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Mountain Finance Corporation (NYSE:NMFC)

Q1 2013 Earnings Call

May 7, 2013 10:00 am ET

Executives

Robert A. Hamwee – Chief Executive Officer & Director

David M. Cordova – Chief Financial Officer and Treasurer

Steven B. Klinsky – Chairman of the Board of Directors

Analysts

J.T. Rogers – Janney Capital Markets

Jonathan Bock – Wells Fargo

Operator

Good morning, everyone, and welcome to the New Mountain Finance Corporation First Quarter 2013 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. (Operator Instructions) Please also note today’s event is being recorded.

And at this time, I would like to turn the conference call over to Mr. Rob Hamwee, CEO. Sir, please go ahead.

Robert A. Hamwee

Thank you, and 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. Steve Klinsky is going to make some introductory remarks. Before he does, I would like to ask Dave to make some important statements regarding today’s call.

David M. Cordova

Thank you, Rob. I would like to advice 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 earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our May 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 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 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 Advisers BDC, L.L.C. 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 would 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?

Steven B. Klinsky

Thanks, everybody. Before turning the call back over to Rob and Dave, I wanted to welcome you all to New Mountain Finance Corporation’s first quarter earnings call for 2013. Rob and Dave will go through the details, but I am once again 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 March 31, 2013 was $0.34 per share, which is in line with our previously announced range of $0.33 to $0.35 per share and fully covers our previously announced Q1 dividend of $0.34 per share.

The company’s book value on March 31 was $14.31 per share, an increase of $0.25 from Q4 and an all-time high for the company. We are also able to announce our regular dividend for the current quarter ending June 30, 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 have began and have represented just 0.6% of the cost basis of our existing portfolio and 0.3% of cumulative investments made to-date.

New Mountain Finance continue to expand its asset base in Q1. The company invested a $112 million in gross originations in Q1, deploying the proceeds from largest $29 million equity capital raise and related credit facility upside them.

Target 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.

Robert A. Hamwee

Thank you, Steve. As always, I’d like to start with a brief review of NMFC and our strategy. As outlined on Page 5 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm with more than $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 models, and extensive fundamental research.

Some of the key hallmarks of 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 within 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 and 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 6, you can see our total return performance from our IPO in May 2011 to May 3, 2013. We continue to be very pleased with both our absolute and relative return performance. As outlined on Page 7, credit market strengths continued through March and April. 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 condition 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 and 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 3/31/13 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 Q1, no assets had negative credit migration. We have one SLF asset with a cost of $13.6 million and a fair market value of $9.6 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 accompanying on non-accrual representing a cost 0.6% of our total portfolio and under 0.1% of fair market value. Since the inception of our credit efforts in 2008, we have made investments in 112 portfolio companies of which only one has migrated to non-accrual.

Over 99% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale. Pages 9 and 10 show for 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 in leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical, fundamental support for our internal ratings and marks.

As you can see by looking at the two tables, leverage multiples are in almost all cases trending in the right direction and even more importantly, no single company in either page has had a material increase in leverage multiple with the exception of one loan in the SLF.

On page 11, we show a table depicting how NMFC’s publicly traded float has nearly tripled based on the four equity offerings we have completed since our IPO. We now have 31.3 million shares in our float, representing 74% 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. As 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 below the line items. First we look at realized gains and realized credit and other losses, while you can see the individual quarterly data, I draw your attention to the number highlighted in blue, which shows cumulative net realized gains of $13.4 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 $22.1 million. For clarity, our mark-to-market loss on our one defaulted investment, ATI, of $5.3 million is reflected in this number, along with various other mark-to-market gains and losses reflected on our schedule of investments.

Finally, we combine net realized with unrealized depreciation to derive the final line on the table, which in the yellow box shows a current cumulative net realized and unrealized depreciation of $35.4 million.

The point here is to show that on both our realized and combined realized unrealized basis, we have offset any credit losses or impairments with below the line gains elsewhere in the portfolio.

In fact, by this methodology we have built the $35 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 may cause the bottom line number to vary over time 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, as seen on Page 13, in Q1 we made material investments in four portfolio companies and had total gross origination of $112 million. Repayments totaled $62 million and opportunistic sales were $24 million for total net origination less sales of $27million. All of the investments in keeping with our strategy on industries and businesses that are well known to us to our historical private equity activities.

For instance, our education team had extensive experience with the McGraw-Hill Higher Education division we help finance. The company benefits from numerous characteristics that are important to us, including acyclicality, favorable secure trends, global scale and oligopolistic market with significant barriers to entry, high free cash flow, and a highly fragmented customer base with a strong – with a stronger focus on quality versus price.

Page 14 and 15 show the impact of Q1 investment and disposition activity on asset types and yields respectively. Asset origination type was skewed towards first lien investments. Despite this emphasis on first lien assets and a challenging spread environment, portfolio yields were slightly up increasing from 10.3% to 10.4%.

Moving on to page 16, we continue to selectively find attractive opportunities to deploy capital despite a meaningful reduction in credit spreads in the broader market. 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 insights into how those businesses are likely to perform based on our industry research.

As in Q1, we are deploying roughly as much capital as we are getting back from repayments. So we continue to operate with our credit facilities fully deployed allowing for an optimized level of earnings. Just like in Q4 and Q1, 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 both; how the pipeline are attractively priced and structured opportunities develops going forward and the magnitude of repayments received.

In terms of the portfolio review on page 17, the key statistics as of 3/31 look very similar to 12/31. As always, we maintain a portfolio comprised 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 18, we have a broadly diversified portfolio with our largest investment at 3.8% of fair value and the top 15 investments accounting for 45% of fair value consistent with Q4.

With that, I will now turn it over to our CFO, Dave Cordova to discuss the financial statements and key financial metrics. David?

David M. Cordova

Thank you, Rob. For more details on the financial results and today’s commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Before we turn to slide 19, I want 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.

During the current quarter and as a results of A, the primary share issuance of PubCo shares in March of 2 million shares, B, AIV Holdings secondary sale of 4.9 million shares in March, and C, 98,409 shares issued in our drift to PubCo shareholders. The ownership has shifted from PubCo owning 60% and AIV Holdings owning 40% at December 31, to PubCo, and therefore the public shareholders owning 73.5% and AIV Holdings owning only 26.5% of OpCo at March 31.

This structure is a massive feeder whereby the financial statements for OpCo floated PubCo and AIV Holding pro rata based on a respective ownership. All discussion throughout this call in presentation is focused on OpCo and its operations.

Additionally, OpCo owns the equity of a non-recourse vehicle the SLF. These vehicle originates 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 19. The OpCo and SLF portfolios had approximately $1.03 billion in investments at fair value at March 31, 2013. We had approximately $15.9 million of cash and about $16.6 million of other assets, which includes approximately $9.5 million of interest and dividend receivable much of which we’ve already received, $5.4 million of deferred credit facility costs, these costs get amortized over the life of our credit facilities and primarily increased from last quarter due to the $20 million increase on the OpCo credit facility and $1.7 million of other assets, including deferred operating costs, receivables from an affiliate, and other prepaid expenses and assets.

We had total debt outstanding of about $430.2 million on our two credit facilities, which is made up of $215.2 million on our OpCo credit facility, which had $230 million of capacity at 3/31 and $215 million on our SLF credit facility, which had $215 million of capacity at 3/31.

We had about $22.7 million of other liabilities, which is made up of approximately $5.5 million of dividends payable, $14.1 million of payables to affiliates for management incentive fees, approximately $0.8 million of interest payable, and $2.3 million of vendor payables for various expenses.

This all gets us to a net asset value of $610.5 million, or $14.31 per share at March 31, 2013. This is an increase of $0.25 per share from the December 31, 2012 NAV of 14.06 per share, and an increase of $0.49 per share from the March 31, 2012 NAV of 13.82 per share as adjusted for the Q2 2012 special dividend.

Our consolidated debt-to-equity ratio at March 31 was 0.7 times to 1, which is in the middle of our targeted debt-to-equity ratio range. As a reminder, our credit facilities allow us advance rates of 25%, 45% or 70%, depending on the type of the underlying assets and then our OpCo facility that rated LIBOR plus 2.75% and the SLF facility, the rate is approximately 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 20, 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 accretion 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 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 has historically been the case, our interest income is predominately paid in cash, which is approximately 95% this quarter. Specifically, we had approximately $24.5 million of interest income, which breaks out as follows.

Cash interest income of $22.3 million, PIK income of about $600,000, net amortization of purchased premiums and discounts and origination fees of about $600,000, and about $1 million of pre-payment fees on seven investments that fully repaid during the quarter. Other income of approximately $300,000 was made up of delayed compensation, revolver fees and consent and amendment fees. Our Part I incentive fee was approximately $3.5 million, reflecting higher adjusted pre-incentive fee, NII than a previous quarter, and our management fee was approximately $3.6 million.

Our interest expense of $3.1 million is broken out to represent about $2.7 million of actual interest expense on our borrowings, $60,000 of non-usage and custodian fees, and about $357,000 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 costs, audit and tax, board costs, other admin expenses, and indirect expenses reimbursable under our administration agreement.

The bottom line for the first quarter is adjusted net investment income of $13.8 million, or $0.34 per weighted average share. This is in line with the adjusted NII range, discussed on our March 7, 2013 call of between $0.33 and $0.35 per share. We are pleased that we were able to complete a strategic capital raise in March and still deliver our adjusted NII within our expected range.

Moving to below the adjusted NII lines, we had adjusted net realized gains of $0.6 million as of result of repayments and sales at prices above our adjusted cost basis. Adjusted unrealized gains of $12.8 million were driven in large part by write-ups, resulting from continued performance of the underlying portfolio and broader market appreciation.

Additionally we accrued $2.7 million for our Part II incentive fee in the first 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, 2013, 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 March 31, 2013, we had a net increase in capital resulting from operations of $24.6 million. There was one more administrative item to note.

As mentioned on our prior call, our expense cap of $3.5 million that was in place since April 1, 2012 expired on March 31, 2013. We 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 21. As briefly discussed earlier, the $13.8 million of adjusted NII for the first quarter was within the range we discussed on our Q4 earnings call of $13.2 million to $14.4 million, or $0.33 to $0.35 per share.

We paid a $0.34 per share of dividend, which we believe to be our fully ramped run rate adjusted NII, excluding the impact of capital wages. Therefore, we expect to fall within the range of $13.9 million to $15.1 million of adjusted net NII in the second 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 Q2, 2013 dividend of $0.34 per share in line with the previous four quarters. The Q2, 2013 quarterly dividend of $0.34 per share will be paid on June 28, 2013 to holders of record on June 14, 2013.

At this time, I would like to turn the call back over to Rob.

Robert A. Hamwee

Thanks, Dave. Well, 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 fall between $0.33 and $0.35 per share in line with our current expectation.

In closing, I would just like to say that we continue 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?

Question-and-Answer Session

Operator

Ladies and gentlemen at this time, we will begin the question-and-answer session (Operator Instructions) Our first question comes from [Brian Lynch] from KBW. Please go ahead with your question.

Unidentified Analyst

Good morning, gentlemen.

Robert A. Hamwee

Hi, Brian.

Unidentified Analyst

Hey, I didn’t see any sizeable appreciation, any single investment in your investment portfolio, what sort of $13 million of portfolio appreciation pretty much spread throughout the portfolio just from kind of a strong credit markets?

David M. Cordova

Yeah, I think it’s a combination of strong credit markets, a lack of any problem in the portfolio, and at the margin of few outperformers, but yeah, there is no like, $5 million big pop in any one thing or the portfolio doesn’t really lend itself to that given that everything is very close to par or par plus.

Unidentified Analyst

Okay. That’s great. And then talking about the strong credit markets on Slide 15, you guys provide your activity investment roll, because credit markets have kind of been strong recently and spreads have been compressing, going forward. Do you guys see, you guys still being able to generate any kind of spread on investments that you guys originate versus investments are rolling off?

David M. Cordova

Yeah, and I think we’re going to certainly work very hard to at least keep that sort of 10.4% portfolio yields plus or minus where it is and where it’s been. And I think we’re – we’ve got a number of initiatives underway to continue to make sure that we’re able to access within our risk metrics and risk tolerance, the type of investments that can generate that yield and that’s consistent with what’s rolling off.

Unidentified Analyst

Got it. And then on quarter-to-date in Q2, you guys made a $20 million investment in the blackout energy. That was a preferred equity investment and we had about 18% yield on that, which is kind of outside of your normal investment history. Can you guys kind of talk about what you guys were seeing in that investment?

David M. Cordova

Yeah, it was really a unique, somewhat time sensitive opportunity in an area we’ve been doing a lot of work on, which we’ve talked about in previous calls, which is energy, which has been a state that New Mountain broadly has spent a tremendous amount of time on over the last number of years. And given some of the time sensitivity around the opportunity, I think we’re able to structure a very attractively priced structured piece of paper. I will point out, it’s preferred, but it does, it does paying cash, and it does have a, what we believe is a very viable put option within a years time. So it’s a very nice piece of paper, I don’t expect it to last very long. But while it’s there, it’s going to be a very different piece of paper for us.

Unidentified Analyst

All right. Thanks for answering my questions.

David M. Cordova

Yeah, anytime.

Operator

(Operator Instructions) Our next question comes from J.T. Rogers from Janney Capital Markets. Please go ahead with your question.

J.T. Rogers – Janney Capital Markets

Hey, good morning, guys.

Steven B. Klinsky

Hey, J.T., how are you?

J.T. Rogers – Janney Capital Markets

Doing well, thanks. Just wondering if you can talk a little bit more about maybe some of the initiatives that you mentioned in the preserve yield on the portfolio?

Steven B. Klinsky

Yeah, I mean there is a number of things going on. I mean we’re continuing to look at certain – within our core industries, some certain smaller types of opportunities that fit within our appropriate parameters. We do have the energy initiatives that I mentioned previously and then there are few others things J.T., I just don’t want to get into until we actually have some more meat on the bone. But let me just say, we are very focused on continuing to expand our purview. So if and as the challenging spread environment continues, we can maintain our risk adjusted return profile.

J.T. Rogers – Janney Capital Markets

Okay, great. Any detail you can provide on the energy markets or how that fits in with the idea of looking for acyclical companies?

Steven B. Klinsky

Yeah, I mean, we’ve done a lot of research around the secular trends in terms of what’s been happening in the energy area primarily around the – from renaissance that we’ve seen over the last few years in North American drilling and the whole infrastructure around that. So we do think that there is a secular opportunity there, one needs to be very careful about where and how we participate, but New Mountain as a firm has underwritten that opportunity and then it’s just a question of finding the right ways to play it. We think that is much more of a secular opportunity than it is a cyclical one.

J.T. Rogers - Janney Capital Markets

Okay, and have you guys made private equity investments in energy before? Was there something you guys were sort of working on that side and it’s translated to the [BEC]?

Steven B. Klinsky

Yeah, J.T., this is Steve Klinsky. We’ve – well, we do our deep sector dives, so we’ve been working behind the scenes in energy for private equity for probably two or three maybe four years, in pipelines and natural gas and loans to natural gas and so forth, we have not made a major full platform investment in it. We’ve also in our public equity, our New Mountain Vantage, we are major shareholder of the company called National Fuel Gas, where we helped, encouraged them to develop their land of the Marcellus Shale, which turned out to be very successful. That’s was back since ‘06. So we’ve been involved in this space one way or the other since at least ‘06, and have had all sorts of experts working for us behind the scenes and if we can find a good individual specialty loan at a great rate, it lends itself to NMFC.

J.T. Rogers – Janney Capital Markets

Okay. Great, and then just sort of a general question, are you guys seeing any – what are you guys seeing in terms of pick up in M&A, do you have sense as to the appetite for – on behalf of middle market private equity firms for making new deals versus refinancing, sort of out several months from now, maybe not just immediately in the near future?

Unidentified Company Representative

Yeah, I think we do see signs that activity is picking up in that middle market sponsor area. It’s frankly been a little bit slower than we thought it would be, but we do see that coming back around. For us the challenge is going to be, a, finding the right opportunities, and then, b, having those be appropriately priced. So I think the overall flow from that area will not be the issue, I think the issue will be the percentage of that flow that is appealing to us

J.T. Rogers – Janney Capital Markets

Okay, great. I’ll hop back in the queue.

Steven B. Klinsky

Great, thanks.

Operator

(Operator Instructions) And our next question comes from Jonathan Bock from Wells Fargo.

Jonathan Bock – Wells Fargo

Good morning, guys. Thank you for taking my questions.

Robert A. Hamwee

Hey Jonathan.

Jonathan Bock – Wells Fargo

Maybe turning to the liability side of the balance sheet, obviously you’ve been very successful in lowering the rates that you are paying on your facilities, but then I look at the portfolio, I also see that this really does lend itself well to the securitization type of financing given the fact that there, these are high quality credits that do have some form of liquidity and it can be very attractive in a securitization structure. Is that on your radar and are there any impediments, Rob that you might see to pursuing securitization on balance sheet securitization financing rather as part of your financing strategy going forward?

Robert A. Hamwee

We are exploring some form of a securitization transaction. Again, that’s one of the things in the broad strategic initiatives and again until we have more meat on the bones, I don’t want to over promise and under-deliver, but it is something, Jonathan, that is very much on our radar screen.

Jonathan Bock – Wells Fargo

Makes total sense. Can you give us just a broad sense, I know Rob, you’re very familiar with CLO market trends, where are AAAs kind of coming out right about now in general in terms of financing just broadly speaking?

Robert A. Hamwee

Yeah, about a 115.

Jonathan Bock – Wells Fargo

Okay.

Robert A. Hamwee

And just to put that into context, right, we were sort of north of 200, when the CLO market kind of reengaged post the crisis, and pre the crisis, spread bottomed out at like 40, so $115 million is good, it’s not obviously anywhere near it was when the market was at it’s absolute peak in 2007, but it has come in a fair bit from where the market was just a few years ago.

Jonathan Bock – Wells Fargo

And I appreciate some of Brian’s comments on portfolio companies; in particular, I wanted to zero in, walk me through the acyclicality of a McGraw-Hill type of investment?

Steven B. Klinsky

Sure. So McGraw-Hill is serving the higher education learning materials market, and we’ve seen – we’ve been – held secondary education investors for a very long time in different ways and one of the things we like about that state is it does not tend to have sharp ups and downs depending on the macro-economic outlook whether it’s GDP plus 3 or GDP minus 1, you still have a relatively consistent population going to universities and the demand for the materials that McGraw-Hill supplies is very consistent over long period of time.

Jonathan Bock – Wells Fargo

That’s helpful. And Rob, the reason I only asked the question is because few years ago, we had a similar type of investment in an another BDC and Cengage or Thomas Learning…

Steven B. Klinsky

Sure.

Jonathan Bock – Wells Fargo

That obviously really based on how it performed didn’t mimic what I would view as type of strong investments that you’ve made, and so maybe just for your investors that are familiar with both the Cengage experience and now looking at another education company, are there any major differences that one could draw considering that both are public and it’s you are able to speak on both?

Steven B. Klinsky

Yeah, absolutely I mean, look the Cengage was a top of the market buyout in 2007, believe it was levered nine times – eight to nine times in that [pre-play], so that [plate] is big from a CapEx. So Cengage was sort of hobbled out of the box in terms of their ability to reinvest in the business and obviously the business has had a tremendous transformation over the last five or six years from just a pure print business to a mixed print and digital business, and given their capital structure, Cengage was fundamentally unable to invest required resources into that transformation and therefore lost significant market share.

So the market was actually a good market and you can see that in how Pearson performed, so Cengage lost, I think it was seven or eight points of market share, primarily to Pearson, a little bit to McGraw, but primarily to Pearson, and given how fully levered they were that was – that’s in the fixed cost element of the business that was something that was obviously sort of fatal to that capital structure. So it was a business that was hobbled by capital structure in an industry that actually performed quite well.

So McGraw-Hill has a much lower purchase price, much lower leverage multiple that we think is very appropriate for that business and has been able to over the last half a dozen years make the necessary investments to retain it’s market share and we believe has the capital structure going forward to continue to make those investments, and do well in again what is both (inaudible) marketplace and a stable marketplace.

Jonathan Bock – Wells Fargo

Fair enough. It’s very helpful, and then the last question just relates to the pipeline and what percentage of that looks a $100 million of potential investments near term as standard refinance and what is that – what percentage of that is considered new money transactions if you could kind of bifurcate between the two as best you could?

Steven B. Klinsky

Yeah, absolutely. So we’re looking at, let’s see, one, two about half and half.

Jonathan Bock – Wells Fargo

Okay.

Steven B. Klinsky

So about half is refinanced and about half is either facilitating M&A or facilitating an actual new money buy up.

Jonathan Bock – Wells Fargo

Would it be fair to say that you are seeing in M&A build across private – the sponsored lending environment, or too early to tell?

Steven B. Klinsky

No, we are seeing it. I mean, it’s still early days, but we’re definitely seeing more action if you will whether that again leads into actionable deals. For us is a second question, but we are definitely seeing more a build in early – in middle stage activity that should result in more transactions occurring.

Jonathan Bock – Wells Fargo

Okay, great. Thanks for taking the question.

Steven B. Klinsky

Yeah, anytime, Jonathan. Thank you.

Operator

And at this time I’m showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.

Steven B. Klinsky

Well, thanks again to everybody for the time and attention today. We look forward to chatting again in three months time.

Operator

And at this time, that concludes today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.

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