Rob Hamwee - Chief Executive Officer
Steve Klinsky - Chairman, NMFC and CEO, New Mountain Capital
Dave Cordova - Chief Financial Officer
Adam Weinstein - Executive Vice President and CAO
Jonathan Bock - Wells Fargo
Troy Ward - KBW
J.T. Rogers - Janney Capital Markets
New Mountain Finance Corporation (NMFC) Q4 2012 Results Earnings Call March 7, 2013 10:00 AM ET
Good morning. And welcome to the New Mountain Finance Corporation Fourth Quarter 2012 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (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. Good morning, everyone. With me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; and Dave Cordova, CFO of NMFC. I'm please to introduce Dave, who joined us last fall and was promoted to CFO at the beginning of the year.
Adam Weinstein, our prior CFO has been promoted to an oversight role of Executive Vice President and Chief Administrative Officer as previously planned. Steve Klinsky is going to make some introductory remarks.
Before he does, I'd like to ask Dave to make some important statements regarding today's call.
Thank you, Rob. I would like to advise everyone that today's call and webcast is being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.
I would also like to call your attention to the customary Safe Harbor disclosure in our March 6, 2013 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 you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections.
We do not undertake to update our forward-looking statements or projections unless required by law. Any references to New Mountain Capital or New Mountain are referring to New Mountain Capital LLC or its affiliates and may be referring to our investment advisor, New Mountain Finance Advisors BDC LLC where appropriate.
To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com or call us at 212-720-0300.
At this time, I’d like to turn the call over to Steve Klinsky, the Chairman of New Mountain Finance Corporation, who will give some highlights beginning on page four of the slide presentation. Steve?
Thanks, everybody. Before turning the call back over to Rob and Dave, I wanted to welcome you all to New Mountain Finance Corporation's fourth quarter earnings call for 2012. Rob and Dave will go through the details, but I’m pleased to present the highlights of another strong quarter for New Mountain Finance.
New Mountain Finance's adjusted net investment income for the quarter ended December 31, 2012 was $0.36 per share, which is above our previously announced range of $0.33 to $0.35 per share. Full year net investment income of $1.36 per share more than covered our full year regular dividend of $1.34 per share.
The company's book value on December 31st was $14.06 per share, a decrease of $0.04 from Q3, but an increase of $0.10 prior to the Q4 special dividend of $0.14. Book value is up $0.46 from December 31, 2011, and we paid $1.71 in total aggregate dividends in 2012 including special dividends.
We’re also able to announce our regular dividend for the current quarter ending March 31, 2013. The regular dividend will again be $0.34 per share consistent with our previously communicated view that we have reached a fully ramped steady state dividend level.
The credit quality of the company’s loan portfolio continues to be strong with once again no new loans placed on non-accrual this quarter. As a reminder, we built our models based on a 3% assumed annual default rate and a 1% annual loss assumption from the date of the IPO. In fact, we have had only one issuer default since October 2008 when the debt effort began and it represented just 0.6% of the cost basis of our existing portfolio, and just 0.3% of cumulative investments made to date.
New Mountain Finance's pace of new investments was very strong in Q4. The company invested $267 million in gross origination in Q4, fully deploying the proceeds from December’s $53 million equity capital raise and related credit facility upsizing.
Targeted yields on new investments continue to be consistent with our previously communicated expectations. Our portfolio continues to emphasize positions in recession resistant acyclical industries pursuant to New Mountain's overall strengths and strategy. We continue to be very pleased with the progress of New Mountain Finance to date and we are pleased to address you as fellow shareholders, as well as management.
With that, let me turn the call over to Rob Hamwee, New Mountain Finance Corporation’s Chief Executive Officer.
Thank you, Steve. As always, I’d like to start with the brief review of NMFC and our strategy. As outlined on page five of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm with approximately $9 billion of assets under management and approximately 100 staff members, including nearly 60 investment professionals.
NMFC takes New Mountain's approach to private equity and applies it to corporate credit with a consistent focus on defensive growth business model, and extensive fundamental research.
Some of the key hallmarks of the defensive growth business models include acyclicality, sustainable secular growth driver, high barriers to competitive entry, niche market dominants, repetitive revenue, variable cost structures and strong free cash flow.
With this historically successful, business model focused approach in mind, our mandate since the inception of New Mountain’s debt investment program in 2008 has been to target what we believe to be high-quality businesses that demonstrate most or all of the defensive growth attributes that are important to us.
And to do so with an industries that are already well researched by 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 sustainable model that will allow us to generate attractive risk adjusted rates of return across changing cycles and market conditions. To achieve our mandate, we utilize the existing New Mountain investment team as our primary underwriting resource.
Turning to page six, you can see our total return performance from our IPO in May 2011 to March 1, 2013. We continue to be very pleased with both our absolute and relative return performance.
As outlined on page seven, credit markets have been very strong since the beginning of the year. In addition to ongoing QE and the expectation of extraordinarily low risk free rates for an extended period of time, a dearth of supply from new issuers coupled with strong demand from resurgent CLO market have served to compress spreads and corporate credit.
Recent history has shown that market conditions can change quickly, so I’d like to reemphasize that New Mountain Capital and accordingly NMFC have always been proactively focused on defensive acylical business models that our financing has turned out until late 2016 and not subject to traditional mark-to-market margin cost.
Our single highest priority continues to be our focus on risk control and credit performance, which we believe over time is the single biggest differentiator of total return in the BDC space.
If you refer to page eight, we once again layout the cost basis of our investments both the current 12/31/12 portfolio and our cumulative investments since the inception of our credit business in 2008, and then show what, if anything has migrated down the performance ladder.
In Q4, no assets had negative credit migration. We have one SLF asset that with the cost of $14.6 million and a fair market value of $10.3 million that previously migrated from an internal rating of 2 to internal rating of 3 indicating operating performance materially below our expectations but no near or medium-term expectation for non-accrual. We continue to have only one portfolio on non-accrual representing a cost 0.6% of our total portfolio and under 0.1% of fair market value.
Over 98% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale. Pages nine and 10 show the operating company and SLF respectively, leverage multiples for all of our material holdings when we entered an investment and leverage levels for the same investment as of the end of the current quarter.
While not a perfect metric, the asset by asset trend and leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical fundamental support for our internal ratings and marks.
As you can see by looking at the two tables, leverage multiples on almost all cases trending in the right direction and even more importantly, no single company on either page has had a material increase in leverage multiple that the exception of one loan in the SLF.
On page 11, we show a table depicting how NMFC’s publicly traded float has more than doubled based on the 30 equity offerings we have completed since our IPO. We now have 24.3 million shares in our float, representing 60% of the total shares outstanding, and liquidity and daily trading volume has increased commensurably.
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. And you can see we continue to cover approximately 100% of our cumulative regular dividend out of NII.
On the bottom of the page, we focused on global line items. First we look at realized gains and realized credit and other losses or you can see the individual quarterly data, I draw your attention to the number highlighted in blue, which shows cumulative net realized gains of $12.8 million since our IPO.
Next, we look at unrealized appreciation and depreciation. As you can see highlighted in gray, we had cumulative net unrealized appreciation of $9.3 million. For clarity, our mark-to-market loss and our one the profit investment ATI of $5.1 million is reflected in this number, along with various other mark-to-market gains and losses reflected on a schedule of investments.
Finally, we combine realized with unrealized depreciation to derive the final line on the table, which in the yellow box show the current cumulative net realized and unrealized depreciation of $22 million.
The point here is to show that on both the realized and combined realized unrealized basis, we have offset any credit losses or impairment with below the line gains elsewhere in the portfolio.
In fact, by this methodology we have build the $22 million cushion to offset any future credit losses some of which we are paid out as special dividend. Our market driven volatility around unrealized appreciation and depreciation had caused the bottom line number to vary overtime through economic gains and losses will accumulate in the realized bucket where we will strive to retain a positive balance.
Moving on to portfolio activity, Q4 originations continue to demonstrate our strong sourcing capabilities as we took advantage of a relatively lender family market as borrowers rush to complete transactions ahead of 12/31 tactical changes.
Specifically, as seen on pages 13 and 14, in Q4 we made material investments in 12 portfolio companies had a record total growth originations of $267 million. Repayments totaled $109 million and opportunistic sales were $47 million for total net originations less sales of $111 million. All the investments in keeping with our strategy on industries and businesses that are well known to us to (inaudible) private equity activities.
For instance, Kronos, a business we have successfully lent to multiple times over the last four years is a classic enterprise software business, an area where New Mountain has nearly a decade of successful private equity investing across multiple platforms.
Enterprise software generally and Kronos in particular is characterized by many of the attributes we price, highly recurring revenue with very high annual renewal rates, niche market dominants as the overwhelming industry leader, very high free cash flow given limited CapEx and positive working capital generation, and limited cyclicality given the mission critical nature of the product and into deeply embedded position.
Another good example is our investment in PRA, specialty contract clinical research organization providing outsourced drug development services to leading biotech and mid-sized pharma companies, a business -- an industry, our private equity group has studied extensively for a number of years.
As in other cases, we have been able to leverage our detailed knowledge of the business and strong relationship with management into an investment thesis in which we have a very high level of conviction.
The key element of our thesis include acyclical end market, positive long-term secular growth drivers, high degree of revenue visibility and suitability, attractive free cash conversion and the best-in-class management team.
Pages 15 and 16 show the impact of Q4 investment and disposition activity, and asset type and yield, respectively. Asset net origination type was skewed towards second lien investments but upon absolute basis and relative repayment. Portfolio yields were slightly up increasing from 10.2% to 10.3%.
Moving on to page 17, while origination activity has slowdown in Q1, our pipeline has grown substantially in recent weeks and we expect the much busier Q2. While credit spread have contracted meaningfully in the first two months of the year, we continue to believe that our integration with the broader New Mountain platform allows us to focus on opportunities of high-quality businesses where we already have great interaction to have those businesses are likely to perform based on our industry research.
Despite this modest activity level in Q1, we’re deploying roughly as much capital as we are getting back from repayment. So we continue to operate with our credit facilities fully deployed allowing for an optimize level of earnings.
Just like in Q4, where we raised only as much capital as we had visibility to deploying in the near-term. Any balance sheet expansion from here will be a function of how the pipeline of attractively priced and structured opportunities develops going forward.
In terms of the portfolio review on page 18, the key statistics as of 12/31 was very similar to 9/30. As always, we maintained our portfolio comprise of companies in the defensive growth industries like software, healthcare, business services and education that we believe will outperform in an uncertain economic environment.
Finally, as illustrated on page 19, we have a broadly diversified portfolio with our largest investment at 4.1% of fair value and a top 15 investments accounting for 45% of fair value down from 49% in Q3.
With that, I will now turn it over to our CFO, Dave Cordova to discuss the financial statement and key financial metrics. Dave?
Thank you, Rob. For more details on the financial results and today’s commentary, please refer to the Form 10-K that was filed last evening with the SEC. Before we turn to slide 20, I wanted to mention that we have included a structure chart as Appendix A in the presentation.
Similar to prior calls, I will spend a moment reviewing the company’s structure as a brief refresher. The structure was set up similar to an up-reach structure whereby the public company, PubCo has no direct operations of its own and its sole assets as its units of our operating business OpCo.
Today the other units of OpCo are held by a private BDC owned by New Mountain’s private equity fund AIV Holdings. This structure is a master feeder whereby the financial statements for OpCo flow to PubCo and AIV Holdings pro rata based on their respective ownership. All discussions throughout this call and presentation is focused OpCo and its operations.
Additionally, OpCo owns the equity of a non-recourse vehicle the SLF. These vehicle originate lower yielding first lien loans, but with greater leverage at 2 to 1. For GAAP, asset coverage and presentation purposes, we consolidate this SLF vehicle into the operations of OpCo.
Now I would like to turn your attention to slide 20. The OpCo and SLF portfolios have approximately $989.8 million an investments at fair value at December 31, 2012. We had approximately $12.8 million of cash and about $23 million of other assets, which includes approximately $10 million of unsettled sell proceeds related to one portfolio company, which we received in early January, $6.3 million of interest and dividend receivable much of which we’ve already received, $5.5 million of the deferred credit facility cost.
These costs get amortized over the life of our credit facilities and increase from last quarter due to the $40 million aggregate increase on our two credit facilities and $1.2 million of other assets including deferred operating costs, receivable from affiliates and other prepaid expenses and assets.
We had total debt outstanding of about $421.2 million on our two credit facilities which is made up of $206.9 million on our OpCo credit facility, which had $210 million of capacity at 12/31 and $214.3 million on our SLF credit facility, which had $215 million of capacity at 12/31.
We had about $34.5 million of other liabilities, which is made up of approximately $11.2 million of dividends payable, a $11 million of payables to affiliates for management and incentive fees, approximately $9.7 million of outstanding commitments on one investment which already closed in early January, approximately $0.7 million of interest payable and $1.9 million of vendor payables for various expenses.
This all gets us to a net asset value of $569.9 million, or $14.06 per share at December 31, 2012. This compares to an NAV per share of $14.10 at September 30, 2012 and $13.60 per share at December 31, 2011. The NAV increased $0.10 per share from September 30, 2012 prior to the declaration of the special dividend of $0.14 that was declared on December 27.
Our consolidated debt-to-equity ratio at 12/31 was 0.74 to 1, which is at the high end of our targeted debt-to-equity ratio. As a reminder, the OpCo credit facility allows us advance rates of 25%, 45% or 70%, depending on the type of the underlying assets at a rate of LIBOR plus 2.75%.
And the SLF facility allows us advance rates of 70% on qualifying first lien assets at a rate of LIBOR plus 2%. Both facilities do not mature until October 2016. Importantly, our credit facility covenants are generally tied to the operating performance of the underlying businesses rather than the marks of our investments at any given time.
On slide 21, we show our consolidated income statement for the full quarter at the OpCo level. As was discussed in prior quarters, the main reason for the creation of our up BDC structure was to make sure that the built-in gains that were in the portfolio at the time of the IPO are only allocated to AIV Holdings. Therefore, not burdening the public shareholders with any of those taxable gains or increased discretion on the predecessor investments over time.
Since, we were not able to step up the assets for GAAP, our income statement will generally show greater accretion than if a step up had occurred until the predecessor assets are sold, mature or are repaid. Therefore, on this slide, we show the actual income statement in the left column and then adjust the income statement to reflect it, as if all the assets were stepped up to the fair value at the IPO in the right column.
We used the adjusted income statement to judge our performance of the portfolio during the period, and it is also the basis for calculating our dividend and incentive fees. As it’s historically been the case, our interest income is predominately paid in cash. Specifically, we had $22.7 million of interest income, which breaks out as follows.
Cash interest income of $20.5 million, PIK income of about $600,000, net amortization of purchased premiums and discounts and origination fees of about $500,000. And about $1.1 million of pre-payment fees on five investments that fully or partially repaid above par during the quarter.
Dividend and other income of $1.2 million was made up of dividends on warrants owned and preferred stocks, the late compensation, revolver fees and consent and amendment fees. Our Part I incentive fee was approximately $3.4 million, reflecting higher adjusted pre-incentive fee net investment income than the previous quarter, and our management fee was approximately $3.2 million.
Our interest expense of $2.8 million is broken out to represent about $2.4 million of actual interest expense on our borrowings, $75,000 of non-usage and custodian fees and about $335,000 of amortization of our upfront borrowing costs.
We have capped the amount of our expenses reimbursable to the administrator for our second year as a public company at $3.5 million. And so for this quarter, our combined amount of professional fees, accounting expenses and other admin expenses are approximately $0.9 million in total. These amounts relates to legal cost, audit and tax, board costs, other admin expenses and indirect expenses reimbursable under our administration agreement.
The bottom line for the fourth quarter is adjusted net investment income of $13.6 million, or $0.36 per weighted average share. This exceeds the adjusted net investment income range, discussed on a November 7, 2012 call of between $0.33 and $0.35 per share. We are pleased that we were able to deploy the proceeds from the December offerings and still deliver adjusted net investment income above our expected range.
Moving to below the adjusted net invested income line, we had adjusted net realized gains of $2.7 million as of result of refinancing and sales at prices above our adjusted cost basis. Unrealized gains of $1.6 million were driven in large part by write-ups, resulting from continued performance of the underlying portfolio and broader market appreciation.
Additionally we accrued $860,000 for our Part II incentive fee in the fourth quarter. As under GAAP, we are required to accrue incentive fees assuming a hypothetical liquidation of the entire portfolio at the balance sheet date.
However, as of December 31, 2012, cumulative net adjusted realized gains did not exceed cumulative adjusted unrealized depreciation and therefore, we have not paid any Part II incentive fee. In total, for the quarter ended December 31, 2012, we had a net increase in capital resulting from operations of $17 million.
Turning to slide 22, I would like to give a brief summary of our annual performance for 2012. For the year ended December 31, 2012, we had total adjusted interest income of $80.2 million and dividend and other income of $2.1 million.
Our Part I incentive fee was approximately $11.5 million, and our management fee was approximately $11.1 million. Interest and other credit facility expenses were approximately $10.1 million and our combined amount of professional fees, accounting expenses and other admin expenses were approximately $3.4 million.
These all results in 2012, total adjusted net investment income of $46.1 million, or a $1.36 per weighted average share. For the year ended December 31, 2012, we had total adjusted realized gains of approximately $11.9 million, unrealized gains of $20.4 million and total accrued Part II capital gains incentive fees of $4.4 million. In total, for the year ended December 31, 2012, we had a total net increase in capital resulting from operations of $74 million.
Finally, for 2012, we declared total regular dividends of $1.34 per share and total special dividends of $0.37 per share, resulting in total aggregate dividends of $1.71 per share. There is one more administrative item to note. Our expense cap of $3.5 million that was in place since April 1, 2012 will expire on March 31, 2013.
We have decided to continue to subsidize the expenses of the BDC for the next year by imposing a cap of $4.25 million on direct and indirect expenses. New Mountain Capital is very committed to the BDC and believes that supporting the expense burden, based on our size is prudent.
Now, I will turn your attention to slide 23. As briefly discussed earlier, the $13.6 million of actual adjusted net investment income for the fourth quarter exceeded the range we discussed on our Q3 earnings call of $12 million to $13.1 million, or $0.33 to $0.35 per share, was primarily a result of higher prepayment fees, dividend and other income of approximately $2.2 million compared to $1.6 million in the prior quarter.
We paid a $0.34 per share of dividend, which we believe to be our fully ramped run rate adjusted net investment income excluding the impact of capital wages. Therefore, we expect to fall within the range of $13.2 to $14.4 million of adjusted net investment income in the first quarter of 2013, or $0.33 to $0.35 per share.
Although, this is simply an estimate and could materially change. Given our belief that our full ramped run rate dividend will continue to fall in the previously declared expected range of $0.33 to $0.35 per share, our Board has declared a Q1, 2013 dividend of $0.34 per share in line with the previous three quarters. The Q1, 2013 quarterly dividend of $0.34 per share will be paid on March 28, 2013 to holders of record on March 15, 2013.
At this time, I would like to turn the call back over to Rob.
Thanks, Dave. Once again, we do not plan to give explicit forward guidance. It continues to remain our attention to consistently pay the $0.34 per share on a quarterly basis for future quarters, along with the adjusted NII of between $0.33 and $0.35 per share in line with our current expectation.
In closing, I would just like to say that we continued to be extremely pleased with our performance to date. Most importantly, from a credit perspective, our portfolio continues to be very healthy. Once again, we'd like to thank you for your support and interest. And at this point, turn things back to the operator to begin Q&A. Operator?
(Operator Instructions) The first question comes from Jonathan Bock of Wells Fargo. Please go ahead.
Jonathan Bock - Wells Fargo
Good morning and thank you for taking my questions. So, first just a few housekeeping, items, Rob, related to the markets. In light of spread timing that what we have seen across the levered financed landscape with little supply and significant amount of demand, can you walk us through the value proposition that you see today in second lien loans versus through first lien collateral, because we've seen quite a migration towards second lien and new originations. And some might think that second lien loans carry a bit of higher risk, so if you could walk us through that value prop, we’d appreciate it?
Yeah. Absolutely, Jonathan. So, we always start with the business, right, and so it is the same thing. How well do we know it, and based on that how much do we like it. And how do we feel about the volatility around the earnings, the future earning stream as we position ourselves as a lender.
So when we look at some of the second lien stuff, I mentioned two on the call, Kronos and PRA. We're doing second lien where our attachment point goes to the high -- say the high fours or up to the mid to high fives. We're talking about businesses that have enterprise value and our judgment as sophisticated private equity investors in those industries of 10, 11 times. We feel very good about the value proposition of being at those leverage multiples, earning the spread that we're earning with that type of loan to value, which we think compares very favorably to other things that are available in the market today.
And we also believe that when we focus on second lien, we're extremely doubling into our intensity of knowledge on these businesses and as when we have that high conviction, we get comfortable with those -- that type of leverage issues. So, I don’t think it’s fair as a blanket statement to say all second liens are riskier than all first leans. I think there are bad and good risk reward opportunities in first lien. There are bad and good risk reward opportunities in second lien. And I think as long as you take each opportunity on a sort of one off basis and analyze it appropriately, I think you can be to some degree agnostic about what this [maturity is] [ph] called.
Jonathan Bock - Wells Fargo
That’s very helpful color. And again, we understand that the reliance on the private equity manager does provide some significant synergies and value. And maybe getting to that, we have noticed over the past you’ve got quite a strong track record in government services. And so perhaps outline the risks if any that are faced by portfolio companies involved in federal services as it relates to government sequestration.
Yeah. And that’s a good question. And it’s something we’ve spent a really lot of time on as a firm, both speaking about our private equity investment as well as thinking about our debt investments in the space and really re-underwriting that. And this goes back six months ago because we saw this coming, and we’ve been spending the last six months talking to managers at our own companies to people at companies we lend to and to our broad network of people in that world.
And I think that the bottom line and now obviously, we are living under sequestration is that -- is obviously not helpful for the equity values of the companies. But as a lender to these companies, particularly the ones that we are involved with, we really don’t think it’s a material issue. I mean, we think sequestration has a sort of 0% to a 10% impact on the revenue and profitability of the companies.
So, when you are -- again, as a lender, the way we underwrite loan-to-value, that doesn’t have a material impact on our coverage. And really the fact that we are positioned, primarily in companies in the federal service side that are really mission critical in terms of dealing with cyber security, dealing with terrorist threats, NSA, that type of signal intelligence work.
And we’re seeing this, it really hasn’t been, nor is it expected to be a material change in their revenue or profitability. So, we spend a lot of time in the issue. We’re certainly -- we had the question ourselves, but we’ve satisfied ourselves through very thorough investigation that is not a material risk to the portfolio going forward.
Jonathan Bock - Wells Fargo
Okay. That’s great. And then, maybe a few balance sheet growth questions. One in particular, as spreads have come in slightly and it’s been a rather, we call frothy 1Q. And then, we also see kind of limited, at least to this point net portfolio growth, which is understandable based on the strength in 4Q.
Would it be fair to say that growing the equity account might be more of a secondary item perhaps because you -- which is not necessarily to [daily] [ph] investors in light of the fact that really the growth or the near-term expectation [supplies] [ph] are really rather modest? And when you are near the quarter, how are you looking at kind of that growth in the equity accounts just over the next, I’d say month and a half?
Yeah. I think, we’ve always taken the position that we raise capital, one, when our leverage is fully deployed and two when there is actually something to do with the money. So its not about raising equity when you can, it’s about raising equity when there is something either the market is broadly attractive which its not right now or there are niche opportunities, which we are always seeing because -- we've got a very broad reach that accumulate in a pipeline that's very actionable.
And again we saw that in Q4 when we did the equity raise in December, it was a modest equity raise. And we had very targeted uses for that money. And we deployed it within weeks.
I think that's the guiding principle going forward. So as I said in the prepared comments, our equity raising will be a function of how the pipeline develops in the coming weeks and months. So it will be -- we would expect it to be targeted as opposed to saying hey broadly the market is great, let's raise a boat load of money. And we'll figure out what to do with it.
Jonathan Bock - Wells Fargo
I think we hopefully demonstrated to the market over the last two years that we are very focused on optimizing our ROE and our balance sheet, which allows us to take the lease possible risk at the asset level and still deliver the dividend and ROE that the market expects from us.
Jonathan Bock - Wells Fargo
Excellent. I think BDC investors do, appreciate and I know that all I’m focused on return on equity. Then they maybe kind of rephrasing, would you say the current environment -- the current supply environment for 1Q is better than expected or just slightly lighter than one would have expected to this point?
I think it’s about what we expected back when we raise the money in Q4 in December. I did make the comment that while we have some great opportunities immediately ahead of us, I was meaningfully concerned about entering into January with any meaningful excess capital because it was an obvious that there would be a lot of stuff to do in January and February.
That kind of played out. We actually -- as I mentioned on the call, our pipeline is definitely improving in a meaningful way. But it's only been a couple of weeks, so I want to see how that develops over the next couple of weeks before we make any decisions on our ultimate capital raising approach. But whatever we do, again it's going to be absent a dramatic change in the overall market. It's going to be targeted and smaller as opposed to non-targeted and bigger.
Jonathan Bock - Wells Fargo
Perfect. And then last question, just on a specific investment. It's a healthcare IT and I know, you mentioned it is an SLF loan, but virtually logic, just in terms of the write-down this quarter that was a bit more meaningful than the things we've seen in the past. Maybe just an update on that company and the situation how you're looking to continue to realize value for investors?
Yeah. That's where we're obviously actively involved in. We're working with the company the best way possible to maximize value for everybody. Also, we got to be careful, Jonathan, just because of the subject to confidentiality. And I want to be as transparent as possible with our shareholders but at the same time we respect those confidentiality obligations.
But I can say that we're in the senior position. I think we've taken a prudent reserve against the loan. But as I did state, we don't see any high risk of near-term non-accrual. And therefore I think we're comfortable where we hold bit, hope that it’s stabilizes there and that it ultimately returns back to full value.
Jonathan Bock - Wells Fargo
Okay. That's fair. That’s very helpful. Thanks a lot guys.
Okay. Thanks Jonathan.
(Operator Instructions) The next question comes from Troy Ward of KBW. Please go ahead.
Troy Ward - KBW
Great. Thank you. And just following up a little bit on John’s conversations, as you said, December 7th, you did the $45 million to $50 million public offering and by the end of the year, you were levered at 0.74 with $12 million of cash. Can you just describe to us, I mean that’s a lot different than most of EDCs we see that they have a lag before they put that capital to work. Can you describe to us the process that you go through to not only invest the equity but the leverage in such a short period of time?
Yeah. And I think when we came into December, we had a very robust pipeline of things that were lined up for closing. So, while I think entering Q4, I was not expecting to do a capital raise but the deal flow and the attractiveness of the deal flow drove the desire and the need to raise the capital.
So again I think our approach is to let the deal flow drive the capital, not to let the capital drive the deal flow because that’s kind of backwards.
Troy Ward - KBW
But what point do you make the commitments to your partners in the transactions that you will fund? It would seek…
We’re obviously not getting long risk that we can’t deliver on if the market goes away from us at any time. So we are not finding anything or committing to anything prior to having the capital in hand.
So, one of the things I think we are good at those is teeing up opportunities. You are having visibility and it’s all probability weighted, right. But having really good visibility into what we are going to likely to close on before getting along on our capital.
But at the same time, we are obviously not putting ourselves in a position where if the market would go away tomorrow and our plan to raise capital fail because the equity markets imploded that we have any risk of not delivering on a commitment. So Troy, that's a balancing act and it's something we’re good at.
Troy Ward - KBW
Okay. That's fair. And then again kind of where John was leading as well, he wrote down the equity path. But when you think about obviously as you correctly stated, you don’t raise capital and just put it out unless you have -- raise capital unless you have need for it. But how do you view the appropriate accretion to earnings and the dividend to shareholders versus just growth.
We’ve seen too many times where the balance sheet as a whole grows, but dividend and earnings basically stay the same, maybe the shareholders aren’t hurt but they’re not really held. So at what point do you say, we can help shareholders. What's that level of accretion that makes it worth it to go out and raise additional equity?
Yeah. I think there is three or four factors driving that, right. There -- the obvious one is if the equity can be raised that any type of meaningful premium-to-book value, that's by nature accretive. So that's one factor to take into consideration.
The second factor is to the extent the new opportunity fetch have a higher return for the same risk as the existing portfolio that's accretive, right. So that's just means the average yield and the asset goes up.
The third driver will be to the extent we get to the scale where we’re really leveraging our fixed cost infrastructure. And we’re kind of getting there, but we’re not 100% there. But that is another way to make all of it being equal to make a capital raise accretive. So those are some of the factors that we look at.
So again, it's not growing for growth sake. I think our main driver there is sort of the first do know harm principle. So we want to make sure that we are able to not add any incremental risk to the portfolio as we grow as well as not have any meaningful dilution to the near-term dividend. That’s why we've been so I think controlled about raising capital the way we have.
Troy Ward - KBW
Okay. And then one final common question on the liability side of the balance sheet. You mentioned that your liability is turned out to 2016 and our subject to mark-to-market covenants. But can you provide us -- remind us I guess what the covenants in those facilities are. And also how do you view adding additional lending partners to your liability structure or different structures to your liability side of the balance sheet whether its baby bonds or something else?
Sure. So let me just take covenants first and then I will talk about the different types of ways we can access debt capital. So just a reminder, the way the covenants work is we basically have a borrowing base that builds up asset by asset. So what we do is -- what we put a loan into our borrowing base and there is a certain level of earnings on that loan -- on the company that we’re lending to.
The covenant is set around that earnings level. So the earnings level deteriorates by certain amount. At that point, that loan would become subject to mark-to-market. But that’s a pretty meaningful level of deterioration and you can see again by the numbers we put out on -- I think it’s page 9 and 10, where we show that EBITDA multiple drip and that is what the covenant has said again.
We really have had only very small handful of instances where that’s been an issue. In fact, there is really only one right now that we’re dealing with. So against a borrowing base right that has $1 billion of asset in it, you have one $15 million asset that become subject to mark to market. It’s really a pretty immaterial impact.
But that will be the way we would get potentially hurt, right. If our underwriting was just poor and we had a bunch of things that we thought we are going to have $40 million of operating earnings and it turned out they had $25 million of operating earnings than those things would fall into that mark-to-market basket. But it all ties into what we think we are good at which is underwriting future earnings.
Troy Ward - KBW
Okay. And then other structures within the liability side?
Yeah. So as you know all of our debt today is with Wells, who has been a great partner for us and obviously has their own $1 trillion balance sheet. So despite the fact that we are at 400 and change with them, we are not at this point pumping up against capacity issues. But we are thinking about, are there other people to bring into that syndicate at the right point in time as that becomes appropriate and necessary.
And then we are thinking about obviously the pros and cons of different sources of capital given the historically low interest rate environment, do baby bonds make sense. Does a convert make sense and there are some other things we are kicking around.
So I think we are very -- we are financial guys, hard in many ways. So we are always trying to optimize the liability side. And there maybe things over the course of next year or two that you will see that we’ll take advantage of that.
Troy Ward - KBW
Great. Appreciate the comments, guys.
Yeah. Thank you.
The next question comes from J.T. Rogers of Janney Capital Markets. Please go ahead.
J.T. Rogers - Janney Capital Markets
Good morning, guys. Thanks for taking my question. I guess how do -- first, how do you expect other general administrative expenses and administrative expenses to scale as you grow the portfolio. What do you see sort of the fixed cost number in there?
Yeah. I think that as we continue to grow we’re probably going to cut on the comps $5 million to $6 million range. So the caps for the next year $2.5 million means we’re still eating a modest amount of that as a parent company.
But as you think about us its getting bigger, it won’t be too much longer before even if the cap goes away, we start to get the benefit of leveraging our fixed expense base across our larger earning stream. We’re getting close but that’s the range I would use right there.
J.T. Rogers - Janney Capital Markets
Okay. That’s great. And then just wondering what you guys are seeing, I know its hard to predict but given the current environment and assuming things do the same, do you have a sense as to how -- what private equity activity will be this year on the M&A front? You expect a more active year or less active year than last year?
Yeah. I think it will be consistent with last year. I think the timing of it is kind of building now as we speak right. We have that sort of big rush at the end of last year. I think we now pause and now both on our private equity business obviously as a player in the market as an private equity investor than as well the sponsors we cover as a lender. We’re definitely seeing a market pick up in volumes.
How much of that converts into deals, we’ll have to see. But we think there are still some pretty strong forces that will drive very meaningful private equity activity this year. And again I think we’ve got some pretty good insights into that given where we fit.
So we expect a pretty busy year. I think the bigger issue for us will be that issue around what -- in our universe of what we like, what are the spreads and how wide or narrow is that delta. I’m confident in the deal flow being there. I think the bigger -- the question will be how much is the risk reward lined up to our criteria.
J.T. Rogers - Janney Capital Markets
That’s helpful. And then you guys have done a great job maintaining optimum leverage in maximizing ROE. And that the current level you guys are just covering the dividend with the NII. This may be ways off but when we go to the next credit cycle and presumably earnings take a hit recently short-term.
What tools do you guys have to maintain earnings power and maintain the dividend? Or is it your expectation that the portfolio is a sufficient quality that the credit cycle won’t impact you to the extent it puts the dividend in danger?
Yeah. And I think there are two things going on. I do think our goal and our expectations is that the credit profile of the portfolio is such that we would expect to go through a cycle. And we back head to the last cycle in such a way that we would not see a meaningful impact on our NII from defaulted items not generating the types of interest payments we are currently receiving, right.
That being said, we are using the good time, if you will, to build up that positive reserve, that $22 million that I talked about on page -- where was the page 12, I believe. And I think that will continue to grow. So that’s something that -- some of that we payout currently in form of special and some of that we keep behind to deal with the situation you are talking about.
So, we’re kind of always operate as there is another credit cycle just around the corner. And that’s that what drives our defensive investment approach. And I think we are structuring the dividend to be coverable in all circumstances, irrespective of the credit environment.
J.T. Rogers - Janney Capital Markets
Okay. Great. Thanks a lot.
All that being said, obviously no guarantee, so we are not guaranteeing anything but we have confidence in that.
J.T. Rogers - Janney Capital Markets
That makes sense.
Great. Thanks J.T.
This concludes our question-and-answer session. I would like to turn the conference back over to Rob Hamwee for any closing remarks.
Well, thank you. Well, thanks everyone to taking the time to listen-in today. We appreciate again the interest and the support and look forward to coming back to you in the couple of month to talk about Q1 in the interim of course. Our phone lines are always open so any questions, follow up et cetera just call myself, call Dave and we’ll be always happy to talk. Thanks and have a good day.
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