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spk04: hello and welcome to today's new mountain finance corporation third quarter 2022 my apologies welcome to today's earnings call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Rob Hamwe, CEO of New Mountain Finance Corporation. Please go ahead.
spk06: Thank you, and good morning, everyone, and welcome to New Mountain Finance Corporation's third quarter earnings call for 2022. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital, John Klein, President of NMFC, Laura Holson, COO of NMFC, and Shiraz Khadji, CFO of NMFC. 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.
spk05: 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 November 8th earnings press release. I would also like to call your attention to the customary safe harbor disclosure in our press release and on page two 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'll 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, We'll give some highlights beginning on page four of the slide presentation. Steve?
spk00: Thanks, Shiraz. It's great to be able to address you all today, both as NMFC's chairman and as a major fellow shareholder. I believe we have good news to report despite the difficult U.S. economic conditions of recent months. Net investment income for the third quarter was 32 cents per share, more than covering our 30 cent dividend per share that was paid in cash on September 30th. Our net asset value was $13.20 per share, just a 0.22 or 1.6% decrease despite the rising interest rate environment, as some gains on individual positions, such as Haven, helped offset the impact of rising interest rates on existing loans. We believe our loans are well positioned overall in defense of growth industries that we think are right in all times and particularly attractive in the challenging macro conditions of today. New Mountain's private equity funds have never had a bankruptcy or missed an interest payment and the firm overall now manages $37 billion of assets. Similarly, our credit funds, including NMFC, have experienced just six basis points of net default loss per year since we began our efforts in 2008. Looking forward, the rise in interest rates can be a substantial positive for our quarterly earnings going forward since we chiefly lend on floating rates, which have been rising. Accordingly, we are pleased to announce that we are increasing our dividend to 32 cents per share, up from the current 30 cents per share, for the fourth quarter. And New Mountain, as the manager, will give dividend protection, in other words, waive incentive fees if needed, to maintain this level through at least the end of calendar year 2023. As page 13 of the presentation shows, there is also the potential to significantly out-earn this $0.32 per share level at current interest rates if all other factors hold constant. This extra earnings could appear as special dividends or as deleveraging of our balance sheet. We believe the strength of New Mountain and of NMFC are driven by the strength of our team. New Mountain overall now numbers 215 team members, and the firm has developed specialties in attractive defensive growth, that is, acyclical growth sectors, such as life science supplies, health care information technology, software, infrastructure services, and digital engineering. Talent has also been rising within this team, and to this end, we are pleased to announce a key promotion. John Klein, who has helped lead NMFC and our credit efforts since 2008, will be named CEO of NMFC, effectively January 1st, 2023. Rob Hamwe will continue as a key leader of the effort, as vice chairman of NMFC and its investment committee, where I continue as chairman. Rob, John, and I also continue as managing directors of New Mountain overall, working as we have before. Finally, we continue as major shareholders of NMFC, owning over 12% of NMFC's total shares personally. Rob, John, and I have never sold a share of NMFC, even as we have been buying. With that, let me turn the call back to Rob. Thank you, Steve.
spk06: We have included a few new pages this quarter as a high level summary of NMFC, our priorities, and our differentiated approach. On page seven, we show NMFC at a glance, highlighting our best in class quality metrics, strong return track record over our 14 year history, and detailed disclosure of the acyclical sectors we have exposure to through our portfolio companies. On the following page, we highlight NMFC's differentiated approach to lending. Our defensive growth strategy enables us to focus on investing in strong businesses in acyclical sectors, which provides insulation for macroeconomic headwinds, as Steve described earlier. We are not buying the market and proactively avoid the sectors of the economy where we think there is the most volatility and cyclicality. In addition, our credit business was founded with the idea of leveraging the intellectual capital of the full New Mountain platform. We have real sector expertise in these defensive growth sectors thanks to a team of 89 investment professionals who focus day in and day out on these sectors. It is important to note our senior advisors, operating executives, and portfolio company CEOs have actually run similar businesses which allows us to identify the most attractive opportunities in the market. This breadth of resources at our disposal allows us to go far deeper on diligence than a standalone credit firm ever could, and ultimately allows us to make better credit decisions and avoid mistakes. Steve spoke earlier about our shareholder alignment. We believe that these three elements, our defensive growth strategy, our integrated research and underwriting model, and shareholder alignment have resulted in a proven track record of execution. This is demonstrated by our total return performance, consistent coverage of our dividend, and strong credit performance. Turning to page nine, we believe our portfolio continues to be very well positioned overall, particularly for periods of volatility. The updated heat map shows the positive risk migration this quarter with two positions representing $93 million of fair value improving in rating and two positions representing just $34 million worsening in rating. We are pleased that over 92% of our portfolio is rated green on our risk rating scale. Conversely, our red and orange names, which represent our most challenged positions, now represent just 2.3% of the portfolio. Starting with the positive movers on page 10, Haven, formerly known as Tenawa, which, as a reminder, ceased operations at its plant on April 14th due to a fire, migrated from yellow to green as the insurance carriers deemed the plant a total loss and confirmed the full payout of the insurance policy. The company has now received the full proceeds from the insurance carriers, which enabled them to repay our $46 million debt position at par post-quarter end and left meaningful residual equity value, which we expect to monetize over the next several months. The education business improved from red to orange as the impact of COVID on the industry further recedes. The two negative movers are both relatively small positions and include a business services company, which we placed on non-accrual this quarter due to continued top line and execution challenges, and a healthcare business, which has experienced some idiosyncratic headwinds combined with staffing issues. The updated heat map is shown on page 11. As you can see, given our portfolio's strong bias towards defensive sectors like software, business services, and healthcare, we believe the vast majority of our assets are very well positioned to continue to perform no matter how the economic landscape develops. We continue to spend significant time and energy on our remaining red and orange names. We also wanted to highlight that we moved the page detailing leverage migration on the underlying portfolio companies to the appendix. We are committed to our best-in-class disclosure, so we will continue to share this information going forward, but believe our heat map largely captures the impact of leverage migration. With that, I will turn it over to John to discuss market conditions and other important performance metrics. Thanks, Rob.
spk07: Good morning, everyone. Since our last call in August, the overall investing environment across most asset classes has continued to be difficult. The challenges associated with higher interest rates, inflation, geopolitical instability, and pockets of economic softness have not receded. However, through this period, corporate direct lending continues to be one of the most resilient asset classes across all financial markets. Floating base rates, attractive spreads, secured debt structures, and low loan-to-value ratios have provided investors with valuable stabilities in an otherwise volatile investing environment. Additionally, our strategy of making loans to non-cyclical, defensive businesses provide added margin of safety compared to that of the overall lending market, which generally has much higher exposure to inflation sensitive, cyclical, and capital intensive businesses within sectors that we avoid. While new deal activity remains materially lower than last year, we continue to see good opportunities to make add-on investments into existing portfolio companies and to finance select sponsor-backed purchases in the upper middle market. In general, sponsor equity contributions remain very attractive, consistently ranging from 60 to 80 percent of enterprise value, while pricing is at the very wide end of historical ranges. Finally, it is important to highlight that the overall direct lending market continues to take meaningful share from the syndicated loan and high-yield bond asset classes, as our private financing solutions offer an ease of execution, price clarity, and capital certainty that is still not available in these other markets. Page 13 presents an interest rate analysis that provides insight into the positive effects of increasing base rates on NMFC's earnings. We have updated this page to give more clarity into the impact of increasing base rates on our portfolio, as well as the timing of that impact. As a reminder, the NMFC loan portfolio is 88 percent floating rate and 12 percent fixed rate, while our liabilities are 52 percent fixed rate and 48 percent floating rate. Given this capital structure mix, we are long LIBOR and thus have material positive exposure to increasing rates. As we reported last quarter, we have experienced a lag. Our assets reset at a slower cadence than our liabilities. On the upper right side of the page, we show how this timing lag played out during the third quarter, where rate increases on assets occurred at a slower pace compared to that of our liabilities, resulting in a negative drag of 30 basis points. As shown on the lower bar chart, this mismatch caused a two cent headwind during the quarter compared to a hypothetical scenario where base rates were 2.5% on both assets and liabilities. To the extent rates stabilize at 3.5% or 4.5%, we would expect a material uplift in earnings to approximately 36 to 38 cents per share, all else being equal. Turning to page 14, we present more detail behind the 22-cent decline in our book value this quarter. Starting on the left side of the page, we show that credit-driven fair value changes resulted in a net NAV decrease of eight cents per share from Q2 to Q3. This minor decrease was driven by performance-related valuation decreases for seven names, including Amentum, which continues to have a strong outlook but modestly took down expectations for the year. These valuation declines were offset by a material write-up at Haven, which was unrealized at the end of Q3, but will be mostly realized by the end of Q4. Our remaining portfolio experienced 14 cents per share of depreciation associated with general spread widening in the overall credit market. In the context of the broader financial markets, NMFC's book value is very stable and reflective of a portfolio with strong credit quality and increasing future income potential. Page 15 addresses NMFC's long-term credit performance since its inception. On the left side of the page, we show the current state of the portfolio, where we have $3.2 billion of investments at fair value, with $59 million, or 1.8% of the portfolio, currently on non-cruel. As mentioned earlier, we did put a business services company on non-accrual, which represents $20 million, or 0.6% of our current portfolio. NMSC's cumulative credit performance, shown on the right side of the page, remains strong. Since our inception in 2008, we have made $9.7 billion of total investments, of which only $347 million have been placed on non-accrual. Of the non-accruals, only $79 million have become realized losses over the course of our 14-year history. As shown on the next page, default losses have been more than offset by realized gains elsewhere in the portfolio. The chart on page 16 tracks the company's overall economic performance since its IPO in 2011. As you can see at the top of the page, since our initial listing, NMSC has paid approximately $1 billion of regular dividends to our shareholders, which have been fully supported by over $1 billion of net investment income. On the lower half of the page, we focus on below the line items, where we show that since inception, highlighted in blue, we had a cumulative net realized gain of $16.8 million, which is basically flat with last quarter. This cumulative realized gain is offset by $73.9 million of cumulative unrealized depreciation on our portfolio, which increased this quarter by about $24 million, which was largely driven by valuation changes related to widening risk spreads in the general market. On the bottom of the page, in yellow, we show how cumulative net realized and unrealized loss stands at just $57 million, which remains a tiny fraction of the $1 billion of net investment income that we have generated since our IPO. As we look forward, our team remains very focused on reversing this small cumulative loss and maintaining best-in-class credit quality throughout the portfolio. Page 17 shows a stock chart detailing NMSC's equity returns since its IPO over 11 years ago. Over this period, NMSC has generated a compound annual return of 9.6%, which represents a very strong cash flow-oriented return in an environment where risk-free rates have been historically low. This year, NMSC's performance has compared favorably to most equity indexes and has materially exceeded 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. I will now turn the call over to our COO, Laura Holson, to discuss more details on our recent originations and current portfolio construction.
spk02: Thanks, John. As shown on page 18, we originated almost $125 million in Q3 in our core defensive growth verticals, including software, business services, and consumer services. We primarily funded these originations with repayments and a modest amount of sales, keeping us fully invested and at the high end of our target leverage range. We continue to have great success targeting and sourcing high-quality deals within niches of the economy where we have the highest conviction and expertise. Since quarter end, overall deal activity has been consistent, but more borrowers continue to migrate to the direct lending market as the syndicated market remains somewhat closed to new issue. As always, we remain extremely selective on credit and are focusing on the highest quality opportunities in a widening opportunity set. We expect to remain fully invested in our target leverage range as our deal flow absorbs any proceeds from ordinary course loan repayments. Turning to page 19, we show that our asset mix is consistent with prior quarters, where slightly more than two-thirds of our investments, inclusive of first lien, SLPs, and net lease, are senior in nature. Approximately 8% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. Assuming solid operating performance and a supportive valuation environment, we believe these equity positions could continue to increase in value and drive book value appreciation. We hope to monetize certain of these equity positions in the medium term and rotate those dollars into yielding assets. As discussed earlier, we expect Haven to be a near-term example of this, as we realize the equity proceeds over Q4 and Q1. Page 20 shows that the average yield of NMFC's portfolio increased from 10.3 percent in Q2 to 11.3 percent for Q3, largely due to the benefit of the increasing forward LIBOR curve. Spreads remain wider, and the supply-demand imbalance continues to favor lenders, which helps support our net investment income target. Turning to page 21, we show detailed breakouts of NMFC's industry exposure. We have further enhanced our industry disclosure this quarter to provide more insight into the significant diversity within our software, business services, and healthcare sectors. As we have stated, we believe these sectors are well positioned in an inflationary environment given the pricing power and margin profile that comes along with the largely tech and services nature of these industries. In our view, the chart demonstrates the differentiated domain expertise our team has developed and shows why we operate with confidence in any economic cycle. The sectors we focus on have innately attractive cash flow characteristics, such as high EBITDA margins, minimal CapEx and working capital needs, and flexible cost structures. As a result, as interest rates rise, we believe most of our borrowers have sufficient free cash flow to cover the increasing interest burden, which I will touch on more on the following page. We've successfully avoided nearly all of the most troubled industries while maintaining high exposure to the most defensive sectors within the U.S. economy that we believe can perform well in more volatile macro environments. We added page 22 this quarter to highlight the trends in the scale and credit statistics of our underlying borrowers. As you can see, the weighted average EBITDA of our borrowers has increased over the last several quarters to over $130 million. While we first and foremost concentrate on how an opportunity maps against our defensive growth criteria and internal New Mountain knowledge, we believe that larger borrowers tend to be marginally safer, all else equal. We also show the relevant leverage and interest coverage stats across the portfolio. Leverage has been largely consistent. Loan to values continue to be quite compelling, and the current portfolio has an average loan to value of just 41%. From an interest coverage perspective, we've seen modest compression as base rates rise, But as I mentioned earlier, we think the free cash flow characteristics and growth profiles of the industries we focus on lend themselves to decent cushion. The weighted average interest coverage on the portfolio is still north of two times today. Finally, as illustrated on page 23, we have a diversified portfolio across over 100 portfolio companies. The top 15 investments, inclusive of our SLP funds, account for 38% of total fair value, and represent our highest conviction names. With that, I will now turn it over to our Chief Financial Officer, Shiraz Khaji, to discuss the financial statement.
spk05: Shiraz? Thank you, Laura. For more details on our financial results in today's commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Now I would like to turn your attention to Slide 24. The portfolio had over $3.2 billion in investments at fair value on September 30th and total assets of $3.3 billion, with total liabilities of $2 billion, of which total statutory debt outstanding was $1.7 billion, excluding $300 million of drawn SBA-guaranteed debentures. Net asset value of $1.3 billion, or $13.20 per share, was down 22 cents, or 1.6% from the prior quarter. At quarter end, our statutory debt-to-equity ratio was 1.26 to 1. However, net of available cash in the balance sheet Net leverage is 1.23 to 1 within our target leverage range. On slide 25, we show historical leverage ratios and our historical NAV adjusted for the cumulative impact of special dividends. Consistent with our goal of minimizing credit losses and maintaining a stable book value over the long term, you will see that current NAV adjusted for special dividends is not far off from our NAV back to our IPO over 11 years ago. On slide 26, 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. For the current quarter, we earned total investment income of 78.1 million, a $5.3 million increase from the prior quarter. This is due to higher interest income from base rate resets, offset by lower fee income in the quarter. Total net expenses were approximately $45.6 million, a $4.2 million increase quarter-over-quarter due primarily to higher base rates in our floating rate debt. As discussed, the investment advisor has committed to a management fee of 1.25% for the 2022 and 2023 calendar years. We have also pledged to reduce our incentive fee if and as needed during this period to fully support our new $0.32 per share quarterly dividend. Based on our forward view of the earnings power of the business, we did not expect to use this pledge. It is important to note that the investment advisor cannot recoup fees previously waived. This results in quarterly NII of 32.5 million or 32 cents for weighted average share, which exceeded our Q3 regular dividend of 30 cents per share. As a result of the net unrealized depreciation in the quarter, but an increase in net assets resulting from operations of $7.7 million. Slide 27 demonstrates 95 percent of our total investment income is recurring this quarter. You will see historically, on average, over 90 percent of our quarterly income is recurring in nature, and on average, over 80 percent of our income is regularly paid in cash. We believe this consistency shows the stability and predictability of our investment income. Turning to slide 28, the red line shows our dividend coverage. While NII exceeded our Q3 dividend, the Dividend Protection Program could have provided additional coverage if needed. As previously mentioned, based on our preliminary estimates, we expect our Q4 NII will be in excess of $0.32 per share. Given that, our Board of Directors has declared a $0.02 per share or 7% increase in our Q4 dividend to $0.32 per share, which will be paid on December 30th to holders of record on December 16th. On slide 29, we highlight our various financing sources. Taking into account SBA guaranteed advantages, we had almost $2.3 billion of total borrowing capacity at quarter end, with over $315 million available on our revolving lines, subject to borrowing-based limitations. 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 30, we show our leveraged maturity schedule. As we've diversified our debt issuance, we've been successful at laddering our maturities to better manage liquidity, and over 75% of our debt matures on or after 2025. Post-quarter end, we issued a $200 million three-year convertible note at a fixed rate of 7.5%. Proceeds of the successful private placement will be used to tender for our 2018 convertible note due in 2023, and any residual proceeds will be used to repay other outstanding indebtedness. Furthermore, our multiple investment-grade credit ratings provide us access to various unsecured debt markets that we continue to explore to further ladder our maturities in the most cost-efficient manner. With that, I would like to turn the call back over to Rob.
spk06: Thanks, Shiraz. In closing, we are optimistic about the prospects for NMFC in the months and years ahead. Our longstanding focus on lending to defensive growth businesses supported by strong sponsors should continue to serve us well. We once again thank you for your continuing support and interest, 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?
spk04: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first question today comes from the line of Bryce Rowe from B. Reilly. Please go ahead. Your line is now open. Thanks.
spk08: Thanks for taking the question. Good morning. Good morning. Wanted to maybe start here on the dividend. Nice to see the uptick here to 32 cents. Maybe you could comment a little bit on how you're thinking about the dividend from a future perspective, especially given the rise in rates and the favorable impact it might have on the earnings stream. Will you seek to maybe put in place some level of cushion so that dividend coverage will in fact be in excess of the dividend paid?
spk06: Yeah, yeah, it's a good question, and we certainly want to operate the business, you know, prospectively with, you know, a material coverage to the dividend, and I think that slide on page 13, you know, shows you a little, gives you a little bit of sense of where we think, you know, the NII is going to, so long as, you know, rates are you know, set up to stay all the way to where they are, but, you know, stay elevated for some material period of time. So, yeah, certainly our intention to run the business with a, you know, a meaningful commission to the dividend from the NAI. Okay.
spk08: And then maybe a follow-up on that, Rob, in terms of maybe terms and conditions right now with newer originations. Are you all seeing any higher type of floors within the transactions with the thought that maybe rates are going up now, but perhaps they go back down at some point in the future? So are you seeing higher interest rate floors within your transactions?
spk06: No, the floors haven't really modified. Now, the spreads are higher. The market overall is dislocated. So we're getting the benefit on new deals, not just of the higher base rate, but also of higher spread and call protection and just better terms generally. But one term that hasn't changed materially is the floors.
spk08: Okay. All right. Thank you so much. I'll get back in queue and let somebody else ask some questions.
spk05: Thanks.
spk04: Great, thank you. Thank you. The next question today comes from the line of Ryan Lynch from KBW. Please go ahead. Your line is now open.
spk03: Hey, good morning. And John, congratulations on the promotion. Well deserved. The other, I also wanted to congratulate you guys on a really nice slide deck. I love, you guys have always had a great slide deck, but I really love the improvements you guys have made. recently. My first question is kind of a complicated one, so I want to see if you can hopefully follow me through this. I was kind of trying to do some back of the envelope math on slide 13 and slide 22, kind of using those in combination. And if I assume that LIBOR in Q2, your effective LIBOR rate was kind of around your floor rates of around 1%, if it went from 1%-ish in Q2 to that 2.2% effective rate that you guys show on slide 13, it looks like your interest coverage that you have on slide 22 went down from 2.4 times to 1, excuse me, 2.4 times to 2.1 times. So that's like around 120 basis point increase in rates decreased your interest coverage by about 0.3 turns. And so that's roughly 100 basis point increase reduces that interest coverage by about 2.25 turns. If I look at the forward curve today at 5% versus where your effective rate was at the end of the third quarter, 5% versus the 2.2%, you're talking about almost 300 basis points of potential rising rates, which my back of the envelope math would equate to about 0.7, 0.8 turns of lower interest coverage from your 2.1 today. So you're getting down closer to that that one times interest coverage level. Of course, that's just the average. There's guys who have interest coverage significantly above that and guys who have interest coverage probably meaningfully below that. And so this is the kind of math that I think investors are thinking about of how credit quality, not just in your portfolio, but across the BDC space, and we're talking about your portfolio specifically, is positioned to hold up for a pretty substantial increase in interest rates over the coming year. So I'd love to hear your commentary on my quick back of the envelope sort of math as well as how should investors be thinking about the impacts from rising rates and how do you feel about that in your portfolio?
spk06: Yeah. Hey, Ron, it's a great question. We've been spending an inordinate amount of time focusing on exactly that question. I'm going to actually let Laura Holson, you know, get into some of the details there. Laura?
spk02: Yep. Yeah, no, great. It's a good question. And as Rob said, it's something that we spend a lot of time sensitizing kind of across the portfolio. I would say the math isn't quite as draconian as what you laid out. And I think there's a couple of reasons for that. The first is, you know, the analysis on page 22 is kind of a point in time estimate, right? So it's using EBITDA for the LTM period. And so the math you're doing doesn't incorporate the growth of our underlying portfolio companies, which as we've talked about, these are pretty growthful industries, right? So I think one key benefit is that you just have some natural cushion quarter to quarter over the fact that these companies are growing nicely. And I think beyond that, again, we do this, as you said, this is kind of an aggregate average kind of across the portfolio. And we've actually done the kind of name-by-name buildup, at least for kind of all of our sizable positions. And when we do sensitize base rates up to, you know, 5% or north of 5%, we're still showing in excess of, you know, one, one and a half times interest coverage ratio, again, for our materials. debt positions, excluding things like AR or recurring revenue loans. So hopefully it gives you a sense of why we think we're comfortable as well as, you know, all of the other items that I mentioned around just the characteristics of the portfolio and the fact that there's, you know, within the underlying portfolio companies, there's a lot of levers companies can pull in the event that rates continue to migrate in this direction. So, again, the analysis on page 22, while helpful, is kind of point in time and static and doesn't reflect, I think, a lot of the levers both on the growth side as well as on the cost structure side that we think provide additional cushion and coverage. And then you overlay that with something we've talked about not in this call but on prior calls, which is just the loan-to-values here. And we do think that sponsors, again, given the sizable equity cushions, that are junior to our debt in the capital structures that sponsors would step up and help defend things if everything else stays as is. So hopefully that gives you some sense for how we're thinking about it.
spk03: Yeah, it gives you some sense. I'm glad you brought up sort of the growth profile. I'm just curious, what are the current trends that you guys are seeing from a growth perspective in your portfolio? I'm not sure what sort of data you guys have. I know some companies report kind of on a quarter lag. Some companies give you monthly financial statements. We've seen other, there's another index out there that shows private middle market businesses on a month-to-month basis. revenue and EBITDA growth basis. And for the first two months of the third quarter, so July and August, the overall index had 2.1% decline in earnings. And then particularly software, or excuse me, technology had a 3% decline and healthcare had a 5% decline in earnings, you know, year over year from the first two months. And so I'd love to hear what sort of trends you guys are seeing in your portfolio. know as of uh the most recent data and i'd love to hear what what what sort of data what what sort of time frame we're talking about are we talking about you know the prior quarter or or are you here we talk about any sort of you know current monthly information yeah i would say most of our borrowers you know provide us with quarterly financial info so we have full q2 numbers from all of our portfolio companies and then within the next week
spk02: to two weeks, we're going to start seeing a material portion of companies report Q3. But I can talk a little bit about the Q2 numbers that we saw and then the handful of Q3 numbers that have come in so far, which is we're still seeing very strong top-line growth trends. And it's a mix of price and volume, right? Again, given the pricing power of the borrowers within industries that we focus on, we are seeing the ability to get meaningful price, even to the extent that, you know, volumes have flattened off a little bit. But in aggregate, still seeing, you know, nice top line growth. I would say the area that we're, you know, that we're continuing to watch is just on the margin side for, you know, for obvious reasons. But I think the good news is that, again, given the sectors, you know, which are largely, you know, tech and services in nature, you know, we don't have a lot of, you know, supply chain costs, freight costs, raw material costs, anything like that on the inflation side. It's really more around just labor and wage inflation and staffing, which actually we're starting to see maybe a little bit of improvement on, if anything. So the fact that we're starting from relatively high EBITDA margins to begin with, again, gives us the ability to withstand a little bit of margin pressure. But if I had to summarize, I would say still very strong top-line growth and a little bit of margin pressure, but nothing that we're concerned about in aggregate.
spk03: Okay. That's helpful. So we covered sort of the interest coverage and EBITDA and revenue growth trends. I would just love to hear what does it mean? So if I look at the public equity indexes for software-related companies, and I understand your book is not completely software, but that's the largest sector, that's down like 40% year-to-date, that index. Yes. And so I'd love to hear what have software multiples been doing? Uh, how much have they compressed in, in, in private middle market businesses, um, kind of year to date. And what does that mean, if anything, um, for your current portfolio companies?
spk06: Hey, John, you want to handle that one?
spk07: Sure. I'd be happy to handle that. Thanks, Rob. And, and, uh, And thanks for all the questions, Ryan. When we think about software, and I'm just going to use revenue multiples to make it really easy. When we think about where good software businesses traded in the public market last year, we saw multiples of, in many cases, on great businesses, 20 to 30 times revenue. So this year, we've seen a lot of those revenue multiples come down to as low, for really good businesses, to the six to 10 times level in the public markets. So when we see our sponsor clients buying great software businesses, they're generally still paying six to ten times revenue. And in some cases, that looks like a bargain to them relative to where a lot of these world class businesses were trading last year. And on average, our attachment points through a typical Unitron loan would be maximum two to three times revenue. So still, worst case, a 50% loan to value. And in many cases, a whole lot better than that. So to summarize, I think that the decrease in multiples in software is a public markets problem much more than it is a problem for a unit trust lender right at the top of the capital structure earning really good yield.
spk03: OK. That's helpful. Again, appreciate the updated slide deck. You guys always have a great slide deck, but appreciate the upgraded slide deck. And slide 13 is super helpful to kind of show your earnings trajectory, both from kind of the mismatch in rate resets for the third quarter and also just longer term what LIBOR does. So that's all for me today. I appreciate the time.
spk06: Great. Thanks, Ryan, and thanks for the comments. We appreciate it.
spk04: Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad.
spk01: We have a follow-up question.
spk04: Follow-up question from Bryce Rowe from B. Reilly. Please go ahead. Your line is now open.
spk08: Hey, guys. Sorry to belabor the call here. Did have a couple more and thought they might get asked. Let's see. In terms of kind of upcoming debt maturities, obviously you've kind of tackled the larger one with the convertible notes offering here. At this point, can you talk a little bit about how you're Thinking about the unsecured notes that are coming due here in 2023, do you feel comfortable just drawing down on the credit facilities to repay those? Or are you truly kind of exploring the unsecured markets?
spk05: Yeah, go ahead, Shiraz. Yeah, Bryce. Yeah, I mean, I think on the unsecured side, we're always looking at the markets. You know, it's not very attractive right now. You know, the bond market's closed right now. The unsecured market is open, but, you know, rates are what they are. I think we feel confident. You know, we got the convert done. We've tackled sort of the major item that's coming due next year. In terms of the maturities that's coming up earlier part of the year, we feel confident we have enough availability in our revolving lines to take care of those. And also, we touched on it briefly earlier, you know, we potentially, you know, could delever the business as we get repayments coming in on some of our positions. So that's on the table as well for us to consider. But we feel like we have enough levers right now to take care of the maturities without having to do something unnatural.
spk08: Great. Okay. That's helpful, Shiraz. And then maybe one more from me. You guys have had a good year in terms of realizing some gains, right? And so just kind of curious where you stand right now from the kind of an estimated spillover position is that, you know, are we, are we talking about, um, you know, some level of distributable event here, um, you know, late 22 or early 23, or can you, uh, can, can you carry a bit of that over into 23? Thanks.
spk05: Yeah, not, not much right now. I mean, um, so we did have some of the gains earlier this year from our real estate portfolio. We had losses from prior years to offset that, so there was nothing really that created any sort of spillover going into next year. We think if some of the equity positions that Laura touched on earlier do materialize in the median next year, potentially we could be in that position, but right now we feel like we're not flat, but we're just a little bit above flat, but not a big spillover.
spk08: Okay, great. I appreciate it. Thanks for taking the follow-up. Thanks, Bryce. Appreciate it.
spk04: Thank you. There are no additional questions waiting at this time, so I'd like to pass the conference back over to Rob Hanwe for any closing remarks. Please go ahead.
spk06: Great. Thank you. And once again, thanks to everybody for their time. We really do appreciate it. You obviously know where to find us for any potential follow-up, and otherwise look forward to speaking to everybody in the weeks and months ahead. Thanks. Have a great day.
spk04: This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.
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