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New Mountain Finance Corporation (NYSE:NMFC)

Q1 2014 Results Conference Call

May 08, 2014 / 10:00 A.M. E.T.

Executives

Steven B. Klinsky – Chairman

Robert A. Hamwee – CEO and Director

David M. Cordova – CFO and Treasurer

Analysts

Greg Nelson – Wells Fargo Securities, LLC

Arthur Winston – Pilot Advisors

Casey Alexander – Gilford Securities

Greg Mason – Keefe, Bruyette & Woods

Bryce Rowe – Robert W. Baird & Co.

J.T. Rogers – Janney Capital Markets

Operator

Good morning and welcome to the New Mountain Finance Corporation First Quarter 2014 Earnings Conference Call.

All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.

Please note, this event is being recorded. I would now like to turn the conference over to Robert A. Hamwee, Chief Executive Officer. Please go ahead.

Robert A. Hamwee

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.

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.

David M. Cordova

Thank you Rob. 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 earnings press release.

I would also like to call your attention to the customary Safe Harbor disclosure in our May 7th 2014 press release and on page two of this slide presentation regarding forward-looking statements. Today’s conference call and webcast may include forward-looking statements in 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 adviser, New Mountain Finance advisers, BDC, LLC were 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 NMFC, who will give some highlights beginning of 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 2014. 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 is pro forma adjusted net investment income for the quarter ended March 31st 2014, was $0.37 per share above our initial guidance of $0.33 to $0.35 per share. This more than covers our previously announced Q1 dividend of $0.34 per share. The company’s booked value on March 31st was $14.53 per share, which is up $0.15 from last quarter and once again represents a new high for the company.

We are also able to announce our regular dividend for the current quarter ending June 30, 2014. 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. We have had only one issue or default since October 2008 when the debt effort began, representing less than 0.3% of cumulative investments made to date. The company invested $158 million in gross originations in Q1 and $118 million net of repayments. 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 back over to Robert A. Hamwee, NMFC’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. On page five we have provided some key financial highlights.

As outlined on pages six and seven of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm with more than $12 billion of assets under management and approximately 100 staff members, including over 60 investment professional. Since the inception of our debt investment program in 2008, we have taken New Mountain’s approach to private equity and applied it to corporate credit with a consistent focus on defensive growth business models, an extensive fundamental research within industries that are already well known to New Mountain or more simply put, we invest in recession resistant businesses that we really know and that we really like. We believe this approach results in a differentiated and sustainable model that will allow us to generate attractive risk adjusted rates of return across changing cycles and margin conditions.

To achieve our mandate, we utilize the existing New Mountain investment team as our primary underwriting resource. Additionally, I would note here that our public float is now nearly $750 million up from $150 million at IPO.

Turning to page eight, you can see our total return performance from our IPO in May 2011 to May 5th 2014. On page nine, you can see the dollar attribution of return by year and cumulatively since our IPO. As you can see from this slide, we have generated the significant majority of shareholder return to our regular dividend but have also generated meaningful positive returns in the other three category. We continue to be pleased to both our absolute and relative return performance.

As outlined on page 10, credit spreads have recently been generally stable as limited market volatility is offset by modest to fund outflows from a number of market participants. We continue to see significantly elevated credit spreads and smaller less liquid credit. Given the continued focus in the market on the possibility of future short term and long-term rate increases, we wanted to highlight NMFC’s defensive positioning relative to this potential issue.

As you can see on page 11, 86% of our portfolio is invested in floating rate debt. Therefore, even in the phase of a material rise in interest rates, assuming that it consistently shape yield curve, we would not expect to see a significant change in our book value. Furthermore, as the table at the bottom of the page demonstrate, meaningful rise and short-term rates will generally increase our NII per share with the only exception being a modest rise having a slightly negative impact is the cost of our borrowings rise while our interest income does not initially go up, given the presence of LIBOR floors on our assets.

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 12, we once again lay out the cost basis of our investments with the current 33114 portfolio and our cumulative investments, the inception of our credit business in 2008 and then show what, if anything, has migrated down the performance ladder.

In Q1, once again, no new assets had negative credit migration. We continue to have one SLF asset with the cost of $13.4 million and a fair market value of $8.5 million, that previously migrated from an internal rating of two to internal rating of three, indicating operating performance materially below our expectation but no near or medium term expectation for non-accrual.

Since the inception of our credit efforts in 2008, we have made investment of over $2.5 billion, 132 portfolio companies of which only one representing just $6 million of cost has migrated to non-accrual. Over 99% of our portfolio at fair market value is currently rated one or two on our internal scale.

Pages 13 and 14 show leverage multiples for all of our holdings above $7.5 million when we entered an investment and leverage level 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 are almost all cases roughly flat or trending in the right direction.

Turning to page 15, we continue to work diligently with the FDA to finalize the licensing process. We currently expect to receive a license sometime in the next three months.

The chart on page 16, helps track the company’s overall economic performance since its IPO. At the top of the page, we show how the regular quarterly dividends being covered out of net investment income. As you can see, we continue to more than cover 100% of our accumulative regular dividend out of NII. On the bottom of the page, we focus on below the line items.

First we look at realized gain and realized credit and other losses. As you can see looking at the row highlighted in green, we have had success generating real economic gains nearly every quarter through a combination of equity gain, portfolio company dividend and trading process. Conversely, we’ve had only one material realize loss representing the realized default loss of $4.3 million on API in 2013.

Beyond that, the numbers highlighted in orange show that we’re not avoiding non-accruals by selling poor credits to the loss prior to actual default. The net cumulative impact of this excess to date is highlighted in blue, which shows cumulative net realized gains of $23.4 million since our IPO.

Next we look at unrealized appreciation and depreciation. As you can see highlighted in grey, we have a cumulative net unrealized appreciation of $26.3 million. Finally, we combined net realized with unrealized appreciation to derive the final line on the table, which in the yellow box shows a current cumulative net realized and unrealized appreciation of nearly $50 million.

The point here is to show that on both the realized and combined realized unrealized basis, we have consistently and methodically more than offset any credit losses or impairments with below the line gains elsewhere in the portfolio. In fact, by this methodology, we have now built a $50 million cushion to offset any future credit losses, some of which we have stayed out to special dividends.

On market-driven volatility around unrealized appreciation and depreciation they 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 as seen on page 17, we had another active quarter for originations in Q1. We made significant investments in nine portfolio companies and had total growth originations of $158 million. Repayments in Q1 were modest, totaling $41 million. Since we attempt to run the business close to fully levered, we funded some of the originations with asset sales of $61 million resulting in net originations of $57 million.

As shown on page 18, we have had an active start to Q2 with originations and commitments of $87 million. Pages 19 and 20 show the impact of Q1 investment and disposition activity on asset type and yields respectively. Both asset originations and repayments were weighted towards first lien investments. Yields on originations were 100 basis points higher than those of disposals and 60 basis points lower than the portfolio as a whole. The net impact, is that portfolio yield overall is effectively unchanged at 10.9%.

As you can see, we continue to find attractive opportunities to deploy capital. We reached our target leverage level in Q1 so we funded incremental originations through opportunistic sales of lower yielding assets. As we continue to see strong origination activity in March and April, we raised equity capital in early April to provide funding for those – these opportunities. We retain our commitment to running the company and optimize leverage level and accordingly the equity rates has already been largely deployed or committed.

In terms of the portfolio review on page 21, the key statistics as of 3-31 was very similar to 12-31. The asset mix means roughly evenly split between first lien and non-first lien. As always, we maintain a portfolio comprised of companies in the defensive growth industries like software, education, business services and healthcare that we believe we’ll outperform in an uncertain economic environment.

Finally, as illustrated on page 22, we have a broadly diversified portfolio with our largest investment at 3.9% of fair value and the top 15 investments accounting for 46% of fair value consistent with past quarters.

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

David Cordova

Thank you, Rob. For more details on the financial resolve in today’s commentary, please refer to the form 10-Q that was filed last evening with the SEC. Before we turn to slide 23, I want to remind everyone that following the final sale by New Mountains private equity fund, AIV Holdings. We are in the process of collapsing our structure into one that is more straight-forward from an operational and financial reporting perspective. The anticipated structure is provided as a reference in appendix B of the presentation.

As a quick update, AIV Holdings was legally dissolved on April 25th 2014. On Tuesday, our shareholders approved the election to withdraw the BDC election for New Mountain Finance Holdings, LLC and approved the new investment advisory in management agreement with NMFC. Going forward, NMFC the sole remaining BDC, will be the new operating company.

Now I would like to turn your attention to slide 23. The portfolio have just under $1.2 billion in investments at fair value at March 31st 2014, cash and cash equivalent of $13 million and total assets of just over $1.2 billion. We have total debt outstanding of $487 million on our two credit facilities, which had $495 million of total capacity.

Net asset value of $697.1 million for $14.53 per share was up $0.15 from the previous quarter largely due to realized and unrealized gains, net of the capital gains incentive fee of approximately $0.12 per share and adjusted net investment income for the quarter exceeding our dividend by $0.03 per share. As of March 31st our debt to equity ratio was 0.7 to 1. As a reminder, our 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.

On slide 24, we show the historical NAV per share and leverage ratios which highlight the effort trend in NAV per share since inception and leverage ratio’s probably consistent with our target leverage of between 0.65 to 0.75 to 1.

On slide 25, we show our quarterly income statement results. We believe that our pro forma adjusted NII, which exclude excess implementation associated with the predecessor investments, the capital gain incentive fee and the non-recurring (inaudible) distribution is a better measure of our quarterly performance. This slide highlights that while realizations and unrealized appreciation-depreciation can be volatile below the line we continue to generate stable net investment income above the line.

Focusing on the quarter ended March 31st 2014, we earned total investment income of approximately $30.7 million. This represents an increase of $2.4 million or 8.5% from the prior quarter, largely attributable to an increased asset base as well as an increase in dividend income.

Total net expenses of $13.1 million increased $1 million or 8.3% due to an increase in the incentive fees and management fees associated with a higher NII and asset growth as well as an increase in interest expense associated with a higher average debt balance. These results in first quarter pro forma adjusted NII of $17.6 million or $0.37 per weighted average share, which is the high end of our updated guidance provided on April 7th 2014 of $0.35 to $0.37 per share and more than covers our Q1 regular dividend of $0.34 per share.

Shifting to below the NII line, we had adjusted net realized gains of $2.9 million, largely driven by the sale of five investments and material repayments on foreign investments. Adjusted unrealized gains of $5 million were primarily driven by higher marks on a broader portfolio. As a result of the net realized and unrealized gains in the quarter, we increased our capital gains incentive fee accrual by approximately $1.6 million. In total for the quarter ended March 31st 2014, we had a net increase in member’s capital from operations of $23.9 million.

As slide 26 demonstrates, our total investment income is predominantly paid in cash. Though the amount of pre-payment fees vary from quarter to quarter based on repayments, our historical earnings have consistently shown some material pre-payment fee income. Therefore, we show total interest income as a percentage of total investment income both with and without pre-payment fees, which is one measurement of the stability and predictability of our investment income.

Turning to slide 27, as briefly discussed earlier, our pro forma adjusted NII for the first quarter clearly covered our Q1 dividend. Given our belief that our fully ramped run rate NII will continue to fall in a previously declared expected range of $0.33 to $0.35 per share, our Board of Directors have declared a Q2 2014 dividend of $0.34 per share in line with the past eight quarters.

The Q2 2014 quarterly dividend of $0.34 per share will be paid on June 30th 2014 to holders of record on June 16th, 2014.

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 to continue streaming our intention to consistently pay $0.34 per share on a quarterly basis for future quarters so long as the adjusted NII covers the dividend in line with our current expectations.

In close, 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 the things back to the operator, to begin Q&A. Operator.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions)

At this time, we will pause momentarily to assemble our roster.

And the first question comes from Greg Nelson with Wells Fargo Securities. Please go ahead.

Greg Nelson – Wells Fargo Securities, LLC

Hey guys, thanks a bunch for taking my questions. I thought that portfolio sales were you know, a little bit higher this quarter. Was this something in particular? I saw that also repayments were down. Eureka [ph] is trying to churn the assets a little bit more in get us in positions and into higher yielding ones.

Robert A. Hamwee

A little bit of that and a little bit of just – the originations relative to the repayments left us in the position where we have the luxury of really choosing – comparing new originations to the lower yielding assets in the portfolio. So it was a function of our general previous position of running fully levered. So we don’t run with a lot of slack in the system. A slack really is the degree to which we have liquid assets that are sometimes more – a little lower yielding. So, it’s an opportunity to both deploy capital into new attractive investments and just high grade the portfolio a little bit.

Greg Nelson – Wells Fargo Securities, LLC

Great. Kind of a also that you know on the margin and assets it’s kind of been going a little bit towards second lien, you mentioned that rates, you’ve seen yields stabilized. Do you think we’ll continue to see this on the margin ship towards second lien?

Robert A. Hamwee

Yes, I mean we didn’t really see the shift right this quarter. We were more first lien from an origination standpoint than second lien, I think that’s to some degree idiosyncratic as opposed to a function of the market place. I think we’re very comfortable that over the long term the portfolio will be structured in that kind of 50-50 plus or minus 10% in either direction, so if you look up the pipeline for Q2 so far, the biggest investment net pipe on – in that pipeline of commitments and executed deals is that just first lien, so we’re still seeing good opportunity sets in both first lien and non-first lien so I wouldn’t expect that mix to very meaningfully in the coming quarter.

Greg Nelson – Wells Fargo Securities, LLC

Great, that’s good color. And then, on the SBIC license, it’s very good to hear that it could come over the next three months. If equity’s – if stock prices trading below NAV, do you think you’d be able to fund a facility with liquidity generated from the portfolio?

Robert A. Hamwee

Yes. I mean, you know as always and consistent with the most recent equity raise, we do – we are fully committed to not raise equity below NAV full stop. So, we will either fund it with equity raised at NAV, or fund it with liquidity from the portfolio.

Greg Nelson – Wells Fargo Securities, LLC

Perfect. Thanks for taking my questions.

Rob Hawee

Any time.

Operator

The next question comes from Arthur Winston with Pilot Advisors. Please go ahead.

Arthur Winston – Pilot Advisors

Thank you. My first question is, given the continued raise of equity capital and selling more shares, assuming no deterioration in credit conditions and no adverse fluctuations in interest rates and then these rates don’t hurt you too much. We – can we assume that despite higher shares, that $0.34 a share would be the baseline for the dividend and then any changes, any increased dividend would come from special dividend based on capital gains, et cetera?

Robert A. Hamwee

Yes, I think that’s a fair assumption. I mean, look, we’re always evaluating, do we have an opportunity to move the dividend up? I think if you’ve seen just from our results you’d rather under-promise and over-deliver a little bit and make sure we cover that dividend and hopefully have a few cents left over. And then on top of that, we have this history of paying special dividends from below the line gains. So, yes, I mean the answer’s yes. $0.34 is our focus for the immediate future.

Arthur Winston – Pilot Advisors

Can you give some way for a shareholder to predict the future sales of shares and again we appreciate that you didn’t go below the net access value to the shareholders. That was terrific. But, what’s going to determine, are we going to sell for the insurance every other quarter or what? What would it determine if all these share sells?

Robert A. Hamwee

Yes, I mean in a strange way it’s pretty simple, right? We – the determine for us is strictly a function of the attractive opportunity set that we believe is accretive to the portfolio, less repayment and what we deemed to be kind of appropriate sales not opportunistic sales, gives us a balance. And if that balance is negative or zero, we will not raise equity capital. If that balance overtime becomes meaningfully positive, we will – we need to raise equity capital just mathematically to fund that balance.

So, we take the approach, I guess differently. We raise equity capital when we need it, not just because we can. And I think we’ve – now in our fourth year as a public company, demonstrated that time and again and we continue to first use our balance sheet from a leverage perspective because that’s obviously a lot cheaper and then we – equity raises is effectively the plug for the difference between our originations and our repayments.

Arthur Winston – Pilot Advisors

Understood. My last question is, there’s been some discussion that certain indexes like some Russell index and some S&P are going to sell shares in our company at a certain date because of certain accounting, conventions that they’re not so happy with. Could you kind of throw some color, educate the more naive (inaudible) what this is all about?

Robert A. Hamwee

Yes, I mean, it’s – what it boils down to is that the regulatory bodies have come out with some guidance recently that the mutual fund complexes would need to add into their disclosed expense ratios, their pro rata share of expenses from vehicles like ours. Yes we think that’s somewhat silly because, look instead of paying 30 people salaries we pay a lump sum management fee to an adviser that does all the work that those 30 people would be doing.

So, while the regulators that you’ve got differently. Then just having a traditional employees, they’ve just insourcing versus outsourcing you get to the same place, and why one is deemed to be appropriate to pick up at a mutual fund level as an expense, doesn’t make a lot of sense to us but – and we’re trying – the rest of the industry are trying to explain that to the regulators but for now, the impact of that ruling is such that the index funds in particular which are very focused on their reported expense ratio are under pressure to not have that number go up at all so they are lobbying the relevant underlying indexes that they track to exclude – as long as this regulatory position is in place to exclude those entities like ourselves that would be picked up in that regulatory promulgation.

So, you know it’s unfortunate. We are hopeful that overtime we can reverse that position because we don’t think it’s the position with a lot of merit but for now that’s the (cross) of the issue.

Arthur Winston – Pilot Advisors

Can you get ballpark, how many shares can be thrown around the market if this doesn’t change?

Robert A. Hamwee

Yes, and I think it’s – the numbers that I’ve seen is that we’re talking about is roughly 8% of the capitalization of the industry, but I don’t those would yield “be thrown on the market” at this point in time, I think we’ve probably seen this sector under a fair a bit of pressure since this first came out in the market. It is the floor discounting mechanism, so my sense is that we’ve actually seen the relevant pressure already, but that’s speculation not certain.

Arthur Winston – Pilot Advisors

Is the line – more of than 8% or more or less in line with the 8% do you think?

Robert A. Hamwee

We believe they’re roughly in line. Maybe a little bit less.

Arthur Winston – Pilot Advisors

Thank you very much for answering my questions and thank you for your excellent disclosures.

Robert A. Hamwee

Thank you, you’re very welcome.

Operator

The next question comes from Casey Alexander with Gilford Securities. Please go ahead.

Casey Alexander – Gilford Securities

Hi, good morning and thank you for taking my questions.

Robert A. Hamwee

Sure.

Casey Alexander – Gilford Securities

As it relates to the ruling that may be forthcoming. Just in your opinion, is it going to make it more different and change the nature of your ability to raise capital through equity offerings?

Robert A. Hamwee

I don’t think so. I think it’s more transient than it is – assuming it stays and again I’m hopeful that it doesn’t stay. But assuming it stays, I think there’s some dislocation as shared transition. But we are always talking to new institutional investors who are not at all exposed to this, so I think it’s more about a little bit of paying and (inaudible) a transition in the days but I don’t think it has any meaningful long term impact on the ability of the industry to raise capital or the ultimate long term trading levels of the securities.

Casey Alexander – Gilford Securities

Well, I mean I would agree with you that there is a sort of level of equilibrium where institutions that just care about making money, they don’t care about their expense ratios will start to take up the slack. But I was just wondering if you have – hard to know where that’s going to be. If that’s going to be above or below sort of the NAV line. It’s going to be interesting to watch.

In relation to your structure collapse, since I’m not a lawyer and haven’t deeply analyzed your previous structure, there’s a lot of language in here about withdrawing as a BDC. Are those just subsidiaries that are withdrawing as a BDC and New Mountain Finance will still be run as a BDC, the parent company or is there something changing about your overall structure from the parent company level?

Robert A. Hamwee

Yes, there’s nothing changing substantively towards shareholders. The relevant entity is the BDC will be a BDC and will all get the benefits of being a BDC.

Casey Alexander – Gilford Securities

OK.

Robert A. Hamwee

This is very much a technical fix to a legacy issue we had from our IPO when we contributed a portfolio that had a lower tax basis so we have to have a complicated multi-BDC structure to deal with the tax issues and now that the legacy portfolio investors have fully exited their shares, we are allowed for the SEC and the tax regulations to just collapse that three tier BDC structure that added complexity and expense to our lives. And so to said, absolutely no substantive impact on any shareholder or how we go about the business, and in fact just simplifies our reporting and reduces the expenses.

Casey Alexander – Gilford Securities

So that’s great. That’s what I thought, but I just wanted to be sure. From a housekeeping standpoint, do you happen to have handy there what your portfolio composition is from the standpoint of fixed rate versus floating rate?

Robert A. Hamwee

Yes, we actually have a slide in our presentation on page 11 that shows floating rate is 86% and fixed rate is 14%.

Casey Alexander – Gilford Securities

All right, thank you. I’m not on the slide deck so I appreciate that. I think that’s all of my questions, thanks very much.

Robert A. Hamwee

You’re very welcome.

Operator

Operator

The next question comes from Greg Mason with KBW. Please go ahead.

Robert A. Hamwee

Hey, Greg.

Greg Mason – Keefe, Bruyette & Woods

Hey, good morning. First I wanted to talk about the voluntary waiver – waive of the professional and admin expenses, the cap that you guys have been employed. You know it’s been very beneficial to shareholders. I think in 2Q of 12, it went up to $3.5 million annually, last second quarter went up to $4.75 million annually cap. Is your thought processed to keep the cap going and will there be another step up here in Q2 of 14 and any thoughts of what that could be?

Robert A. Hamwee

So, Greg we’ve gone to the point given our scale where we no longer need the cap to sort of maintain what we’ve already talked about which is a roughly $0.10 per share over (inaudible). So, I would say our smaller size, you know that would have been a much bigger number per share and so the manager stepped in and helped to reduce that to it’s – to that kind of $0.10 we always talked about.

But now we’ve gotten to the scale where the map just works on its own. So we’re actually stepping out from the cap as of this quarter right?

Dave Cordova

Yes, Q2 there will be no cap.

Robert A. Hamwee

Yes, so that it’s on cap now. But consistent on a per share basis with where we’ve always been and you know at some point the operating leverage will start to kick in.

Greg Mason – Keefe, Bruyette & Woods

So, if I look at the first quarter for example, you know with the cap your actual expenses were close to $1.1 million but excluding the cap, the reported professional and admin expenses were about $1.8 million so about $700 grand higher before the fee waiver. Is that $1.8 million kind of a run rate we should be thinking about?

Robert A. Hamwee

No. OK, I’ll let Dave explain a little bit of the variant steps.

David M. Cordova

Yes, I know. So as disclosed in the QB, a component of that is the indirect expenses which historically from IPO have always been subsidized by the manager and as disclosed, I think on our last call, the expectation would be, you know the manager allowed the discretion and the expectation in the near term is the demand that we’ll continue to subsidize the indirect expenses on the direct expenses is what Rob is referring to as far as our $0.10 per kind of share, shares outstanding target.

And I think you’ll see in Q1, that was a little higher, obviously we’ve had a lot of work done as you can see. Now the legal disclosures with the structure collapse so that’s a large driving force of just general legal and professional fees, to be able to get to the shareholder vote after this past week to go out with the structure.

Robert A. Hamwee

But I think Greg I might be – I should have been more clear, so while we are not prospectively going to subsidize the direct expenses, we are effectively subsidizing by not allocating indirect expenses the way most of our peers do and the way that we certainly can so there’s an indirect subsidy there.

And then the second part of your question is, there’s some one time things in Q1. So the short answer is yes, we believe that we will – that they get that $0.10 or so will cover the direct expenses.

Greg Mason – Keefe, Bruyette & Woods

OK, great. And then, with the positive comments of about a potential SBIC license, how many of your kind of legacy assets that you’ve done would fit into the SBIC license and you know what’s the kind of timeframe as you look at the pipeline opportunities to really build that up and make that a meaningful part of the business?

Robert A. Hamwee

Yes, when we thought about the whole FBA process, last year. We sort of back tested what we’ve done just to get a sense of it without making any changes to our approach and about 50% of what we’ve done historically will fit. So, we feel pretty good about our ability to pretty rapidly populate the SVA capital prospectively. Obviously, this may look different in the future. But the – that’s given the scale of our originations, given that percent even if it moves somewhat, you can do the math and get a quick sense that we feel that we can populate it pretty quickly. And so we look forward to ramping that up in kind of real time once receiving the license.

Greg Mason – Keefe, Bruyette & Woods

OK great, and I think obviously, you guys have targeted leverage of 0.7-ish debt to equity. Would you still looking at that purely on a regulatory basis…

Robert A. Hamwee

Yes.

Greg Mason – Keefe, Bruyette & Woods

Meaning the SBIC, that will be additive to reach your target?

Robert A. Hamwee

Yes, absolutely. We’re comfortable running on an actual basis, higher than 0.7 to 0.7 is really constrained and we really such as 0.65 to 0.75 so we feel like we can take that up to a point of five level but, yes, that would be excluding the FBA because we’re – we give you the constraint as a regulatory bar and having some delta to that is opposed to our – the bill needs to run the business with more leverage.

Greg Mason – Keefe, Bruyette & Woods

All right, great. Thanks guys, I appreciate it.

Robert A. Hamwee

Yes, any time.

Operator

The next question comes from Bryce Rowe with Robert Baird. Please go ahead.

Bryce Rowe – Robert W. Baird & Co.

Hi, good morning.

Robert A. Hamwee

Good morning.

Bryce Rowe – Robert W. Baird & Co.

How are you? Rob you made a comment and I was actually going to ask the questions that Greg just asked but I do have a follow up on related to the Russell. I’m sorry to kind of be the dead horse here, you talked about being hopeful that there might be come change to – I guess what has – what is already been said in terms of Russell eliminating BDCs from the indexes.

If you had your direct contacts with the SEC or with Russell that would make you hopeful or is it more just the industry effort to reverse the decision?

Robert A. Hamwee

It’s really more the latter. Yes, the industry effort. I don’t have any explicit information beyond that. So, I think it’s the industry effort with the – just trying to take it – find the objective and then taking a step back and this doesn’t seem to be a sensible position so we’re hopeful at some point logical will prevail.

Bryce Rowe – Robert W. Baird & Co.

OK, thank Rob, appreciate it.

Robert A. Hamwee

Anytime.

Operator

Again if you have a question, please press star then one. The next question comes from J. Rogers with Janney Capital Management. Please go ahead.

J.T. Rogers – Janney Capital Markets

Hey, good morning guys, thanks for taking my question.

Robert A. Hamwee

Yes, anytime.

J.T. Rogers – Janney Capital Markets

Should – I guess source of – you know the way I understand it, your original structure was set up so that new shareholders would have a stepped up cost basis and the assets that you guys bought back in 2008-2009 at a significant discount. With the collapse of that structure, is there any tax impact to shareholders? Obviously a lot of those assets have been moved out of the portfolio.

Robert A. Hamwee

Yes, I mean there’s virtually no affects – there’s very little affects left that has that old basis. So the short answer is nothing material.

J.T. Rogers – Janney Capital Markets

OK, great. And then you know originations have been high in both the last quarter and quarter to date, but I was wondering if you guys could comment on the board private equity MNA environment, is general tracking this at the current market and what you’re seeing now in a directionally and how active you think 2014 might be?

StevenB. Klinsky

This is Steve Klinsky, so why don’t I take that. You know for New Mountains, owned private equity efforts, we’ve had a very good period where we’ve just bought three companies recently and we’re quite active and happy with what we’re acquiring but it’s really driven by proactive industry deep dives that we’ve done in specific sectors and things unique to our firm.

So, I mean I feel good about ourselves as far as the private equity in general, it’s hard for me to comment, there is still a lot of liquidity in the system and a lot of buyers so I think the key is – you know that firms that have specialties or proactive efforts are differentiated can still be in very good shape and if you’re just kind of a commodity option players it’s probably a difficult time. But I think it’s a kind of a firm by firm analysis.

Robert A. Hamwee

Yes. And just to add to that, from a market place perspective in terms of what we’re seeing, in terms of our flow that obviously isn’t largely driven by MNA, private equity, activity, you know it remains pretty good. I think the bigger issue for us is pricing in terms and that’s where we have to be just incredibly selective and that’s what we’ve been.

Steven B. Klinsky

Yes, I mean there’s certainly a good number of properties for sale or available to buy and the question for private equity firm is to just not overpay and for our lenders to be careful on credit quality.

J.T. Rogers – Janney Capital Markets

Okay great. And are you guys seeing any improvement in leverage or terms, there’s talk about as you guys mentioned earlier fund flows out of this syndicated loan market. Are you seeing better terms recently?

Robert A. Hamwee

Yes, I mean I would say, at a minimum we’ve seen a halt to spread compression in that part of the market. And I would argue that we’ve probably seen a modest uptick in quality of rate and terms based on that technical factor but I wouldn’t call it a whole sale change. But I think most importantly for us is we continue to see the – well the smaller deal, less liquid end of the market as a relatively protected niche where there’s the ability to drive terms to the lender’s favor. And you ought to see that some degree benchmarks off of the broader market but it does seem to be a tremendous premium put on scale and liquidity and the correlate to that is that means you can get paid for being a permanent capital vehicle that doesn’t worry so much about liquidity.

J.T. Rogers – Janney Capital Markets

OK, that’s great. Thanks a lot.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Robert A. Hamwee, for any closing remarks.

Robert A. Hamwee

Great. Thank you. And I just want to thank everybody for your ongoing interest and support and we look forward to talking again next quarter and (office) in the interim people are always free to call us directly. But thanks again.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

END

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