New Mountain Finance Corp (NMFC) 2017 Q4 法說會逐字稿

Good morning, and welcome to the New Mountain Finance Corporation's Fourth Quarter 2017 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. Please go ahead.

Thank you, and good morning, everyone. And welcome to New Mountain Finance Corporation's Fourth Quarter Earnings Call for 2017. On the line with me here today are John Kline, President and COO of NMFC; and Shiraz Kajee, CFO of NMFC. Our Chairman Steve Klinsky is unable to join the call today but will be joining us on future calls.

I'd like to start by asking 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 disclosure 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 Rob Hamwee, who'll give some highlights, beginning on pages 4 and 5 of the slide presentation. Rob?

Thanks, Shiraz. Let me start by presenting the highlights of another strong quarter for New Mountain Finance. New Mountain Finance's net investment income for the quarter ended December 31, 2017, was $0.35 per share at the high end of our guidance of $0.33 to $0.35 per share, and once again, covering our quarterly dividend of $0.34 per share. New Mountain Finance's book value was stable at $13.63 per share as compared to $13.61 per share last quarter. We were also able to announce our regular dividend, which for the 24th straight quarter will again be $0.34 per share, an annualized yield of 10.5% based on Monday's close.

The company had another productive quarter of deal generation, investing $190 million in gross originations versus repayments of $213 million, which keeps us fully invested. Credit quality remains particularly strong as for the third consecutive quarter not only were there no new nonaccruals, but we have no portfolio companies on our credit watch list. I and other members of New Mountain continue to be very large owners of our stock, with aggregate ownership of 9 million shares, approximately 12% of total shares outstanding.

Finally, the broader New Mountain platform that supports NMFC continues to grow, with over $20 billion of assets under management and 130 team members.

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 returns across changing cycles and market conditions. To achieve our mandate, we utilize 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 26, 2018. In the nearly 7 years since our IPO, we have generated a compounded annual return to our initial public investors of nearly 10%, meaningfully higher than our peers in the High Yield Index and approximately 900 basis points per annum above relevant risk-free benchmarks.

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 largely driven 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 7 years we have been public, we have effectively maintained a stable book value, inclusive of special dividends, while generating a 10.3% cash on cash return for our shareholders. We attribute our success to, one, our differentiated underwriting platform; two, our ability to consistently generate the vast majority of our net investment income 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 interests.

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. I am pleased to report that there has been no significant credit migration this quarter. If you refer to Page 10, we, once again, lay out the cost basis of our investments, in both 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 $5.3 billion in 221 portfolio companies, of which only 7, representing just $112 million of costs, have migrated to nonaccrual, of which only 4, representing $43 million of costs, have thus far resulted in realized default losses. Further, virtually 100% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale.

Page 11 shows 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 most recent reporting period. While not a perfect metric, the asset-by-asset trend and 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 table, leverage multiples are roughly flat or trending in the right direction, with only a few exceptions. Only one loan, Edmentum, which we restructured in 2015 and in which we recently invested incremental capital to increase our ownership and support an ambitious future growth plan shows negative migration 2.5x or more. We remain optimistic about the long-term prospects of the company and our investment.

The chart on Page 12 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 out of 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 every year through a combination of equity gains, portfolio companies' dividends and trading profits. Conversely, realized losses, including default losses, highlighted in orange, have generated smaller and less frequent and show that we are typically not avoiding nonaccruals by selling poor credits at a material loss prior to actual default. As highlighted in blue, we continue to have a net cumulative realized gain of $12 million.

Looking further down the page, we can see that cumulative net unrealized depreciation, highlighted in gray, stands at $23 million and cumulative net realized and unrealized losses, highlighted in yellow, is at $11 million. The net result of all this is that in our nearly 7 years as a public company, we have earned net investment income of $481 million against total cumulative net losses, including unrealized, of only $11 million.

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 leverage credit markets continue to be exceptionally strong. The middle market, which is our primary focus, remains very competitive. The highest-quality deals are highly sought after by the lender community, with spreads that declined even compared to Q4. So far in Q1, syndicated deals have taken share for middle market executions as sponsors seek to maximize competitive tension between lenders. Additionally, sponsor-driven repricing continues to be a growing trend, especially in the first lien market. While the second lien market has also been impacted by repricing activity, it has been less prevalent than the first lien market due to higher levels of call protection, more concentrated lender groups and smaller tranche sizes.

NMFC's biggest earnings tailwind, which has helped offset spread pressure, has been the steady increase of 3-month LIBOR, which has increased from 1.4% since our last call in November to nearly 2% today. Additionally, while January and February are typically seasonally weak from a deal flow perspective, we have seen strong new origination volume. And while the market continues to be competitive, we remain confident in our ability to source great deals in our core defensive growth industries in the coming quarters.

Turning to Page 14. NMFC continues to be positively exposed to rising rates as 85% of our portfolio is invested in floating rate debt. Meanwhile, we have locked in 51% of our liabilities at fixed rates to ensure attractive borrowing costs over the medium term. 3-month LIBOR has increased to 198 basis points, which is roughly 100 basis points above the average LIBOR floor on our floating rate assets. As the chart on the bottom of the page shows, given our investment portfolio and liability mix, NMFC remains strongly positioned in the event of a further increase in short-term rates. However, as I mentioned earlier, the LIBOR tailwind that we have experienced has been dampened by tighter spreads on our new investments.

Moving on to portfolio activity. As seen on Pages 15 and 16, NMFC had an active quarter with total originations of $190 million, offset by $213 million of portfolio repayments and $12 million of sales proceeds, representing a small $35 million decline in our investment portfolio. Our new investments consisted of an addition to our Net Lease portfolio, an add-on position to an existing portfolio company purchased in the secondary market and a group of club-style executions by companies well known to New Mountain. We believe that the consistency of our deal flow in this competitive market shows the strength of the broad sourcing network that we have built. Since the end of Q4, we have booked $206 million of new investments, offset by $79 million of sales and repayments, yielding portfolio growth of $126 million.

Turning to Page 17, we present a historical breakout of our annual originations since our IPO in May 2011. With $1 billion of gross new originations and $234 million of net new originations last year, our credit platform has grown substantially since we went public in 2011. NMFC's growth has mirrored that of the overall firm, and our success is, in a large part, a result of continued investment in the broader New Mountain platform. While we are proud of our platform growth, we've been mindful to grow only in periods where we see deal flow consistent with both our credit standards and yield requirements.

On Page 18, we show that our Q4 originations were weighted towards non-first lien assets, with 52% and 19% of our new deals in second lien and preferred stock respectively. On the right side of the page, we show that our repayments were weighted slightly towards first lien assets. While the composition of our investment portfolio moved slightly towards non-first lien assets, we continue to believe that we will have a more balanced mix that is consistent with our historical mix in the coming quarters. In fact, so far in Q1, 70% of the $206 million of new originations have been first lien investments.

As shown on Page 19, Q4 asset yields on new originations of 11.1% were somewhat higher than the average yield of the portfolio. This is due primarily to the non-first-lien-heavy mix on new originations in the quarter.

Overall, we continue to maintain a healthy spread on our investment portfolio despite the competitive environment. Looking forward, however, we believe our portfolio spread could be pressured as our origination mix normalizes and as some of our older, higher-spread loans get replaced with lower-spread assets. We continue to expect rising base rates to be a valuable offset to any spread compression, and we will continue to seek opportunities to generate fee income and increase the utilization of our SBA financing program.

On the top of Page 20, we show a balanced portfolio across our defensive growth-oriented sectors. In the services section of the pie chart, we break out subsectors to give better insight into the diversity within our largest sector.

On the bottom of the page, despite the short term pressure on our historical mix, we continue to maintain a fairly balanced split between senior and subordinated investments. As you can see, first lien debt, SLP investments and Net Lease investments represent 45% of the portfolio, with non-first-lien-oriented investments making up 55% of the portfolio.

The pie chart on the lower right shows that we continue to have an exceptionally clean book of investments, with no exposure to underperforming loans.

Finally, as illustrated on Page 21, we have a broadly diversified portfolio, with our largest investment at 5.7% of fair value and the top 15 investments accounting for 43% 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?

Thank you, John. For more details on our financial results and today's commentary, please refer to our Form 10-K that was filed last evening with the SEC.

Now I'd like to turn your attention to Slide 22. The portfolio had approximately $1.85 billion in investments at fair value at December 31, 2017, and total assets of $1.93 billion. We had total liabilities of $893 million, of which total statutory debt outstanding was $735 million, excluding $150 million of drawn SBA-guaranteed debentures. Net asset value of $1 billion or $13.63 per share was up $0.02 from the prior quarter. As of December 31, our statutory debt-to-equity ratio was 0.71:1.

On Slide 23, we show our historical leverage ratios, which are broadly consistent with our current target statutory leverage of between 0.7 and 0.8:1. On this slide, we also show the historical NAV adjusted for the accumulative impact of special dividends, which portrays a more accurate reflection of true economic value creation.

On Slide 24, we show our quarterly income statement results. We believe that our NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line. Focusing on the quarter ended December 31, 2017, we earned total investment income of $53.2 million. This represents an increase of $2 million from the prior quarter, largely attributable to an increase in other fee income. Total net expenses were approximately $26.6 million, a $1.7 million increase from the prior quarter. As in prior quarters, the investment adviser continues to waive certain management fees, such that the effective annualized management fee is 1.4%. It is important to note that the investment adviser cannot recoup fees previously waived. This results in fourth quarter NII of $26.7 million or $0.35 per weighted average share, which is at the high end of guidance and covered our Q4 regular dividend of $0.34 per share. In total, for the quarter ended December 31, 2017, we had an increase in net assets resulting from operations of $26.9 million.

On Slide 25, I'd like to give a brief summary of our annual performance for 2017. For the year ended December 31, 2017, we had total investment income of approximately $198 million and total net expenses of $96 million. This all results in 2017 total NII of $102 million or $1.38 per weighted average shares. In total, for the year ended December 31, 2017, we had a total net increase in net assets resulting from operations of approximately $109.3 million (sic) [$109.4 million]. Finally for 2017, we declared total regular dividends of $1.36 per share.

The Slide 26 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see, 87% of total investment income is recurring, and cash income remained strong at 84% in this quarter. We believe this consistency shows the stability and predictability of our investment income.

Turning to Slide 27. As briefly discussed earlier, our NII for the fourth quarter covered our Q4 dividend. Given our belief that the -- that our Q1 2018 NII will fall within our guidance of $0.33 to $0.35 per share, our Board of Directors has declared a Q1 2018 dividend of $0.34 per share, which will be paid on March 29, 2018, to holders of record on March 15, 2018.

Finally on Slide 28, we highlight our various financing sources. Taking into account SBA-guaranteed debentures, we had approximately $1.1 billion of total borrowing capacity at quarter-end, with no near-term maturities. Post quarter-end, we issued $90 million of 5-year unsecured notes at an attractive rate of 4.87%. Furthermore, we upsized our NMFC credit facility to $150 million and extended its maturity by 3 years. As a reminder, our Wells Fargo credit facility's 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.

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 net investment income 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.

Before turning the call back to the operator to open up the line for Q&A, a few questions came in just prior to the call off-line, so I just want to address those and then, again, we'll go to live Q&A.

First question was around the impact of a rising rate environment on our borrowers' ability to service their debt. And the shorter answer is, we're very comfortable with that, and for the following reasons: one, our borrowers are very high free-cash-flow-generative, not a lot of CapEx -- working capital requirements, so our interest coverages are quite robust. Secondly, and maybe even more importantly, most of our borrowers are hedging out the majority of the risk through interest rates swaps and caps, so it doesn't really flow to them. They've taken that -- they've transferred that risk to someone else. And third, again, the at-the-margin borrowers are reducing spreads, so they are offsetting their rising rate impact by lower spreads. So again, we're very comfortable with that item.

In terms of -- second question, in terms of mix underlying assets, and how does that change the profile -- the risk profile of the portfolio? Again, we are very comfortable here. Our guiding principle is we will never trade material risk at the asset level for increased yield, that math just never works. We've always said and we'll say it again, the way you get hurt in this business is taking credit losses, and that's -- our first, second and third goal is to avoid credit losses. So more specifically, and I think first of all, the mix is still within our parameters. We've always said it's 50-50, plus or minus 10. I think, right now, we're at 55, 45. And as John pointed out, Q1 is going to swing back towards more senior-heavy. So we'll -- we're going to keep that 50-50, plus or minus 10. So there's not going to be dramatic change in the mix. And secondly, we've said this at other times in the past as well, we'd rather lend at a junior level to an extraordinary company that we know intimately than at the senior level to an okay company that we kind of know. So again, we don't believe that risk is correlated only with where you fit into capital structure.

And final question was general views of the BDC market today. And look, I think BDC stocks in general, we see it certainly in our own stock, have been hit in the last few months. Obviously, there's lots of reasons, and different people can speculate. Our view is that people are worried about credit cycle, worried about -- there have been BDCs that have had problems. I think, some people -- sometimes we get linked inappropriately with interest-sensitive stocks. But again, we are floating rate, as are most of our peers, so we don't thing that makes a lot of sense. But I think our view relative to NMFC is we're still printing out a 10% ROE and doing it with -- in a world, okay, base rates have gone from 0 to 2, but that's still 800 basis points of extra spread and still should be an attractive value proposition. So we are puzzled, frankly, why the stock trades where it trades. So I mean, hopefully that was helpful.

But with that, operator, perhaps you can open up the line to live Q&A. Thank you.

(Operator Instructions) Our first question comes from Jonathan Bock with Wells Fargo Securities.

Fin O'Shea for Jonathan this morning. First on portfolio company, the largest one HI Tech Corp. Just kind of looking for an overview on performance on that name. I think it came on the books about a year ago. It's a -- pays a very high dividend, 15%. And I think you initially outlined that it had a convertible structure. So is that something that -- should we look into -- and this is marked at cost, of course, but it's something that one might have thought would see some appreciation, so if you can kind of give an overview of that name.

Yes, absolutely. So I think HI Tech is performing very well at the underlying business level. And I think, as we stated before, it's only modestly leveraged through both any debt that's ahead of us as well as through our security, leverage points are well below the average of the portfolio. And it's a very valuable franchise. One of the -- probably has the, by far, most direct comp is being acquired at a double-digit multiple by a well-known private equity sponsor. So we feel very, very good about that position. We have not -- we evaluate every quarter, do we need to, based on the convertibility, mark up on an as-converted basis. Obviously, we haven't done that. We will continue to reevaluate that. At some point that may become necessary, but right now, we're comfortable holding unit costs. But we certainly feel incredibly good about the credit profile there.

Very well. Another on the Net Lease REIT. Those are -- those, on the contrary, are marked a little bit above cost, and we're trying to get a little color on that. Are they spitting out higher dividends or NOI? Or is this sort of -- or is it like equity valuation via rising interest rates, if you will?

Yes. So here's what's going on there. The primary driver is that there are rent escalators in our -- in these deals, right? So when you think about the yield, the cash yields, which is what we sort of show flowing through the income statement, that is lower than the IRR, right? Because this IRR is going to be inclusive of 15 years of typically 1.5% to 2.5% rent escalators, and those compound and become quite meaningful over time. So the equity value increases you're seeing is primarily a function of these contractual rent escalators as the portfolio seasons 1-year-plus on each individual deal, that's going to flow through. Then the other thing that could impact, it didn't have a really dramatic impact this quarter, but over time it can go either way, right, it's going to be cap rates. Because these, unlike virtually everything else in our portfolio, these are long-duration assets at a fixed rate. So as cap rates could move up or down, that would also impact the equity value. But the driver this quarter and last couple of quarters has been these escalators kicking in.

And just one more on the SLP, just doing a little glance at those returns, I versus II. SLP -- and correct me if I'm wrong here, SLP I seems to give a little bit higher of a ROE and that amount seems to be close to the management fee amount that NMFC receives. Is this -- if I'm right, is this just due to different underlying composition? Or is this management fee just additional capture of economics that you're able to structure there?

Yes, it's the latter. I mean, the SLP I does have a management fee that NMFC, again not the manager, but NMFC collects because of about 75% of the equity in SLP I is third party and there is a fee there. SLP II is different that we're putting up 80% of the capital and not charging the management fee on the minority there. So that is the primary driver of that delta, you're right about that.

(Operator Instructions) Our next question comes from Casey Alexander with Compass Point Research and Trading. -- I'm sorry, our next question comes from Ryan Lynch with KBW.

Yes, first one, just wanted to talk about Edmentum. You guys had that marked at about 80% of your cost. I know you guys can't comment on other peoples' valuation, but there are couple of other BDCs in the market that had that investment marked at 0 and at 74%. And again, I know you can't comment on other peoples' valuation or their methodology, but could you just provide a little color on how you guys got comfortable with that? Or how you guys, I guess, calculated that 80% valuation? And why you're comfortable at that level?

Yes, look, I mean, we're the single-largest shareholder of Edmentum right now. I think we're more intimately involved with the business than anyone else. And I think it's a private equity sector that we're very well versed in, so I think we're incredibly well positioned to value that security. Time will tell who is right or who's wrong, but we, by definition, are incredibly comfortable with that valuation, and we'll see over time. But I certainly don't think anyone is in possession of any more facts than we are.

Okay, fair enough. And then going back to your Net Lease business, I mean, that business was mostly flat, didn't really grow much in 2017. Except in this most recent quarter, you guys made an investment, and then we saw so far in the first quarter of 2018, you guys made another investment. So I was just curious if you could provide any more details of why that business is now starting to see some more growth recently?

Yes, look, I think it's episodic. I can't point to any one particular thing that will drive that to be more active in one quarter than in another quarter or a 6-month period. We do see a pretty good pipeline today, so if I had to guess, I'd say the next 6 months will look a little bit more like the last quarter or 2 than the bulk of 2017. But like everything else we do, we have a pretty high bar for what we're willing to do there and everything in the pipeline could fall away. So we don't have any mandate to deploy any amount of capital over any time period in that business. It's wherever we find really attractive opportunities, and we do have I think one of the leading teams in that space now, but we're going to be very disciplined about what we do there. So yes, I don't know. That's all -- I can't give you any more clarity around what's likely to drive it. It's pretty idiosyncratic by nature.

Okay. Yes, that's helpful. I understand it's a multi-business, I mean, tough to predict. And you guys mentioned on the call a couple of times about rising rates, rising LIBOR, I wanted to talk about you guys' liabilities structure for a minute. You guys did some attractive -- issued some attractive 4.9% yield in unsecured notes in January to help further fix out the interest rates on your debt capital structure. As you guys continue to tap the bond markets for debt financing, is there any thought to try to pursue potentially getting an investment-grade rating. I would think, given your guys' size and track record, that would be something that you guys will be able to achieve and can maybe trim off some costs on you guys' unsecured bonds you guys continue to place those in the market?

Yes, it's a good question. It's really something that is we are thoughtful about, and we're, obviously, looking at all our people to maximum -- minimize our borrowing costs. Clearly, an investment-grade rating will be helpful to that endeavor, so it's -- that's not lost on us. Beyond that, I can't say more.

(Operator Instructions) Our next question comes from Art Winston with Pilot Advisor.

We, as shareholders, and I'm sure other shareholders are really happy the way the credit losses have evolved through the years and are very small. But I was wondering if you could think out loud -- if you can come up with any circumstances -- or what would have to happen after the -- for the dividend to be -- to go up, which seems quite unlikely? And I'm sure that you would consider, like you've done from time to time, buying shares back if the share price would fall. So I wonder if you could comment on these 2 things.

Yes, absolutely. So we are not managing this to increase the dividend over time. I just want to be perfectly clear about that. Our goal is to take as little risk as possible and support this dividend. Again, we think it's a pretty attractive yield in a -- in this and any medium-term interest rate environment. Look, if LIBOR went to 8% -- if it went back to very, very different interest rate regime, and the 10-year was at 7% or 8% or 9% and LIBOR was at 6% or 7%, I think then we have to think about -- then it becomes a different value proposition. But as long as rates are anywhere near where they've been, we're very -- we think it's a good value proposition for the shareholders at this dividend. And our -- I -- again, our goal is to deliver that dividend with as little credit risk as possible.

On the second question, the buyback at a -- we typically said in the 90s, we're not -- the friction of the buyback doesn't make sense. As we get into the 80s, as a percent of book value, I think we would seriously consider, and certainly in the 70s where we're buying as much as we can. So that's how we think about the buyback, and we'll continue to be guided by that. Hope that's helpful.

(Operator Instructions) Our next question comes from Jeff Greenblatt with Monarch Capital.

Most of my questions have been answered, but I'll just focus on just one comment. As a long-term shareholder, this is more of a big picture comment. From my point of view, and I'm sure hopefully from you guys' as well, your portfolio looks to me as good as it has in a while and has you focused. You're only -- you've got 100% in I or II in terms of your ratings, you've termed out at attractive prices a good portion of your debt and you're well positioned for the environment, I believe, we're in, in terms of rising rates than I think most others. Yet, at least in the last few years, other than small instances, your stock is trading at a larger discount to NAV, which you've said puzzles you. So I just want to circle back to your last comment. As you sit there today and get repayments and cash comes in, your stock in the market is trading at or above -- at a yield where you're putting money out, yet you could buy a diversified portfolio of loans, both first and second liens, that you know well. I'm a little curious why, sort of, you need to be below 90% of NAV to get interested here. You've got a $50 million authorization, of which you've only used $2.9 million. Could just -- I mean, to me, you're just -- and I'm on the outside obviously, why wouldn't purchases right in the market where it is right now, if that's at 90 or 92 or whatever, be a better use from the owner's point of view, where you know what you're buying, you're buying a diversified portfolio than putting out money into new paper? Could you just comment a little bit more on that?

Yes, absolutely. So I guess sitting here today, right? It's priced at roughly 13 (inaudible) 13.60 to -- so I think we're about $95. Yes, and there may be a different thought process at $95 than at $90, but I think the frictional cost -- and look, yes, and we've been always honest about this, we're here, number one, to deliver a good value prop for the shareholders, but we're also looking to create value from a management perspective. So -- and we think that we can align ourselves around that and people need to be cognizant about that. So over time, we do want to grow. We think there's value in growth, a bigger platform that allows us to address the needs of our clients, our sponsor clients, in a more meaningful way. So we do believe there is value at scale. And the frictional costs, we pay roughly 5% every time we issued stock. So to issue -- pay the 5% and then buy back on just -- at $95, we don't think is the right approach. And also, we want to make sure we have capacity if the stock gets to $85 or $80 or $75. So we can debate it, but that is our approach, and that's kind of how we view it.

So I assume then, as a follow up to what you guys have always said, you're not going to issue stock below NAV to grow capital.

That's for sure. We've been 100% transparent about that. And we've always said we will never ever issue stock if that doesn't meet the company book value for us.

(Operator Instructions) Our next question comes from Casey Alexander with Compass Point Research and Trading (sic) [Gilford Securities Incorporated].

I apologize for my earlier technological challenges. I appreciate your thoughtful approach to underwriting new investments, and in that vein, I find the additional investment in Edmentum interesting. Can you explain sort of what your thought process was there? What the impact is to the existing Edmentum securities that you already have? And sort of where this sits in the capital structure? And finally, was there any additional equity that came into the company at the same time that you made this additional investment?

Okay, sure. Let me try to address that all in turn. So our view on Edmentum, and again we need to step back a second in Edmentum. And it's a private company, so I need to be a little circumspect, but Edmentum is one of the leading players in the K through 12 digital curriculum digital assessment tool Market. That is a market that is a very attractive place to be. Edmentum's problem has not been a market challenge, it's been an execution challenge. So last summer, we brought in a new leader for the business, who is rebuilding that execution capability. And she is, in our judgment, and again, this is incorporated in our private equity expertise and our #1 core competency in private equity is evaluating managers, so that's what we do all day, she's extraordinary. And our view is that she is going to fix the execution challenges that the company has had. We're in a market where comparable companies traded incredibly high multiples. For good reason, these are -- they had direct comps traded in the mid- to high teens from an EBITDA multiple. And that we think with -- we've got a plan, and not 5 years from now but in the relatively near to medium term, to fix a lot of the issues that the company has had and take advantage of a very strong market and execute and do well, and ultimately, get an exit at a multiple that's compelling. So we think there's tremendous value to be created at Edmentum. Execution is -- there's always execution risk, right? That -- but we think the preponderance of outcomes are quite feasible here. And so we want to support the company with the appropriate amount of growth capital to allow it to achieve its goals and to take advantage of the opportunities that's lie before it. And we're just generally the firm well versed in the sector. So again, not without some risk, but we think the reward is much higher than the risk. Our capital -- and one other investor, who is a current shareholder, is putting capital as well alongside of us, changing form of junior capital, not true common equity, but it's junior capital and had significant equity in the form of warrants attached to it. So it's a quasi-equity in that sense, to you other question. Did that -- did I address that good?

Well, yes. I think you addressed pretty much everything other than what you would judge the impact to be to the existing Edmentum securities that you own. I mean, I can see where they're marked in the book at the end of the quarter, but how would you judge the impact, as this money did come in after the end of the quarter?

Yes. I'm sorry, yes, good question. No material impact. It's not substantive enough to change that, given the scale of business. So no material impact on the other securities.

(Operator Instructions) Our next question comes from Charlie Sloan with Oak Family Advisors.

I just want to say, as a shareholder from the Midwest, thank you so much for your transparency and the center of alignment with shareholders. We don't see that very often, and it's great to see. Yes, we appreciate it very much. The question that I have is how many names can you actually own? As you say, and I agree with the philosophy obviously, how many names can you actually own that you know incredibly well? And how big can the portfolio get and still meet that very, very high test?

Yes. No, it's a fair question. I think it's scores, it's not hundreds, but I think it is scores. And I do think we've also -- that answer changes over time as the scale of our platform from a human capital perspective grows. And what I mean by that is if our model is leveraging our private equity team members and their sector expertise, as we grow the private equity team, and it's certainly -- it's more than doubled since we've started the credit, and so we add verticals or subverticals within our core verticals, our addressable capacity goes up, if you will. And we've seen that, right? Because there are things that we can do today where we have great underlying sectoral expertise that 3, 5 years ago we just didn't have. And so we're also trying to make sure we're lining up the growth of our capital with the growth of our human capital, and specifically our addressable subsectors. So it is something that we actively manage again. And I do think relative to the size of the portfolio today, we have capacity. And -- but we will manage that. But we have to -- we always have to ask ourselves when we're looking at a new opportunity is, do we know this space? Do we know this company? And the answer is, no, we kind of have to figure it out from the first innings, we'll probably just going to pass and wait for the next one.

(Operator Instructions) Our next question comes from [Curt Wheeler], private investor.

Recently, I read or heard that in the next few years LIBOR will not be a published benchmark. Have you heard anything about that? And how would it impact your business?

Yes, it's a good question. We are following that. Yes, we're well aware of that, and we are following that very closely. We do think that there is a -- and this is the -- 2021 is, I believe, the year that they're talking about. But there is the working group, it's obviously -- we are a tiny piece of that, and there is a working group that's either going to figure out a way. And there was just some news recently that there may be a plan to continue with LIBOR, but there's a working group that if LIBOR does sunset at some point that there will be a relevant -- a similar benchmark that would be utilized in the same way, and the transition plan would occur. Obviously, this goes well beyond our business into the multitrillion market for loans that reference LIBOR as the benchmark. So definitely something that -- to keep on our radar screen, but we feel pretty good that the industry, as a whole, will have a couple of different ways to deal with this. But we'll keep everyone informed as that evolves.

(Operator Instructions) I'm seeing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Rob Hamwee for any closing remarks.

Thank you. And again, thanks to everybody. We, as always, appreciate the support and interest and look forward to speaking in a couple of months with the Q1 numbers. Have a great day. Goodbye, now.

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