New Mountain Finance's (NMFC) CEO Rob Hamwee on Q4 2016 Results - Earnings Call Transcript

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New Mountain Finance (NYSE:NMFC) Q4 2016 Earnings Conference Call March 1, 2017 10:00 AM ET

Executives

Rob Hamwee - CEO

Steve Klinsky - Chairman, NMFC and CEO, New Mountain Capital

John Kline - President and COO

Shiraz Kajee - CFO

Analysts

Jonathan Bock - Wells Fargo Securities

Ryan Lynch - KBW

Jeff Greenblatt - Monarch Capital Holdings

Chris Kotowski - Oppenheimer and Company

Operator

Good morning and welcome to the New Mountain Finance Corporation Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Rob Hamwee, CEO, New Mountain Finance Corporation. Please go ahead.

Rob Hamwee

Thank you and good morning, everyone and welcome to New Mountain Finance Corporation's fourth quarter earnings call for 2016. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; John Kline, President and COO of NMFC and Shiraz Kajee, CFO of NMFC.

Steve Klinsky is going to make some introductory remarks, but before he does, I’d like to ask Shiraz to make some important statements regarding today's call.

Shiraz Kajee

Thanks, Rob. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our February 28 earnings press release.

I would also like to call your attention to the customary Safe Harbor disclosure in our press release and on page 2 of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law.

To 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.

At this time, I’d like to turn the call over to Steve Klinsky, NMFCs Chairman who will give some highlights beginning on page 4 and 5 of the slide presentation. Steve?

Steve Klinsky

The team will go through the details in a moment, but let me start by presenting the highlights of another strong quarter for New Mountain Finance. New Mountain Finance’s adjusted net investment income for the quarter ended December 31, 2016, was $0.34 per share in the middle of our guidance of $0.33 to $0.35 per share and once again covering our Q4 dividend of $0.34 per share. New Mountain Finance’s book value was $13.46 per share as compared to $13.28 per share last quarter, an $0.18 increase per share. We're also able to announce our regular dividend for the current quarter, which will again be $0.34 per share and annualized yield in excess of 9% based on Monday's close. The company invested $222 million in gross originations in Q4 and had $169 million of repayments in the quarter, maintaining a fully invested balance sheet. During this quarter, we completed the ramp of our second senior loan program and in January, we received the green light letter for our second SBIC license. These areas, along with our net lease vehicle, continue to be differentiated value driver for NMFC. I and other members of New Mountain continue to be very large owners of our stock with aggregate ownership of 8.6 million shares, approximately 12% of total shares outstanding.

In summary, we are pleased with NMFC's continued performance and progress overall. With that, let me turn the call back over to Rob Hamwee, NMFC’s CEO.

Rob Hamwee

Thank you, Steve. Before diving into the details of the quarter, as always, I'd like to give everyone a brief review of NMFC and our strategy. As outlined on page 6 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm. 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 model and 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 allows us to generate attractive risk adjusted rates of return across changing cycles and market conditions. To achieve our mandate, we utilized the existing New Mountain investment team as our primary underwriting resource.

Turning to page 7, you can see our total return performance from our IPO in May 2011 through February 24, 2017. In the nearly six years since our IPO, we have generated a compounded annual return to our initial public investors of 12.3%, meaningfully higher than our peers in the high yield index and well over 1000 basis points per annum above relevant risk free benchmarks.

Page 8 goes into a little more detail around relative performance against our peers that are benchmarking against the ten largest externally managed BDCs in public at least as long as we have.

Page 9 shows return attribution. Total cumulative return continues to be driven almost entirely by our cash dividend, which in turn has been more than 100% covered by NII. As the bar on the far right illustrates, over the nearly six years we have been public, we have effectively maintained a stable book value, inclusive of special dividends, while generating a 104% cash on cash return for our shareholders, fully supported by net investment income. We are very happy to be able to deliver this performance over a period of time where risk free rates have been effectively zero and will strive to continue this performance. We attribute our success to one, our differentiated underwriting platform, two, our ability to consistently generate the vast majority of our NII from stable cash interest income in an amount that covers our dividend, three, our focus on running the business with an efficient balance sheet and always fully utilizing inexpensive appropriately structured leverage before accessing more expensive equity and four, our alignment of shareholder and management interests. Our 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 10, we once again lay out the cost basis of our investments, both the current portfolio and our cumulative investments since the inception of our credit business in 2008 and then show what is migrated down the performance ladder. Since inception, we have made investments of nearly $4.3 billion in 194 portfolio companies, of which only 7 representing just $93 million of cost have migrated to non-accrual and only 4, representing $42 million of costs have thus far resulted in realized default losses. This $42 million figure reflects 87% of the Transtar position classified as a realized loss. Approximately 99% of our portfolio at fair market value is currently rated one or two on our internal scale.

Page 11 shows leverage multiples for all of our holdings above $7.5 million 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 table, leverage multiples are roughly flat or trending in the right direction with only a few exceptions. The two loans that show negative migration of 2.5 terms or more are both names we have been discussing for a number of quarters. The first is Transtar where restructuring plans are almost complete and we anticipate receiving a cash payment consistent with our mark in the next few months. The second is Sierra Hamilton where restructuring talks have commenced and we're expecting to have a more fulsome update next quarter.

The chart on page 12 helps track the company's overall economic performance since its IPO. At the top of the page, we show the regular quarterly dividend is being covered out of net investment income. As you can see, we continue to more than cover 100% of our cumulative regular dividend out of NII. On the bottom of the page, we focus on below the line items. First, we look at realized gains and realized credit and other losses. And you can see looking at the row highlighted in green, we've had success generating real economic gains every year through a combination of equity gains, portfolio company dividends and trading profits. Conversely, realized losses including default losses highlighted in orange have been smaller and less frequent and show that we are typically not avoiding non-accruals by selling poor credit at a material loss, prior to actual default. We have suffered our first significant realized loss since our IPO with Transtar, but despite that, continue to have a net cumulative realized gain of $11 million highlighted -- $10 million highlighted in blue. Looking down the page, we can see that cumulative net unrealized appreciation highlighted in grey stands at $29 million and cumulative net realized and unrealized loss highlighted in yellow is at $18 million, an improvement of $11 million from last quarter.

I will now turn the call over to John Kline, NMFC’s President to discuss market conditions and portfolio activity. John?

John Kline

Thanks, Rob. As outlined on page 13, the credit markets have performed very well since our last call. All of the positive trends that our market exhibited in 2016 have continued in 2017. Many investors are optimistic about the economy and have shown a strong desire for enhanced yield. As a result, we've seen consistent fund flows into leverage credit, a gradual tightening of CLO financing spreads. While deal activity was very strong in Q4, it has ebbed in January and February, which is often a seasonally weak period for our market. Fortunately, we have seen significantly more deal opportunities in late February and expect to be busy in the coming months. While we do see pressure on spreads in our markets, we continue to find investment opportunities that are consistent with our credit standards. Additionally, we believe that our differentiated access to deal flow within our targeted defensive growth sectors will continue to serve us well in this competitive market.

Turning to page 14, NMFC continues to be well positioned in the event of future rate increases as 92% of our portfolio is invested in floating rate debt. Meanwhile, we have locked in over half our liabilities at fixed rates to ensure attractive borrowing costs over the medium term. Three months LIBOR has increased to 105 basis points, which is roughly equal to the average LIBOR floor on our floating rate assets. As the chart at the bottom of the page shows, given our investment portfolio and liability mix, NMFC will meaningfully benefit from any increase in short term rates going forward.

Moving on to portfolio activity as seen on pages 15 and 16, consistent with a good market environment, we saw a robust new origination activity in Q4. Total originations were 222 million, offset by 169 million of repayments and 25 million of sale proceeds, yielding net investment of $27 million. Our new originations consisted of new platform investments, select add-on investments to existing portfolio of companies and continued investment in the SLP2 and in our net lease real estate entity. Since the end of the quarter, despite the sluggish deal environment, we have contained our strong investment pace with 136 million of new investments, offset by 62 million of sales and repayments, yielding net investment of $74 million. Based on our pipeline of both committed and anticipated deals, we expect to maintain our solid new investment momentum into the final month of the quarter.

Turning to page 17, we show that for the full year 2016, we have maintained positive net origination, despite being somewhat capital constrained for the better part of the year. We were able to slightly grow our asset base, while investing in new assets that are very consistent with our historical yield and credit quality standards.

Page 18 shows that during the quarter, our originations were fairly evenly weighted between first-lien and non-first lien assets. Meanwhile, sales and repayments were almost entirely non-first lien, including successful exit of our investment in Crowley Holdings Preferred stock, which was our second largest position at the end of Q3.

Asset yield, as shown on page 19, ticked up from 10.4% in Q3 to 11.1% in Q4, which is due to a material shift upward in the forward curve after the November elections. Pro forma for that shift in the forward curve, our portfolio yields were roughly flat with the third quarter.

On page 20, we show a balanced portfolio across our defensive growth oriented sectors and a healthy mix between first-lien and second-lien investments. On the lower right, it is important to note that the vast majority of our portfolio continues performing at or above our expectations.

Finally, as illustrated on page 21, we have a broadly diversified portfolio with our largest investment at 4.5% of fair value and the top 15 investments accounting for 39% of fair value.

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

Shiraz Kajee

Thanks, John. For more details on our financial results in today's commentary, please refer to the Form 10-K that was filed last evening with the SEC.

Now, I'd like to turn your attention to slide 22. The portfolio had approximately $1.6 billion in investments at fair value at December 31, 2016 and total assets of $1.66 billion, with total abilities at $717.4 million, of which total statutory debt outstanding was 589 million, excluding 121.7 million of drawn SBA-guaranteed debentures. Net asset value of 938.6 million or $13.46 per share was up $0.18 or 1.4% from the prior quarter. As of December 31, our statutory debt to equity ratio was 0.63 to 1. As John mentioned, we have made almost $74 million of net investments in Q1, which brings that ratio up to historical norms.

Slide 23, we show the historical NAV per share and leverage ratio, which are broadly consistent with our current target statutory leverage of between 0.7 and 0.8 to 1. We also show the NAV adjusted for the cumulative impact of special dividends, which portrays a more accurate reflection of true economic value creation. As the chart shows, after almost six years, adjusted NAV per share of $14.07 is virtually identical to the $14.08 at IPO.

Slide 24 will show our quarterly income statement results. We believe that our adjusted NII is the most appropriate 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 December 31, 2016, we earned total investment income of approximately $43.8 million. This represents an increase of $2 million, up 4.8% from the prior quarter, largely attributable to an increase in dividend and fee income. Total net expenses of 20.8 million were also up slightly from the prior quarter. As mentioned on prior calls, due to the merger of our Wells Fargo credit facilities and consistent with the methodologies since our IPO, the investment advisor will continue to waive management fees on the leverage associated with those assets that share the same underlying yield characteristics with investments leveraged under the legacy SLF credit facility. This results in an effective annualized management fee of 1.4% for the quarter, which is in line with prior quarters. It is expected, based on our current portfolio construct, that the 2017 effective management fee will be broadly consistent with prior years and it is important to note that the investment advisor cannot recoup management fees previously waived. This results in fourth quarter adjusted NII of $23 million or $0.34 per weighted average share, which is in line with guidance and covers our Q4 regular dividend of $0.34 per share. In total, for the quarter ended December 31, 2016, we had an increase to net assets resulting from operations of $33.8 million.

Slide 25, I’d like to go through a brief summary of our annual performance for 2016. For the year ended December 31, 2016, we had total adjusted investment income of approximately $168 million and total net expenses of $80 million. This results in 2016 total adjusted NII of $88 million or $1.36 per weighted average share. The total for the year ended December 31, 2016, we had an increase in net assets resulting from operations of approximately $111.7 million. Finally, 2016, we declared total regular dividends of $1.36 per share.

Slide 26 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see, 90% of total investment income is recurring and cash income remains strong at 93% this quarter. We believe this consistency shows the stability and predictability of our investment income.

Turning to slide 27, as briefly discussed earlier, our adjusted NII for the fourth quarter covered our Q4 dividend. We now believe that our Q1 2017 adjusted NII will fall within our guidance of $0.33 to $0.35 per share. Our board of directors has declared a Q1 2017 dividend of $0.34 per share, in line with the past 19 quarters. The Q1 2017 quarterly dividend of $0.34 per share will be paid on March 31, 2017 to holders of record on March 17, 2017.

Finally, on slide 28, we highlight our various financing sources. Taken into account SBA-guaranteed debentures, we had a little over $1 billion of total borrowing capacity at December 31, 2016 with no near term maturities. As a reminder, our Wells Fargo credit facility’s covenants are generally tied to the operating performance of the underlying businesses that we lend to, rather than to the marks of our investment at any given time.

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

Rob Hamwee

Thanks, Shiraz. It continues to remain our intention to consistently pay the $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 closing, I would just like to say that we continue to be pleased with our performance to date. Most importantly, from a credit perspective, our portfolio overall continues to be 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

[Operator Instructions] Our first question comes from Jonathan Bock of Wells Fargo Securities. Please go ahead.

Jonathan Bock

Good morning and congratulations and thank you for taking my questions. I wanted to start real quickly here with -- currently looking at your leverage, your growth, et cetera and then we've also noticed prepayment activity, which you outlined for the first quarter ’17 and I think John, you mentioned that there is going to be an investment build. The question that now would sit in our mind would be the need for equity capital at this point in the environment and you've been very, very judicious and smart about how it's raised. But when you think of what needs to be funded, given that you have a green light letter, does that -- could one expect that an equity raise would be used to fund the SBIC expansion and then also when we think about your prepayments, given you're still a little under levered, don't you have the ability maybe over the next quarter or two to perhaps fund that SBIC license expansion with internal capital and perhaps boosting EPS or NOI a bit more per share instead of going to the market? How do you guys view it an equity raise for such an accretive fund facility?

Rob Hamwee

Yeah. It’s a good question Jonathan. We still view that the process of raising equity really exactly the same way we viewed it since our IPO, which is, we need two conditions to be satisfied. One, we need to raise the capital at book value or above; and two, we need to be fully levered. And we define that our target leverage range at sort of 0.7 to 0.8. So it really turns on you know the when and the if of an equity raise really turns on the intersection of, one, what's in our pipeline and exactly what goes from pipeline to fund to deal; and then two, the timing and magnitude of prepayment in the coming months which is just inherently very difficult to predict. So we track that in real time and as you say, the SBA you know incremental ramp up plays a role in that as well. So we track all of that and it's just hard to know sitting here you know when and if an equity raise will come. But I think we can - you can rely on us to be as we have been you know from a six years you know using your word very judicious about doing that in a way that is you know appropriate for all constituents.

Jonathan Bock

So, maybe then just as a follow-up to the overall environment and Jonathan, you kind of mentioned, it’s got the potential to be robust I think you outlined in February. We hear conflicting reports and granted your specialty niche with the world class PE platform that you work with allows you to invest in different areas of the market but perhaps better than the next investor. But we're finding that competition across this space is significant, leverage multiples are higher and there is a general sense of just unease as to capital deployment, and John walk us through where the confidence comes from in terms of what you're putting on the books today given we investors that are listening across the private debt landscape are finding it that it's a fairly difficult time to invest or invest at risk adjusted returns that will be compelling over the long haul.

John Kline

Sure and we agree that it's a tougher spread environment out there and as a mentioned especially in January and February you know there weren’t a lot of deals out there and the deals that were out there were very competitive. What we've seen is we've really seen our pipeline build with a lot of proprietary deal flow and as well as a couple add on investments for situations we were already in. And so when I think about what our advantages is we really leverage the full team at New Mountain to find deals within real niches of the economy that are a little bit less traffic and we're really seeing that strategy play out well at the end of this month and going into March. So that's how I’d answer it. It's just hard work. But we definitely acknowledge that it’s a tough environment out there, spreads are tight, there are deals that that should not be invested in and so we just really maintain our vigilance and try to find the great deals in the sea of deals out there.

Jonathan Bock

Then maybe just a small follow up, so Sierra Hamilton right, so based on non-accrual, slight markdown, understand you're kind of working on it. When you put it on non-accrual sometimes you could put a loan that you know still paying cash on nonaccruals for a number of reasons. Can you give us a sense that you know when it goes on nonaccrual why there wasn’t perhaps more of a mark down and here potentially answering my own question, is there an asset value component that you look at from a liquidation value standpoint like how are you covered as we see kind of that investment slowly playing out? You worked out difficult situations in the past but without giving too much, just a general sense of why the mark was slight despite being placed on the nonaccrual?

Steve Klinsky

So we’ve been I think proactively taking the mark down prior to putting it on nonaccrual sort of seeing where that was headed and what's happened and as you know, Jonathan, can't go into too much detail but what's happened as we've discussed before that business is leveraged to activity in the Permian West particularly as a staffing business that's serving that area. There's been a pretty dramatic uptick in activity there and we think about our recovery in the context of going concern which this business clearly is. So when you look at DCS et cater that has a flow through impact. So we're going to continue to monitor it, but we have a pretty rigorous framework for evaluation purposes. And it's just you know it's sort of deterministic based on the inputs and that's what the model stood out. But with actual meaningful qualitative and quantitative rationale.

Jonathan Bock

And then look - last one, I’d be done. Granted, well, John, you're mentioning the potential robustness in build and the pipeline and potential tighter spreads et cetera. Look just looking at the KeyPoint or Greenway Health or First American Payment Systems all effectively coming off the books all at various yields, how is your outlook on your current book of investments and the potential runoff that will ensue given its just a generally better environment to refi those assets at lower prices.

John Kline

Yeah, I mean we definitely seen that and we expect to continue to see it and it's really a question of magnitude. So we definitely expect to see additional loans come off the books through opportunistic refinancings or frankly M&A takeouts and that's always been the case, the velocity of that obviously goes up or down. And that you know the other side of that coin of course is the pipeline that John touched on. And again as always it's the intersection of those two things that drive the magnitude of any quarter’s capital requirements.

Operator

The next question comes from Ryan Lynch of KBW. Please go ahead.

Ryan Lynch

First one has to deal with you know Permian Tank and Sierra Hamilton. So Permian Tank was restructured in the fourth quarter as you just talked about Sierra Hamilton is in the process of being restructuring. Both of those investments obviously struggle because of the decline in energy prices. So I'm just wondering with these companies you know one being restructured and one in the process of being restructured, so by getting the capital structure right, now, you have a big recovery in energy prices, your position in Permian Tank has now moved to equity, most of it has and I would assume Sierra Hamilton is going to be the same way. Is it reasonable to think that if energy prices stay where they are or maybe even trend a little bit higher that we could see some nice recoveries in these investments or just how should we be thinking about the riskiness of these investments you know post the restructuring and giving the big move in oil prices.

Steve Klinsky

We are cautiously optimistic on the outlook for both businesses and obviously the tailwind of the overall energy market is helpful. There's no doubt about that. We also are optimistic for our ability utilizing our private equity team members to add real value as owners of these businesses. As we've done in the past [indiscernible]. So yes, I mean we're going to be you know we're going to be cautious about reflecting you know future outcomes in near term market, you want to hopefully under promise and over deliver on that, but yes, these businesses are clearly benefited by the current energy environment.

Ryan Lynch

And then I have a couple of questions on the new Net Lease Corporation. So in the fourth quarter you guys put about $75 million of assets into that business within that fund. So how should we be, one, I guess how should we think about asset growth in that business is 75 million a quarter pretty reasonable. And then that was funded this quarter leased at quarter-end when I look at your financial statement, it was about 27 million of equity and 48 million of non-recourse debt in that fund so it's about 1.8 times debt to equity leverage. Is that the approximate leverage we should expect in this fund going forward?

Steve Klinsky

Yes, I mean that is pretty traditional for a net lease structure and as you pointed out all that is both non-recourse to the entity and, but also importantly is non-recourse across deals. So which is a little bit different than what we're you know what we're used to and on the corporate credit side which is obviously a great benefit. So in terms of pace, I think that the pace will be broadly consistent although like we see on the corporate credit side you know any given quarter idiosyncratic volatility to but we would expect really do like that space, we really like the team that’s been built here in New Mountain focused on that space. And so we would expect to continue to hopefully see you know incremental deployment through the net lease vehicle.

Ryan Lynch

And then you guys obviously have two senior loan programs they're both basically fully funded today. Do you guys anticipate ramping up any more senior loan programs or are you guys fine with just having the two on your balance sheet today?

Steve Klinsky

That’s something we're really in active internal discussions about. So I don't have a definitive answer for you on that yet, but it's certainly a possibility that there would be a third.

Operator

[Operator Instructions] The next question comes from Jeff Greenblatt of Monarch Capital Holdings. Please go ahead. Jeff your line is open if you wish to ask a question. Perhaps your line is on mute sir.

Jeff Greenblatt

Can you hear me?

Operator

We can hear you now, yes.

Jeff Greenblatt

I just have a real quick question. I'm looking at the portfolio overall and then I'm looking at the originations in the last quarter. I don't know if this is accurate or not but historically I sort of had the feeling that first lien type paper was it as long as I can remember at least half the portfolio in terms of credit type risk and the origination it looks like there are twice as much second lien as first liens in the last quarter, now I know you had a second lien repayment, but I'm just - that's reflected in the portfolio and I'm just thinking about going forward. How should we view that because in an environment where credit spreads are pretty tight, first lien paper is probably I don't know 7% or 8% depending upon how large the deal and how competitive. Should we assume that in all likelihood to maintain your target dividend that second lien exposures will continue to rise from a credit point of view or second lien below I should say including any preferreds or comments or whatever.

Steve Klinsky

So we actually slowly brought our second lien exposure or junior exposure down this quarter.

Jeff Greenblatt

Through that one big repayment, I understand that but I just meant, going forward overall based upon the interest rate environment we're in, the credit spread environment we're in, and how you look at your goal in terms of maintaining your dividend yields. How are you balancing that versus how much you'll allow second liens and below to overall be part of the portfolio?

Steve Klinsky

So we don't have a specific target although we've always said and we continue to - I’ll continue to say that our goal - our expectation is that the portfolio will be 50% first lien, 50% non-first lien plus or minus 10% in either direction, so 60/40 or 40/60. To be clear though irrespective of the rate environment or the spread environment we are not interested in increasing risk in the portfolio. Now, we have the view that there are second liens we do that are frankly less risky than first liens that we do. A perfect example this quarter is our largest investment in the quarter which is the AmWINS transaction, which if you think about our sort of very simple two dimensional grid for how we think about risk, one is, how great or not great is the business and two, is how well do we know it. AmWINS, we know incredibly well because we owned it for five years in our private equity fund, so we have a ten out of ten from a knowledge perspective.

And when you look through to the underlying drivers and elements of that business it's pretty close to a ten out of ten from a quality of business and volatility frankly on the down side of the business getting recurring revenue, cyclicality et cetera. So I don't view AmWINS as you know more risky than perhaps or potentially less risky as a first lien investment you might have made during the quarter as well. So I just want to make sure that that's well understood. We're not interested in - we understand that the way you get hurt in this business is default losses. So we have to take a little less spread in the quarter, we’ll take less spread in the quarter. So we don't view that correlation as one to one. Now that being said again we do want to think about managing the overall program along that sort of 50/50 plus or minus ten as I said. So I don't know Jeff if that helps with the question or not.

Jeff Greenblatt

Well let me then take that one more step, if I assume those are the rough parameters based upon the environment we're in, is it fair to assume then more likely than not directionally first liens maybe going down a little and second liens going up a little bit for the balance of the year based on how you see the environment or is that an incorrect statement?

Steve Klinsky

I don't think that's a correct statement, no. I may turn out to be accurate and may turn to happen, but it's not because we're sitting here today I think saying, geez we need to be more heavily targeted toward non-first lien originations. It may happen, but it will be idiosyncratic from the bottoms up not a top down view that we need to given the market target more aggressively junior capital to maintain our yields.

Jeff Greenblatt

Should I assume then to the extent that's not the case that there may be increasing leverage in order to achieve your targets in terms of dividends and distributions?

Steve Klinsky

No I don't think we'll from a statutory perspective be outside our 0.7 to 0.8 target leverage range because again that you know we got to be prudent about managing that element of the business as well. Now we may economic leverage pick up as we deploy fully on the SBA side and I think that’s accretive you know that may occur.

Jeff Greenblatt

One more question and thank you for the time. I think in the last quarter or the quarter before that we had discussed the concept that there were substantial unrealized depreciate or remaining appreciation excuse me that could be seen in the portfolio based upon marks. And I think I'd asked you the question well if everything that you have - every asset you have in the book gets paid back at par rather than wherever the market chooses to market and your defaults are just carried at whatever you think is a fair market value, what's the revised or altered view of the fair market value of the portfolio. And I think at the time when we were down at 13.30 or 13.40 NAV that number was up at 14.40 or somewhere up and you said that's a number that you look at. Do you have that number today?

Steve Klinsky

Yeah, and just to be clear this sort of adjusted NAV if you will, right. It was always around 13.75, 13.80, I'm not sure where the 14.40 came from. And that broadly hasn’t changed, so the book value has sort accreted up as we’ve seen recovery and some from security prices where the underlying businesses are fine. But that is…

Jeff Greenblatt

You're right, I was actually looking at - I apologize I was looking at base total portfolio, you're correct they do call that now. So effectively it's fair to say that the portfolio overall has a accreted up to recapture a lot of that unrealized depreciation last year?

Steve Klinsky

Yes.

Jeff Greenblatt

And now it's at par is basically closer to where the NAV is, so the premium of the stock price in the market basically reflects hypothetically loans valued above par, so because of the portfolio you have in place, is that fair way to look at it?

Steve Klinsky

I think that’s a fair way to think about it as well as presumably the stock price reflects just the attractiveness of the yield you know just still over 9% to write…

Jeff Greenblatt

But in order to achieve that it we would result in loans above par effectively?

Steve Klinsky

Effectively yeah, but there are also some perhaps some view on the opportunity to create value through some of the underlying equity positions in the portfolio.

Operator

The next question comes from Chris Kotowski of Oppenheimer and Company. Please go ahead.

Chris Kotowski

I'm just curious most my question have been asked and answered but do you have any perspective on liberalization of BDC legislation and in what way if any would you be most inclined to take advantage of that i.e. would you - do you think the assets that you put on your balance sheet could be levered more or would you be more inclined to expand to use an expanded 30% bucket?

Steve Klinsky

I think broadly we don't have a really differentiated view of what's likely to come out of Washington. I think we've generally been skeptical about the prospects and that skepticism has proved well founded in the last three or four years. So I think that will remain our default position but it's a nice upside to have more optionality if it happens we certainly don't run the business assuming it's going to happen. And if it were to happen I think we need to review the best risk adjusted way to utilize that increase plus the billion optionality more in real time. So we don't have any kind of break glass in case of much later changes, plan X. I think the one thing that could help the sector overall would be if they go ahead and fix [indiscernible] SEC the issues around as you know the index exclusion, inclusion issues.

Chris Kotowski

An then just to make sure I have it right, when we look at the 4.8 million of dividend income that subsumes the 4.1 million of SLP and net lease income and so I guess assume barring some decline in the SLP and net lease, the dividend should be reasonably sustainable?

Steve Klinsky

Oh yeah, we view that - that's contractual effectively, it is classified that way from a GAAP perspective but it is not like an optional dividend from some equity position in there.

Operator

[Operator Instructions] Seeing no further questions, I would like to turn the conference back over to Rob Hamwee for any closing remarks.

Rob Hamwee

Well, thank you everyone, as always we appreciate your time and support and interest, and we look forward to talking to everyone in a few short months when we announce our first quarter results. Thanks again.

Operator

The conference is now concluded. Thank you for attending today's presentation, you may now disconnect your lines. Have a great day.

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