q1, which brings that ratio up to historical norms.

Slide 23, we show the historical NAV per share and leverage ratios, which are broadly consistent with our current target statutory leverage of between 0.7 and 0.8 to 1. We also show the NAV adjusted for the cumulative impact of special dividends, which portrays a more accurate reflection of true economic value creation. As the chart shows, after almost six years adjusted NAV per share of $14.07 is virtually identical to the $14.08 at IPO.

Slide 24 we show our quarterly income statement results. We believe that our adjusted NII is the most appropriate measure of our quarterly performance. This slide highlights that while realizations and unrealized appreciation and depreciation can be volatile below the line, we continue to generate stable net investment income above the line.

Focusing on the quarter ended December 31, 2016, we earned total investment income of approximately $43.8 million. This represents an increase of $2 million or 4.8% from the prior quarter, largely attributable to an increase in dividend and fee income. Total net expenses of $20.8 million were also up slightly from the prior quarter.

As mentioned on prior calls, due to the merger of our Wells Fargo credit facilities, and consistent with the methodologies since our IPO, the investment advisor will continue to wave management fees on the leverage associated with those assets that share the same underlying yield characteristics with investments leveraged under the legacy SLF credit facility. This results in an effective annualized management fee of 1.4% for the quarter, which is in line with prior quarters.

It is expected, based on our current portfolio construct, that the 2017 effective management fee will be broadly consistent with prior years. And it is important to note that the investment advisor cannot recoup management fees previously waived.

This results in fourth-quarter adjusted NII of $23 million or $0.34 per weighted average share, which is in line with guidance and covers our Q4 regular dividend of $0.34 per share. In total, for the quarter ended December 31, 2016, we had an increase in net assets resulting from operations of $33.8 million.

Slide 25, I would like to give a brief summary of our annual performance for 2016. For the year ended December 31, 2016, we had total adjusted investment income of approximately $168 million and total net expenses of $80 million. This results in 2016 total adjusted NII of $88 million or $1.36 per weighted average share.

Total for the year ended December 31, 2016, we had an increase in net assets resulting from operations of approximately $111.7 million. Finally, for 2016 we declared total regular dividends of $1.36 per share.

Slide 26 demonstrates our total investment income is recurring in nature and predominately paid in cash. As you can see, 90% of total investment income is recurring and cash income remained strong at 93% this quarter. We believe this consistency shows the stability and predictability of our investment income.

Turning to slide 27, as briefly discussed earlier, adjusted NII for the fourth quarter covered our Q4 dividend. We now believe that our Q1 2017 adjusted NII will fall within our guidance of $0.33 to $0.35 per share. Our Board of Directors has declared a Q1 2017 dividend of $0.34 per share, in line with the past 19 quarters. The Q1 2017 quarterly dividend of $0.34 per share will be paid on March 31, 2017, to holders of record on March 17, 2017.

Finally, on slide 28, we highlight our various financing sources. Taking into account SBA-guaranteed debentures, we had a little over $1 billion of total borrowing capacity at December 31, 2016 with no near-term maturities. As a reminder, our Wells Fargo credit facility's covenants are generally tied to the operating performance of the underlying businesses that we [lean] to rather than the marks of our investments at any given time. With that, I would like to turn the call back over to Rob.

Thanks, Shiraz. It continues to remain our intention to consistently pay the $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 pleased with our performance to date. Most importantly, from a credit perspective, our portfolio overall continues to be 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)

Our first question comes from Jonathan Bock of Wells Fargo Securities. Please go ahead.

Good morning, and congratulations, and thank you for taking my questions. I wanted to start real quickly here with, currently looking at your leverage, your growth, et cetera, and we have also noticed prepayment activity, which you outlined for the first quarter of 2017. And I think, John, you mentioned that there is going to be an investment build.

The question that now would sit in our mind would be the need for equity capital at this point in the environment. You have been very judicious and smart about how it is raised. But when you think of what needs to be funded, given that you have a green light letter, could one expect that an equity raise would be used to fund the SBIC expansion?

And then also, when we think about your prepayments, given you are still a little underlevered, don't you have the ability maybe over the next quarter or two to perhaps fund that SBIC license expansion with internal capital and perhaps boosting EPS or NOI a bit more per share instead of going to the markets? How do you guys view an equity raise for such an accretive fund facility?

It is a good question, Jonathan. We still view the process of raising equity really exactly the same way we viewed it since our IPO, which is we need two conditions to be satisfied. One, we need to raise the capital at book value or above; and two, we need to be fully levered. And we define that, our target leverage range, as 0.7 to 0.8.

So, it really turns on -- the when and the if of an equity raise really turns on the intersection of, one, what is in our pipeline and exactly what goes from pipeline to funded deal; and then two, the timing and magnitude of prepayments in the coming months, which is just inherently very difficult to predict. We track that in real time. And, as you say, the SBA incremental ramp-up plays a role in that, as well.

We track all of that. And it is just hard to know, sitting here, when and if an equity raise will come. But I think you can rely on us to be, as we have been for almost six years -- using your word -- very judicious about doing that in a way that is appropriate for all constituents.

Okay. So, maybe as a follow-up to the overall environment -- and, Jonathan, you mentioned this -- it has the potential to be robust, I think you outlined in February. We hear conflicting reports. And granted, your specialty niche with the world-class PE platform that you work with allows you to invest in different areas of the market perhaps better than the next investor. But we are finding that competition across this space is significant.

Leverage multiples are higher. And there is a general sense of just unease as to capital deployment. John, walk us through where the confidence comes from, in terms of what you are putting on the books today given investors that are listening across the private debt landscape are finding that it is a fairly difficult time to invest, or invest at risk-adjusted returns that will be compelling over the long haul.

Sure. And we agree that it is a tougher spread environment out there. As I mentioned, especially in January and February, there were not a lot of deals out there, and the deals that were out there were very competitive. What we have seen is we have really seen our pipeline build with a lot of proprietary deal flow, as well as a couple of add-on investments for situations we were already in.

So, when I think about what our advantage is, we really leverage the full team at New Mountain to find deals within real niches of the economy that are a little bit less traffic. And we are really seeing that strategy play out well at the end of this month and going into March. That is how I would answer it. It is just hard work.

We definitely acknowledge that it is a tough environment out there; spreads are tight. There are deals that should not be invested in. So, we just really maintain our vigilance and try to find the great deals in the sea of deals out there.

Then maybe just a small follow-up: Sierra Hamilton, placed on non-accrual, slight markdown. I understand you're working on it. When you put it on non-accrual, sometimes you could put a loan that is still paying cash on non-accruals for a number of reasons. Can you give us a sense, when it goes on non-accrual, why there wasn't perhaps more of a markdown?

And potentially answering my own question, is there an asset value component that you look at from the liquidation value standpoint? How are you covered as we see that investment slowly playing out? You have worked out difficult situations in the past, but without giving too much, just a general sense of why the mark was slight, despite being placed on non-accrual.

We have been, I think, proactively taking the markdown there prior to putting it on non-accrual, seeing where it was headed. And what has happened -- and as you know, Jonathan, can't go into too much detail -- but what has happened, as we've discussed before, that business is leveraged to activity in the Permian, particularly as a staffing business that is serving that area.

There has been a pretty dramatic uptick in activity there, and we think about our recovery in the context of a going concern, which this business clearly is. So, when you look at DCFs, et cetera, that has a flow-through impact. We're going to continue to monitor it. But we have a pretty rigorous framework for valuation purposes, and it is deterministic based on the inputs. And that is what the models have spit out, but with actual meaningful qualitative and quantitative rationale.

Okay. And then last one and I'll be done: Granted, while, John, you are mentioning the potential robustness and build in the pipeline, and potential tighter spreads, et cetera, just looking at KeyPoint or Greenway Health or First American Payment Systems all effectively coming off the books, all at various yields, how is your outlook on your current book of investments and the potential runoff that will ensue given it's just a generally better environment to refi those assets at lower prices?

We have definitely seen that, and we expect to continue to see it. It is really a question of magnitude. We definitely expect to see additional loans come off the books through opportunistic refinancings or, frankly, M&A takeouts. And that has always been the case. The velocity of that obviously goes up or down.

The other side of that coin, of course, is the pipeline that John touched on. And, again, as always, it is the intersection of those two things that drives the magnitude of any quarter's capital requirements.

Thank you for taking my questions.

The next question comes from Ryan Lynch of KBW. Please go ahead.

Good morning. Thank you for taking my questions. The first one has to deal with Permian Tank and Sierra Hamilton. Permian Tank was restructured in the fourth quarter. As you just talked about, Sierra Hamilton is in the process of being restructuring. Both of those investments obviously struggled because of the decline in energy prices.

I'm just wondering, with these companies, one being restructured and one in the process of being restructured, so they are getting the capital structure right, now you have a big recovery in energy prices. Your position in Permian Tank has now moved to equity, or most of it has, and I would assume Sierra Hamilton is going to be the same way. Is it reasonable to think that if energy prices stay where they are, or maybe even trend a little bit higher, that we could see some nice recoveries in these investments? Or how should we be thinking about the riskiness of these investments post a restructuring and given the big move in oil prices?

We are cautiously optimistic on the outlook for both businesses, and obviously the tailwind of the overall energy market is helpful. There is no doubt about that. We also are optimistic for our ability, utilizing our private equity team members, to add real value as owners of these businesses, as we have done in the past with UniTek and Edmentum.

So, yes, we are going to be cautious about reflecting future outcomes in near-term marks. We want to hopefully underpromise and overdeliver on that. But, yes, these businesses are clearly benefited by the current energy environment.

Sure. And then I have a couple questions on the new net lease corporation. In the fourth quarter you guys put about $75 million of assets into that business within that fund. So, one, how should we think about asset growth in that business? Is $75 million a quarter pretty reasonable?

And then, that was funded this quarter, at least at quarter end when I looked at your financial statements, there's about $27 million of equity and $48 million of non-recourse debt in that fund, so it's about 1.8 times debt to equity leverage. Is that the approximate leverage we should expect in this fund going forward?

Yes. That is pretty traditional for a net lease structure. And as you point out, all that debt is both non-recourse to the entity, NMFC, but also, importantly, is non-recourse across deals, which is a little bit different than what we are used to on the corporate credit side, which is obviously a great benefit.

In terms of pace, I think the pace will be broadly consistent, although likely see on the corporate credit side, any given quarter has idiosyncratic volatility to it. But we would expect -- we really do like that space, we really like the team that has been built here in New Mountain to focus on that space. So, we would expect to continue to hopefully see incremental deployment through the net lease vehicle.

Okay. And then, you guys obviously have two senior loan programs. They are both basically fully funded today. Do you anticipate ramping up any more senior loan programs or are you fine with just having the two on your balance sheet today?

That is something we are really in active internal discussions about. I don't have a definitive answer for you on that yet, but it is certainly a possibility that there would be a third.

Okay. Understood. Thanks for answering my questions.

(Operator Instructions)

The next question comes from Jeff Greenblatt of Monarch Capital. Please go ahead.

I just have a real quick question. I am looking at the portfolio overall, and then I'm looking at the originations in the last quarter. And I don't know if this is accurate or not, but historically I had the feeling that first-lien type paper was, as long as I can remember, at least half the portfolio in terms of credit type risk. The origination, it looks like there are twice as much second liens as first liens in the last quarter. Now, I know you had a second-lien repayment, but that is reflected in the portfolio, and I'm just thinking about going forward.

How should we view that? Because in an environment where credit spreads are pretty tight, first-lien paper is, I don't know, probably 7% or 8%, depending upon how large the deal is and how competitive. Should we assume that, in all likelihood, to maintain your target dividend that second-lien exposures will continue to rise from a credit point of view -- or second-lien and below, I should say, including any preferreds or commons or whatever?

We actually slightly brought our second-lien exposure or our junior exposure down this quarter.

Through that one big repayment. I understand that. But I just meant, going forward overall, based upon the interest rate environment we're in, the credit spread environment we're in, and how you look at your goal in terms of maintaining your dividend yield, how are you balancing that versus how much you will allow second liens and below to overall be part of the portfolio?

We don't have a specific target, although we've always said, and I will continue to say, that our expectation is that the portfolio will be 50% first lien, 50% non-first lien, plus or minus 10% in either direction, so 60/40 or 40/60. To be clear, though, irrespective of the rate environment or the spread environment, we are not interested in increasing risk in the portfolio.

Now, we have the view that there are second liens we do that are, frankly, less risky than first liens that we do. A perfect example this quarter is our largest investment in the quarter which is the AmWINS transaction, which, if you think about our very simple, two-dimensional grid for how we think about risk, one is, how great or not great is the business, and two is how well do we know it?

AmWINS we know incredibly well because we owned it for five years in our private equity fund, so we have a 10 out of 10 from a knowledge perspective. And when you look through to the underlying drivers and elements of that business, it's pretty close to a 10 out of 10 from a quality of business and volatility, frankly, on the downside of the business, given recurring revenue, acyclicality, et cetera.

I do not view AmWINS as more risky or potentially less risky as a first-lien investment we might've made during the quarter as well. I just want to make sure that is well understood; we're not interested in -- we understand that the way you get hurt in this business is default losses. If we have to take a little less spread in a quarter, we will take less spread in a quarter. We don't view that correlation as 1-to-1.

Now, that being said, again, we do want to think about managing the overall program along that 50%/50%, plus or minus 10%, as I said. So, I don't know, Jeff, if that helps with the question or not.

Let me then take that one more step. If I assume those are the rough parameters, based upon the environment we are in, is it fair to assume that, more likely than not, directionally first liens may be going down a little and second liens going up a little for the balance of the year, based upon how you see the environment? Or is that an incorrect statement?

I do not think that is a correct statement, no. It may turn out to be accurate, it may turn out to happen, but it is not because we are sitting here today saying: Gee, we need to be more heavily targeted towards non-first-lien origination. It may happen but it will be idiosyncratic from the bottoms up, not a top-down view that we need to, given the market, target more aggressively junior capital to maintain our yields.

Should I assume, then, to the extent that is not the case, that there may be an increase in leverage in order to achieve your targets in terms of dividends and distributions?

No, I don't think we will, from a statutory perspective, be outside our 0.7 to 0.8 target leverage range because, again, we've got to be prudent about managing that element of the business, as well. Now, we may see economic leverage tick up as we deploy fully on the SBA side, and I think that is accretive. So, that may occur.

Okay. One more question, and I thank you for the time. I think in the last quarter or the quarter before that we had discussed the concept that there were substantial unrealized remaining appreciation that could be seen in the portfolio based upon marks. And I think I had asked you the question: If everything, every asset you have on the book gets paid back at par rather than wherever the market chooses to mark it, and your defaults are just carried at whatever you think is a fair market value, what is the revised or altered view of the fair market value of the portfolio? I think at the time when we were down at $13.30 or $13.40 on NAV, that number was up at $14.40 or somewhere up there. And you said that is a number that you look at. Do you have that number today?

Yes. And just to be clear, this, quote-unquote, adjusted NAV, if you will, it was always around $13.75, $13.80. So, I'm not sure where the $14.40 came from. And that broadly hasn't changed. So, the book value has accreted up as we have seen recovery in some security prices to where the underlying businesses were fine (multiple speakers).

Okay, you are right. I apologize. I was looking at base total portfolio. You are correct. I do recall that now. So, effectively it is fair to say that the portfolio overall has accreted up to recapture a lot of that unrealized depreciation last year.

Yes.

And now at par is basically closer to where the NAV is. So, the premium or the stock price in the market basically reflects hypothetically loans valued above par because of the portfolio you have in place. Is that the right way to look at it?

I think that is a fair way to think about it, as well as presumably the stock price reflects just the attractiveness of the yield, which is still over 9% (multiple speakers).

Right. But in order to achieve that, it would result in your loans above par, effectively.

Effectively, yes, but also, perhaps, some view on the opportunity to create value through some of the underlying equity positions in the portfolio.

Right. Okay. Thanks for all your help.

The next question comes from Chris Kotowski of Oppenheimer & Company. Please go ahead.

Thank you. Good morning. I am just curious, most of my questions have been asked and answered, but do you have any perspective on liberalization of BDC legislation? And in what way, if any, would you be most inclined to take advantage of that, i.e., do you think the assets that you've put on your balance sheet could be levered more, or would you be more inclined to expand, to use an expanded 30% bucket?

I think broadly we don't have a greatly differentiated view of what's likely to come out of Washington. I think we have generally been skeptical about the prospects, and that skepticism is proving well founded in the last three or four years. So, I think that will remain our default position.

But it is a nice upside, to have more optionality, if it happens. We certainly don't run the Business assuming it is going to happen. And if it were to happen, I think we would view the best risk-adjusted way to utilize that increased flexibility and optionality more in real time. So, we don't have any break-glass-in-case-of legislative changes, plan X. So, we'll see. I think the one thing that could help the sector overall would be if they go ahead and fix -- out of the SEC -- the issues around, as you know, the index exclusion/inclusion issues.

Right. Okay. And then just to make sure I have it right, when we look at the $4.8 million of dividend income, that subsumes the $4.1 million of SLP and net lease income, and so, assume, barring some decline in the SLP and net lease, the dividend should be reasonably sustainable?

Yes, that is contractual, effectively. It is classified that way from a GAAP perspective, but it is not like an optional dividend from some equity position in there.

Okay. Great. Thank you.

(Operator Instructions)

Seeing no further questions, I would like to turn the conference back over to Rob Hamwee for any closing remarks.

Great. Thank you, everyone. As always, we appreciate your time and support and interest. And we look forward to talking to everyone in a few short months when we announce our first-quarter results. Thanks again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.