New Mountain Finance Corp (NMFC) 2020 Q4 法說會逐字稿

Good day, and welcome to the New Mountain Finance Corporation Fourth Quarter 2020 Conference Call. (Operator Instructions) Please note this event is being recorded.

I would like now 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 2020. 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.

Before diving into the business update, we do want to recognize that we continue to live through a public health crisis that is taking a significant human toll on our community across our country and around the globe. We hope that everyone is staying safe and that you and your families remain in good health.

Turning to business, Steve is going to make some introductory remarks. But before he does, I'd 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 24 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 gain 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 of the slide presentation. Steve?

Thanks, Shiraz. It's great to be able to speak to all of you today as both the Chairman of NMFC and as a fellow shareholder. New Mountain, as an organization, has always sought to explicitly emphasize downside safety and risk control as well as upside returns and therefore has emphasized defensive growth industries that can best survive unexpected market downturns.

New Mountain started with private equity 20 years ago and now manages over $30 billion of assets, including both private equity and credit. Risk control was part of our founding mission. Happily, we have never had a PE portfolio company bankruptcy or missed an interest payment in the history of our private equity effort. Similarly, as of today, we have had only $79 million of realized default losses or just a 0.4% loss rate on the over $12 billion of total debt we have bought since beginning our credit arm in 2008. Meanwhile, we have had significant gains, both in private equity and credit. NMFC has paid $839 million of total cash dividends since NMFC went public in 2011 or about $13.50 of dividends per share in all.

New Mountain was built with defensive growth industries and risk control in mind, long before COVID hit. The great bulk of NMFC's loans are in areas that might best be described as repetitive, tech-enabled business services, such as enterprise software. Our companies often have large installed client bases of repeat users who depend on their service day in and day out. These are the types of defensive growth industries that we think are the right ones in all times and particularly attractive in difficult times.

With that background, let me turn to the specifics of this earnings report on Page 4. Net investment income for the quarter ended December 31 was $0.30 per share, fully covering our dividend of $0.30 per share and in line with our prior guidance. The regular Q4 2020 dividend of $0.30 per share was paid in cash on December 30. Every borrower paid their interest in Q4 and new -- and no new borrowers were placed on nonaccrual this quarter. We currently do not anticipate any additional portfolio companies going on nonaccrual in Q1.

Our December 31 net asset value was $12.62 per share, an increase of $0.38 per share or 3.1% from the September 30 NAV of $12.24 per share. The regular dividend for Q1 2021 was again set at $0.30 per share and will be payable on March 31, 2021, to holders of record as of March 17.

New Mountain, as the manager, has been highly supportive of NMFC and has significant resources, including a strong balance sheet to further support NMFC. I and other members of New Mountain continue to be the largest shareholder of the company with ownership of approximately 12%. Insiders have added approximately 1 million shares to our holdings since the onset of the crisis.

In conclusion, we remain proud of the work that our team did in carefully building a portfolio to withstand a crisis, and I remain confident in NMFC's own competitive advantages and future prospects.

With that, let me turn the call back to Rob Hamwee, CEO of NMFC.

Thank you, Steve. While key quarterly highlights and our standard review of NMFC are detailed on Pages 5 and 6, respectively, once again, this quarter, I would like to focus my time on getting into more detail on the crisis' impact on asset quality, net asset value and leverage migration and net investment income.

As detailed on Page 7, in order to assess how the crisis is impacting our borrowers, we continue to have extensive conversations with both company management and sponsors. Based on those discussions, we have updated each portfolio company scores on the 2 metrics we use to generate our overall risk rating. As a reminder, the first metric, COVID Exposure, ranks from 1 to 4, the degree to which a company is currently being directly impacted by COVID. The second metric, Overall Company Strength, is a combination of 3 sub-metrics: pre-COVID business performance, liquidity and balance sheet strength and sponsor support, which we rank on a scale of A to C. Based on our rankings for the 2 metrics and the resulting risk rating for each company, we once again plotted the overall portfolio accordingly to create the risk rating heat maps.

The updated heat maps showed that risk migration has been positive, as summarized on Pages 8 and 9, with over $200 million migrating from either orange to yellow or yellow to green and no issuers showing a negative migration. Overall, we are pleased with the asset quality and credit trends across the portfolio.

The updated heat map is shown on Page 10. As you can further see from the heat map, given our portfolio's strong bias towards defensive sectors like software, business and federal services and tech-enabled health care, we believe the vast majority of our assets are very well positioned to continue to perform no matter how the public health and economic landscape develops. We continue to spend significant time and energy on our remaining red and orange names and believe if the impact of the pandemic recedes in the months ahead, the majority of those credits will benefit materially. Our largest orange asset, Benevis, continues to make progress towards value recovery as the impact of our new Executive Chairman, new CEO, and our fully engaged PE operating team begins to be reflected in the operating metrics of the business. We have increasing confidence that the strategic plan that has been developed has a reasonable likelihood of achieving full principal recovery and even potential gains in the coming years.

Page 11 outlines the quarter's net asset value increase and the path back to pre-COVID book value. In Q4, we recovered an additional $0.38 per share of the dramatic decline we witnessed in Q1. The largest driver of this quarter's recovery, representing $0.23, was the continuing market impact in our green names as spreads for well-performing credits in our core verticals continue to decline. The other significant driver, accounting for $0.18, was a further recovery in our restructured and equity portfolio, particularly in our net lease REIT, where large declines in cap rates led to material asset appreciation.

Looking forward, we believe we should see further positive price movement in our green- and yellow-rated loans, which, if our risk assessment is correct, should continue to recover in coming quarters as the world normalizes. Even in our orange and red current pay securities, while risks are clearly elevated, we would expect the significant majority of those to continue to pay full interest and principal and ultimately move back towards par.

We also believe there is a further opportunity across our restructured and equity portfolio for book value recovery in the quarters to come, particularly in Edmentum, Benevis and UniTek. As the slide illustrates, if the yielding assets return to par, we would require $60 million of -- $16 million of value increase across the restructured and equity portfolio to return to our pre-COVID book value. Given the underlying operating trends in a number of these businesses, we believe this is achievable in the medium term as $16 million represents just a 6% increase from the current holding value of these securities.

Turning to Page 12, Edmentum had a noteworthy fourth quarter as the ongoing strength in the business allowed the company to sell a significant stake and attractive valuation. As you may recall, Edmentum is a leading provider of K-12 online learning programs. In 2012, NMFC invested $31 million in Edmentum's second-lien term loan to support the merger of PLATO Learning with Archipelago Learning. Softness in the business began in 2014 due to a significant change in competitive dynamics within the industry and a lack of product investment and innovation. In 2015, NMFC partially equitized its position and became a meaningful equity owner of the business. NMFC and other equity owners installed a new management team and invested in a multiyear significant product refresh, leading to a turnaround in performance. NMFC put further capital into the business at this point, significantly increasing our ownership.

COVID has been a further tailwind for Edmentum, driving both immediate and sustainable growth. In December 2020, the Vistria Group, a Chicago-based private investment firm, acquired a 50% stake in the company, deleveraging the balance sheet and resulting in a full recovery, plus significant gains for NMFC. NMFC chose to reinvest a meaningful portion of the proceeds and remain a significant shareholder due to our strong conviction in the continued growth of the company and the likelihood of material further value creation.

In summary, we have invested a total of approximately $78 million into Edmentum prior to the recent sale and have now received cumulative gross cash proceeds from this transaction of $117 million, inclusive of accrued PIK of $60 million, of which we will reinvest $89 million. We look forward to keeping you all updated on what we hope will be further positive developments on this important and exciting portfolio company in the quarters ahead.

Page 13 shows that we continue to manage our statutory leverage ratio at a very comfortable level. Gross debt for the fourth quarter was basically flat, so the increase in net asset value drove further reduction in our net statutory leverage ratio, which is now down to 1.2x. We continue to have a number of portfolio companies currently in active sale processes, the anticipated culmination of which will give us additional financial flexibility to either reinvest or further delever. At this point, we only have $15 million of undrawn DDTL exposure. Our intention is to manage the business at a statutory leverage ratio, net of cash, of 1.0 to 1.25x.

While our first priorities in this environment continue to be asset quality and balance sheet strength, we also want to continue to maximize net investment income while preserving enterprise safety. To that end, quarterly net investment income is stable at $0.30 in Q4. We continue to remain confident, absent a dramatic change in market conditions, in our ability to generate approximately $0.30 of NII per quarter going forward to support the dividend.

With that, I will turn it over to John Kline to discuss market conditions and other elements of the business. John?

Thanks, Rob. Throughout the course of last year, despite the ongoing COVID health crisis, direct lending market conditions steadily improved. While there are pockets of ongoing stress as a result of the pandemic, we see robust multiples and strong prospective sponsor interest in high-quality defensive companies. After a seasonally slow January, we have seen the pipeline continue to build week over week, leading us to believe that we will experience solid portfolio activity going into the spring.

Secondary trading levels in the broader sub-investment-grade credit markets, which we view as a gauge of market health, have nearly returned and, in some cases, surpassed pre-COVID levels. Companies in our core defensive growth sectors, such as software, health care technology and technology-enabled business services, are performing particularly well. We believe these sectors will continue to attract significant capital in 2021 as investors seek to maximize exposure to forward-thinking companies that will be well positioned in a post-COVID world. While we have seen some pressure on yields in private credit, the returns in our marketplace remain highly attractive compared to most other credit asset classes.

Turning to Page 15, we now show how potential changes in the base rate could impact NMFC's future earnings. As you can see, the vast majority of our assets are floating-rate loans with our liabilities evenly split between fixed and floating-rate instruments. NMFC's current balance sheet mix offers our shareholders consistent and stable earnings, even if LIBOR remains under 1%. If base rates rise above 1% as the economy normalizes post-COVID, there is meaningful upside to NMFC's net investment income. For example, assuming our current asset and liability mix, if LIBOR reaches 2%, our annual NII would increase by 9% or $0.10 per share. At 3% LIBOR, earnings would increase by 19% or $0.23 per share.

Page 16 addresses historical credit performance, which shows NMFC's long-term track record. On the left side of the page, we show the current state of the portfolio, where we have $2.97 billion of investments at fair value with $25 million or less than 1% of our portfolio currently on nonaccrual. This quarter, as mentioned earlier, we did not place any new borrowers on nonaccrual.

On the right side of the page, we present NMFC's cumulative credit performance since our inception in 2008, which shows that across $8.1 billion of total investments, we have $600 million that have been placed on our watch list with $236 million of that amount migrating to nonaccrual. Of the nonaccruals, only $79 million have become realized losses over the course of our 12-plus-year history.

Page 17 is a view of our credit performance based on underlying portfolio company leverage relative to LTM EBITDA. As you can see, even despite COVID, the majority of our positions have shown results that are very consistent with our underwriting projections, exhibiting either very minor leverage increases or, in many cases, leverage decreases.

There are 7 companies with securities that have more than 2.5 turns of negative leverage drift. Two of these names are red names on our COVID rating scale which have materially underperformed as a result of COVID but given the vaccine have brighter prospects for the second half of 2021. There are 2 orange names with material negative drift. One is a marketing services company, which we have mentioned in the past, that has suffered various operational challenges; and the other is a distribution business, which has experienced material COVID impact but continues to have significant liquidity to support long term -- its long-term business plan.

Our yellow names include Company BZ and UniTek. Company BZ is a pre-K-12 education-related business that has experienced enrollment headwinds in its pre-K segment but remains well positioned over the long term. UniTek expects to have a materially improved year in 2021 as its core telecom construction business is positively exposed to multiple attractive growth trends.

Finally, we have one green name on our migration list that operates in the financial services compliance sector. The company has experienced a difficult start to 2020 due to COVID-related delays. But after a sponsor equity infusion and an improved operating environment, the business has recently shown better financial performance. Based on current trends, we anticipate that this asset will migrate back towards closing leverage over the course of 2021.

The chart on Page 18 tracks the company's overall economic performance since its IPO. At the top of the page, we show that our net investment income has always cumulatively covered our regular quarterly dividends. On the lower half of the page, we focus on below-the-line items, where we show that since inception, highlighted in the blue box, NMFC has experienced $21 million of net realized losses. In gray, we show that NMFC has total unrealized portfolio markdowns of $86 million. Combined, these 2 numbers represent $107 million of cumulative net realized and unrealized losses. This bottom line number represents a $37 million improvement compared to last quarter driven by the positive change in our portfolio marks that we discussed in detail earlier in the presentation.

Since the Q1 2020 low point in NMFC's fair value, we have recovered $146 million of unrealized losses. As Rob discussed, we continue to believe that most of the remaining cumulative net unrealized loss can be recovered over time if certain performing positions return to par, historically trouble names continue to recover and the overall value of our equity positions appreciate modestly.

Page 19 shows a chart detailing NMFC's stock returns since IPO. While the performance of our shares were impacted by fears around the pandemic, recently, we have seen material improvement in our share price as investors have become comfortable with the trajectory of the U.S. economy and gained confidence in the stability and attractive yield of our portfolio. Since our IPO nearly 10 years ago, NMFC has a compounded annual return of 9.5%, which materially exceeds that of the high-yield index as well as an index of BDC peers that have been public at least as long as we have.

Page 20 provides a final look at NMFC's cumulative return compared to the individual returns of peers. As you can see, NMFC has been the second-best performer among the peer group that we have tracked since the IPO. We continue to build on this total return performance with our $0.30 per share dividend, which, based on the current stock price, represents an annualized dividend yield of approximately 9.8%.

Turning to our investment activity tracker on Page 21, this quarter, our net originations were just $32 million, reflecting our fully invested portfolio. In total, we had $184 million of new originations, offset by $152 million of sales and repayments. New originations primarily consisted of investments in Edmentum , an add-on investment in Benevis, the expansion of our net lease portfolio and several SBIC-related financings.

Page 22 details a group of new investments that we've made so far this year, which include further expansion of our successful SLP program, a new net lease investment in our REIT subsidiary and several new club deal financings, one of which was eligible for inclusion in the SBIC program. This represents a good start to the year from an origination perspective, and we believe that the deal volume will continue to accelerate heading into the spring.

On Page 23, we show that the average yield of NMFC's portfolio was stable from Q3 to Q4 at approximately 8.6%. For the quarter, we were able to originate a group of assets with a weighted average yield of 9.7%. This healthy yield was supported by the Edmentum and Benevis financings, our net lease real estate purchase and second-lien investments. Going forward, based on our current pipeline and overall business strategy, we believe that our origination mix will revert back to our traditional first-lien heavy orientation.

On Page 24, we have several detailed breakouts of NMFC's industry exposure. The center pie chart shows overall industry exposure, where the charts on the right and the left give more insight into the diversity within our services and health care verticals. As you can see, we have successfully avoided nearly all of the most troubled sectors while maintaining high exposure to the most defensive COVID-resistant sectors within the U.S. economy. On the lower half of the page, we show that the portfolio continues to have a high degree of first-lien exposure with approximately 66% of our portfolio invested as senior-oriented assets. Additionally, we present a breakout of risk ratings that match the heat maps shown in the beginning of our presentation.

Finally, as illustrated on Page 25, we have a diversified portfolio with our largest single name investment at 3.3% of fair value with the top 15 investments accounting for 37% 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 the Form 10-K that was filed last evening with the SEC.

Now I'd like to turn your attention to Slide 26. The portfolio had approximately $3 billion in investments at fair value at December 31, 2020, and total assets of $3.1 billion. We had total liabilities of $1.9 billion, of which total statutory debt outstanding was $1.5 billion, excluding $300 million of drawn SBA-guaranteed debentures. Net asset value of $1.2 billion or $12.62 per share was up $0.38 from the prior quarter. At December 31, our statutory debt-to-equity ratio was 1.24:1. And as mentioned, net of available cash in the balance sheet, the pro forma leverage ratio would be 1.20:1.

On Slide 27, we show our historical leverage ratios and our historical NAV adjusted for the cumulative impact of special dividends.

On Slide 28, 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, 2020, we earned total investment income of $67.8 million, an increase of $2.5 million from the prior quarter, primarily due to higher fee income. Total net expenses were approximately $38.7 million, a $2.2 million increase from the prior quarter, consistent with the increase in investment income.

As in prior quarters, the investment adviser continues to waive certain management fees. The effective annualized management fee this quarter was 1.35%. It is important to note that the investment adviser cannot recoup fees previously waived. This results in fourth quarter NII of $29.1 million or $0.30 per weighted average share, which covered our Q4 regular dividend of $0.30 per share. As a result of the net unrealized appreciation in the quarter, for the quarter ended December 31, 2020, we had an increase in net assets resulting from operations of $66.1 million.

On Slide 29, I'd like to give a brief summary of our annual performance for 2020. For the year ended December 31, 2020, we had total investment income of approximately $278 million and total net expenses of $157 million. This all results in 2020 total adjusted net investment income of $121 million or $1.25 per weighted average share, which covered our $1.24 regular dividend paid in 2020. In total, for the year ended December 31, 2020, we had total net increase in net assets resulting from operations of approximately $62.5 million.

Slide 30 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see, 90% of total investment income is recurring and cash income remained strong at 83% this quarter. We believe this consistency shows the stability and predictability of our investment income.

Turning to Slide 31. As briefly discussed earlier, our NII for the fourth quarter covered our Q4 dividend. Based on preliminary estimates, we anticipate our Q1 2021 NII will be approximately $0.30 per share given that our Board of Directors has declared a Q1 2021 dividend of $0.30 per share, which will be paid on March 31, 2021, to hold as a record on March 17, 2021.

Slide 32, we highlight our various financing sources. Taking into account SBA-guaranteed debentures, we had over $2.2 billion of total borrowing capacity at year-end with over $400 million available on our revolving lines, subject to borrowing base limitations. In January, we successfully issued $200 million of unsecured notes at an attractive rate of 3.875% to address our $90 million near-term maturity and to lower our overall cost of capital by calling the entire $52 million of our 5.75% unsecured notes that were due in 2023. As a reminder, both our Wells Fargo and Deutsche Bank 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.

Finally, on Slide 33, we show our leverage maturity schedule. As we've diversified our debt issuance, we have been successful at laddering our maturities to better manage liquidity. We had one near-term maturity at year-end, and we have recently repaid with proceeds from the previously mentioned January notes issuance.

With that, I would like to turn the call back over to Rob.

Thanks, Shiraz. In closing, we are increasingly optimistic about the prospects for NMFC in the months and years ahead. Our long-standing focus on lending to defensive growth businesses, supported by strong sponsors, should continue to serve us well. While risks are more elevated than in the past and we cannot unequivocally discount more challenging scenarios, we believe our model is well suited for the current environment.

We once again thank you for your continuing support and interest in these difficult times, wish you all good health and look forward to maintaining an open and transparent dialogue with all of our stakeholders in the days ahead.

I will now turn things back to the operator to begin Q&A. Operator?

(Operator Instructions) Our first question comes from Finian O'Shea with Wells Fargo Securities.

First question on the UniTek upgrade, Robert, John, it felt like that was last quarter, the one major situational name that you were a bit more measured on your ability to recover and so forth. So could you provide -- and there's also a significant amount to be recovered there still. So I guess a 2-part question. Can you expand a little bit on what happened there? And any change in outlook on recovery potential?

Yes, absolutely, Fin. I'm going to turn that one over to John as he's really the more day-to-day on UniTek. John?

Sure, sure. Thanks, Fin. Yes. I think as we've articulated in the past, 2019, 2020 were both tough years for UniTek. We had some bad contracts, and we also had a business unit that was in a perpetual stay of decline. And I think what's really happened in 2020 is we got out of the business that was declining, and we've also completely exited the bad contract.

So now, at UniTek, we have a collection of businesses that are focused on really one end market, and that end market is fiber construction throughout the southeast and southern states of the U.S. And those business units that make up UniTek right now are all, we believe, in growth industries. They're all healthy. They're all operating reasonably well. Some units are operating very well right now.

So essentially, that's really been the change in the complexion of UniTek. We have had to support the business throughout these changes with a little bit more capital, but we do feel like it's a good investment to make in these markets which are growing in the remaining businesses, which are, as I said, healthy.

Does that help? Yes. I think the only thing I'd add to that, is clearly, UniTek was impacted on the good businesses by COVID. And as COVID has receded to some degree, we -- this company, as well as the company has just adopted, like many companies, they've been able to run at a much more full utilization rate than earlier in 2020.

Sure. That's helpful. And then just a question on outlook for activity. We're hearing a lot from the market analysts and some of your peers that a refi wave is coming. Do you -- what's your take on that? And in addition, do you -- if you see that as well, can you comment on your pipeline today?

Yes. Sure. So I think we definitely are in the midst of a refi wave in the syndicated market. To what degree that penetrates the private credit market, it certainly will, to a degree. We're not seeing it right now, but I think we have to all acknowledge that if conditions stay attractive and spreads compress, we would expect to see some amount of refi activity across the portfolio. The flip side to that is we are seeing pretty meaningful M&A activity. So from a pipeline perspective, it's quite robust right now.

Okay. Awesome. And just a final question that came to mind also from your market conditions slide. Some of these businesses, enterprise software, such as a major category of yours, that's obviously been high -- become a higher-quality part of the market in recent years and was accentuated by COVID. Do you see this trend, like the strength in business software, do you see that impacting your market, like leveraged private credit solutions for these businesses as they go up and become higher quality? I think you mentioned that private equity money certainly still continues to find its way there, seek those businesses. But is that necessarily a good thing for you? Just sort of -- if that's something you currently see or something down the line you see?

Listen, I think we've been seeing it for a number of years, right? I mean I think the notion of lending to an asset-light enterprise software business has changed a lot in 10 years. So that's been an ongoing evolutionary thing that we have seen.

I agree with you that COVID has even further cast light on to the quality of those business models and why they're attractive entities to lend to, but I don't think, Fin, we're seeing a step-function change in the overall market from a lending perspective. I think there's -- for the last number of years, there's been plenty of guys who like to lend to those businesses. The good ones have always been competitive to lend to. We've obviously got our stake in the ground and have good share in that market, and I would not expect that to change. And I do think what's good for us is we will continue to see increasing capital flows into the buyouts of those business models, so our addressable market just continues to expand as private equity funds, in general, become larger and then dedicate increasing percentages of their fund sizes to the industries that we like and that we focus on.

Our next question comes from Ryan Lynch with KBW.

First one I had, I don't really anticipate you guys changing the types of businesses and sectors that you focus on, going forward, coming out of this downturn. But one question I did have was do you anticipate changing kind of where you would potentially look to invest in the capital structures of those businesses. Being that we are now on kind of the upswing and coming out of the credit cycle versus 2 or 3 years ago, everybody was investing in anticipation of a credit cycle hitting. Just any thoughts on that would be helpful.

Yes. It's a good question. I think what we're going to continue to do is really focus on bottoms-up approach to businesses, specific industries and specific companies that we know really well through PE and that we think are great credits. And I think the place in the capital structure will be more a function of where the opportunity is, that's risk-adjusted opportunities. So I wouldn't say we're going to say, "Oh, now we're at a different time in the cycle. We should be 10% more weighted to junior securities." That is really not what we're going to do. I think we'll -- we want to get exposure in a risk-adjusted way possible to what are the best business models that we know the best. And so I would not expect us to target a different position in the capital structure based on our read of where we may or may not be in the credit cycle.

Okay. Understood. Congratulations on the Edmentum's investment. That's obviously been an investment you guys have been with for a long period of time. You supported it, and it's turned out to be a really, really good investment. I'm just curious on kind of the outlook of that business. And based on this transaction, you guys kind of recommitted that business and recommitted to that business at kind of bottom of the capital structure, first exposure with your equity. Obviously, you have some preferred and some debt as well. So can you just talk about why you decided to recommit to that business and also felt comfortable committing in some of the riskier and obviously higher-return opportunity portions of that capital structure?

Yes. So Edmentum has been a strong performer the last 2 or 3 years prior to COVID as we really kind of revamped management, particularly the CEO, who's just been a superstar. And as we've gotten to just really get our arms around the business, it was a business that had some pretty strong secular trends. And then when COVID came, it just put virtually all of those trends on steroids. So we see a multiyear outlook for Edmentum of -- you never want to say -- you can't say guaranteed growth. But when you look at all the factors that drive the company's prospects, they're all about as green as one can be. So we think some of the best growth is really ahead of Edmentum despite the fact that it's had incredible growth at the last year and solid growth the last 3 years.

And we just want to -- we've done so much work. And we -- frankly, if we didn't have a maturing capital structure at Edmentum in 2021, we just would have waited on a transaction generally, right? But we had to do something, either refi the debt or bring in new equity. And given the valuations, we thought it was a good time to take some chips off the table, but we wanted to recommit the bulk of our exposure because we just believe there's -- you want to ride your winners in the investment world. We've had very good success with that as a firm, and we think this is one of the best potential winners that we had exposure to. So -- and we don't think this is not going to take 5 years to play out. I don't want to give specific time frames, but we think there's an opportunity more in the medium term to show that future value creation.

Understood. Yes. You obviously have deep knowledge and deep experience with the fundamentals there. You sounded somewhat positive on even some of your more stressed businesses' ability to recover in 2021 depending on kind of the economic recovery and kind of the reopening. Do you guys have any sort of baseline that a baseline of reopening or recovery that you guys used to make those comments? And what would that look like?

I think it's really more around the narrower issue around COVID because if you think of some of those remaining stressed assets, whether it's getting to full utilization in dental because of COVID kind of getting significantly reduced or whether it's an education-based business, not like Edmentum, but one that is more levered to in-person education or whether it's a hotel-exposed business, those are our few remaining red and orange names, all those things will benefit materially, all else equal, by vaccination and by ultimately the COVID -- the final COVID-exposed names getting recovered.

So the handful of things we have there, it's more about that versus whether it's GDP up 2 or up 5. So the optimism -- and we're not smarter than anyone else about epidemiology, but we're just reading the same things you and everybody else are that vaccines are happening, and that vaccine optimism is increasing. And so it's not crazy to think about a second half of 2021 where those COVID-induced headwinds reduced materially, and that should help those few remaining businesses that are on our heat map. So really, Ryan, I guess it's the COVID optimism relative to where we were a quarter ago that's driving that tone change.

Our next question comes from Art Winston with Pilot Advisors.

Okay. Thank you for your -- for the excellent results and the amount of transparency and disclosure. It's excellent. From -- the originations had a higher level of interest rate. And of course, overall interest rates are rising, yet it sounds like because of prepayments and whatever, the yield on the portfolio is definitely going to go down for the foreseeable future. Is that a fact?

I'm not sure that's totally a fact. I think we're originating at similar yields as we happen. They've come down somewhat. I think the bigger driver is really the leverage coming down, right? And we're committed to that. I think we should be relatively stable from here as -- from a leverage perspective.

So I think the question is, on the one hand, like you say, rates are going up. Now they're really going up more on the long end of the curve, and we're not really exposed to that, right? So we're more tied to the short end of the curve where rates are not going up. Certainly, as John articulated, if the short end, at some point, whether it's this year or next year or whenever, if the short end does start to go up to more historically normalized levels, that would be a big tailwind for us. And then it really comes down to what's going to happen with the credit spreads which have compressed somewhat this year so far. But we've seen that before, and then they've gone back up. So I think we're going to be tracking that very carefully. And that will really be the driver in the -- over the next couple of quarters as to overall asset-level yields, if that makes sense.

Yes. Why is it that your credit election is on the leverage side rather than taking the opportunity to expand a little bit with the better environment we're supposed to be seeing?

Well, I think there's a couple of things, right? I think until we get the true, true, all clear that there's no new mutation that's going to screw things up again or what it may be, we still want to be somewhat defensively postured. And then I think what we're seeing is there is -- there may be an opportunity if we keep our leverage at a slightly lower level than what we were running at pre-COVID, there may be an opportunity to more materially reduce our borrowing expenses. So we're monitoring that and trading off those -- that math as well. So those are the things kind of driving right now where we think the leverage makes sense.

(Operator Instructions) Our next question comes from Chris Kotowski with Oppenheimer.

Yes. I liked your Slide 11 about the NAV recovery process, and I was trying to kind of mentally draw an equivalent map of what the path would be for a recovery of your distribution to the pre-COVID level of $34 million. And I mean the obvious candidates would be rising short rates, I guess, and then also converting equity investments into yielding investments. But I mean, is there a corresponding map to be drawn? And what would be the key elements of that?

Yes. I mean, you hit on dead center, right? Those are the 2 drivers that get us back to where we were, which is LIBOR going from 25 bps to 2%, not like it needed to go to 6%, but 25 bps is tough. So that's driver one. And driver 2 is exactly what you said. It's recycling some of this equity exposure that has no yield, but it's still compounding, ultimately monetizing that and re-plowing that back into yielding assets. And that math is very powerful, right? If you took -- just use a round number, over time, you recycled $100 million of equity exposure into assets yielding 8%. That's $8 million. That really flows to the bottom line, right, because there's no more extra management fee on that. There's no more extra leverage that you need for that. So that's pretty powerful.

And so it really is a combination of those 2 things. Obviously, making sure there's no future deterioration in earnings on future defaults would be offsetting that. So that is the rough -- those are the factors that will drive it. So I think you're dead-on on that.

Our next question comes from Bryce Rowe with Hovde Group.

Can you hear me okay?

Yes, Bryce. We can hear you well.

Okay. Sorry. Rob, I wanted to just kind of follow up on that comment you made about potentially being able to further reduce some of your interest costs. And clearly, we saw the issuance here recently at a nice rate. And so I'm curious kind of where that comment is kind of targeted? Is it targeted to some of the unsecured debt that is on the balance sheet now? Or do you see some potential for spreads coming down within the revolving facilities within the capital structure?

Yes. I think it's predominantly the former on the unsecured side, but we do think there's room on the secured side as well as we come out of, obviously, what was a tough year. And we've seen the dramatic decline in AAA CLO liabilities, and the secured market tends to benchmark off of that market. So yes, we do think there's a potential opportunity there. So it's both size. But I think for the long term, the more dramatic opportunity potentially is on the unsecured side.

Okay. And can you remind us what the opportunity is to refinance some of those unsecured notes? I mean, obviously, the next maturity is July of '22. And so just trying to think about kind of when you might look to pay those down, if there is, in fact, an opportunity to prepay?

Yes. I mean it's -- the timing gets into call provisions, which are a little bit different across the board and just magnitude, right? I mean if the gap in rate is big enough, you can you can prepay early and make that math work. But you can see our big maturity wall is in 2023, but there may be the ability to pull some of that forward, like we're doing with the baby bonds, for instance, now. So it's that -- the timing would be the next 6 to 18 months would be, I think, the way to think about it.

(Operator Instructions) As there are no questions, this concludes our question-and-answer session. I would like to turn the conference back to Rob Hamwee for any closing remarks.

Yes. Thank you, and thanks to everyone. I appreciate, again, as always, the time and the attention and look forward to talking to everybody in a couple of months to talk about Q1. And in the interim, of course, we're always available. People know where to find us. So thank you, and have a great rest of the day. Bye-bye.

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