New Mountain Finance Corporation (NMFC) CEO Robert Hamwee on Q1 2019 Results - Earnings Call Transcript

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About: New Mountain Finance (NMFC)
by: SA Transcripts
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Earning Call Audio

New Mountain Finance Corporation (NYSE:NMFC) Q1 2019 Earnings Conference Call May 7, 2019 10:00 AM ET

Company Participants

Robert Hamwee - Chief Executive Officer

Shiraz Kajee - Chief Financial Officer

Steven Klinsky - Chairman of NMFC and Chief Executive Officer of New Mountain Capital

John Kline - President and Chief Operating Officer

Conference Call Participants

Ryan Lynch - Keefe, Bruyette & Woods, Inc.

Finian O'Shea - Wells Fargo Securities, LLC

Chris Kotowski - Oppenheimer & Co.

Operator

Good morning and welcome to the New Mountain First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded.

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

Robert Hamwee

Thank you, and good morning, everyone. And welcome to New Mountain Finance Corporation's first quarter earnings call for 2019. 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 May 6th 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, NMFC's Chairman, who will give some highlights beginning on Page 4 of the slide presentation. Steve?

Steven 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 net investment income for the quarter ended March 31, 2019, was $0.35 per share, at the high end of our guidance of $0.33 to $0.35 per share and more than covering our quarterly dividend of $0.34 per share.

New Mountain Finance's book value increased by $0.23 per share to $13.45 per share, largely reflecting overall financial market strength since December 31, consistent with our comments on last quarters call. We are also able to announce our regular dividend, which for the 29th straight quarter will again be $0.34 per share, an annualized yield of approximately 10% based on last Wednesday's close.

The Company had a productive quarter of deal generation, investing $158 million in gross originations versus repayments of only $6 million. This balance sheet growth fully deploys February's equity issuance and keeps us fully leveraged in our target range. We're also very pleased to have secured an investment grade rating from Fitch this quarter and last week completed a $117 million no issuance, the proceeds of which are earmarked for repayment of one of our convertible notes in June. Credit quality remains strong with once again no new non-accruals.

I and other members of New Mountain continue to be very large owners of our stock with aggregate ownership of 10.1 million shares, approximately 13% of total shares outstanding. Finally, the broader New Mountain platform that supports NMFC continues to grow with over $20 billion of assets under management and over 145 team members. 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.

Robert 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 models and extensive fundamental research within the 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 utilize 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 May 1, 2019. In eight years since our IPO, we have generated a compounded annual return to our initial public investors of 11%, meaningfully higher than our peers and the high yield index, and approximately 1,000 basis points per annum above relevant risk-free benchmarks.

Page 8 goes into a little more detail around relative performance against our peer set, benchmarking against the 10 largest externally managed BDCs that have been public at least as long as we have.

Page 9 shows return attribution. Total cumulative return continues to be largely driven 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 eight years we have been public, we've effectively maintained a stable book value inclusive of special dividends, while generating a 10.3% cash-on-cash return for our shareholders.

We attribute our success to, one, our differentiated underwriting platform; two, our ability to consistently generate the vast majority of our net investment income 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 interest.

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. Credit performance continues to be strong, with no new non-accruals during the quarter and no material quarter-over-quarter credit deterioration in any single name.

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 has migrated down the performance ladder.

Since inception, we have made investments of approximately $6.7 billion in 260 portfolio companies, of which only eight representing just $125 million of costs have migrated to non-accrual, of which only four representing $43 million of costs have thus far resulted in realized default losses. Further, effectively 100% of our portfolio at fair market value is currently rated one or two on our internal scale.

Page 11 shows leverage multiple for all of our holdings over $7.5 million when we entered an investment and leverage levels for the same investment as of the end of the most recent reporting period. 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 table, leverage multiples are roughly flat or trending in the right direction, with only a few exceptions. The three loans that have had negative migration of 2.5 turns or more are the same three names we discussed last quarter and our prospects this quarter are broadly unchanged.

As a reminder, one loan is previously restructured Edmentum, where prospects remain bright, and second loan is an issuer, where we believe the likelihood of payment default is low in light of a recent equity contribution from the sponsor that resulted in a 29% loan paydown. And the third issuer is in the final stages of a process, which will result in a significant equity infusion that will meaningly grew as composition.

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 more than cover 100% of our cumulative regular dividends 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. 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 generally been smaller and less frequent and show that we are typically not avoiding non-accruals by selling poor credits at a material loss prior to actual default. As highlighted in blue, we continue to have a net cumulative realized gain, which currently stands at $18 million.

Looking further down the page, we can see that cumulative net unrealized depreciation, highlighted in gray, stands at $46 million and cumulative net realized and unrealized loss highlighted in yellow is at $28 million.

The decease in cumulative unrealized depreciation this quarter reflects the market strength experienced since December. The net result of all of this, is that in our eight years as a public company, we have earned net investment income of $615 million, against total cumulative net losses, including unrealized of only $28 million.

Turning to Page 13. We have seen significant growth in the portfolio over the last year, as we have increased our statutory leverage from 0.81 to 1.25. Consistent with the strategy, we articulated when we received shareholder authorization to increase leverage, the preponderance of our asset increase has been in the form of senior loans.

In fact, over the 12-month period, significantly more than 100% of the growth in assets has come from senior securities, as through repayments and sales, non-first liens have actually shrunk on an absolute basis by $127 million, while first lien assets have grown by $658 million.

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 14 credit markets stabilized in Q1 after experiencing volatility in a month of December. Structures and pricing for new deals are similar to those seen in the fall of 2018 and the general competitive environment for high quality loans remains robust.

Competition in our business has been exacerbated by sluggish middle market leverage buyout volumes and Q1, which was the weakest quarter we have seen in the last three years. Looking forward, we believe that new deal flow will improve as our sponsor clients have reported an increased number of auction processes and actionable portfolio company M&A.

As a team, we continue to focus on building relationships with new sponsor clients, deepening existing sponsor relationships, and enhancing club deal flow, so that we can maximize our access to quality companies within our defensive growth verticals.

Turning to Page 15 throughout 2018, steady increase in three months LIBOR has been a meaningful earnings tailwind for NMFC. This benefit has been driven by our floating rate loan portfolio combined with our fixed rate liabilities, which currently account for 51% of our total debt.

The forward LIBOR curve currently suggests that three months LIBOR will remain stable in 2019 and potentially declined by approximately 25 basis points in 2020. Such small movements in LIBOR do not have a material earnings impact on our business.

As shown on the lower half of the page, more significant downward movements in LIBOR of 50 basis points to 100 basis points would pressure earnings. However, in our view, any such material move lower, which signal challenging financial market conditions, which would be accompanied by higher loan spreads.

Turning to portfolio activity on Page 16 despite the sluggish deal environment in Q1 NMFC had a good quarter with total originations of $158 million offset by $6 million of portfolio repayments, representing a $152 million expansion of our investment portfolio.

Our new investments were highlighted by a number of middle market club deals and add on investments driven by portfolio company M&A. We are pleased to report that these new investments have allowed us to reach our leverage target resulting in a fully invested portfolio.

Page 17 shows our origination activities since the end of the quarter. While the deal environment in the first part of Q2 has been somewhat slow. The fully invested nature of our portfolio has enabled us to be highly selective on new investments. In the coming months we are confident than our backlog of actual deals combined with our forward pipeline will approximately equal or expected repayments. Looking out further over the next few quarters, we believe that deal flow will return to normal levels.

Turning to Page 18, our mix originations continues to skew meaningfully towards first lien loans. Again, accounting for over 60% of total new originations this quarter. Repayments were de minimis and had virtually no effect on our portfolio mix. Overall Q1 origination showed a continued shift towards first lien assets consistent with our stated plan to employ increased the portfolio level leverage with a more senior oriented asset mix.

As shown on Page 19, the asset level yield on the portfolio has been impacted by the change in the future expectation for LIBOR which determines the interest rate on our floating rate assets. Pro forma for the decline in the forward curve, our portfolio yields have remained steady compared to Q4 and new originations have been in line with the overall portfolio average. We were made comfortable with our portfolio yield of 10% which solidly supports our quarterly dividends.

The top of Page 20 shows a balanced portfolio across our defensive growth oriented sectors. In the services section of a pie chart, we break out sub-sectors to give better insight into the significant diversity within our largest sector. The chart on the bottom left of the page presents our portfolio by asset type where you can see the shifts towards first lien oriented assets that we discussed earlier in the call.

The chart on the lower right shows that virtually all of our portfolio is performing broadly in line with expectations and we have no performing loans that have a substantially elevated risk of non-accrual. Finally, as illustrated on Page 21, we have a diversified portfolio with our largest investment at 3.3% of fair value and the top 15 investments accounting for 37% 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

Thank you, John. 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.

Now, I'd like to turn your attention to Slide 22. The portfolio had approximately $2.5 billion in investments at fair value at March 31, 2019, and total assets of $2.7 billion. We had total liabilities of $1.6 billion, of which total statutory debt outstanding was $1.4 billion, excluding $165 million of drawn SBA-guaranteed debentures. Net asset value of $1.1 billion, or $13.45 per share, was down $0.23 from the prior quarter. As of March 31, our statutory debt-to-equity ratio was 1.25 to 1.

On Slide 23, we show our historical leverage ratios. The step-up in leverage over the past four quarters is in line with our current target statutory debt-to-equity ratio. On the slide, we also show historical NAV adjusted for the cumulative impact of special dividends, which shows the stability of our book value since our IPO.

On Slide 27, we show our quarterly income statement, results. We believe that our NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line.

Focusing on the quarter ended March 31, 2019, we earned total investment income of $64.2 million slightly increase on the prior quarter, and total net expenses were approximately $36.7 million.

As in prior quarters, the investment advisor continues to waive certain management fees. The effective annualized management fee this quarter was 1.32%. It is important to note that the investment advisor cannot recoup fees previously waived.

This results in first quarter NII of $27.5 million, or $0.35 per weighted average share, which is at the high end of our guidance and more than covered our Q1 regular dividend of $0.34 per share. As a result of the net unrealized appreciation during the quarter ended March 31, 2019, we had an increase in net assets resulting from operations of $43.9 million.

Slide 25 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see, 96% of total investment income is recurring and cash income remained strong at 87% this quarter. We believe this consistency shows the stability and predictability of our investment income.

Turning to Slide 26. As briefly discussed earlier, our NII for the first quarter covered our Q1 dividend. Given our belief that our Q2 2019 NII will fall within our guidance of $0.33 to $0.35 per share, our Board of Directors has declared a Q2 2019 dividend of $0.34 per share, which will be paid on June 28, 2019, to holders of record on June 14, 2019.

On Slide 27, we highlight our various financing sources. Taking into account SBA-guaranteed debentures, we had over $1.7 billion of total borrowing capacity at quarter end. During Q1, we added two new lenders and $60 million of additional capacity to our Wells Fargo credit facility.

As a reminder, both our Wells Fargo and Deutsche Bank credit facility's covenants are generally tied to the operating performance of the underlying businesses that we lend to rather than the marks of our investments at any given time.

Finally, on Slide 28, we show a leverage maturity schedule. As we've diversified our debt issuance, we've been successful at laddering our maturities to better manage liquidity. Divest the one near-term maturity in 2019, we recently issued $116.5 million of unsecured notes and expect to fund the difference from our revolving credit facilities.

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

Robert 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 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 quite 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

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ryan Lynch of KBW. Please go ahead.

Robert Hamwee

Hey, Ryan.

Ryan Lynch

Hey, good morning and thanks for taking my questions. The first one, I know repayments are very lumpy and I know you guys don't control them, but just with the $6 million this quarter almost nonexistent, can you just explain that that was just very unusually low. Can you just explain what was really behind that that really low number?

Robert Hamwee

Yes. And I would say two things predominantly. I mean, one is, look again idiosyncratically it is a collection of individual companies that are all going to have their own decisions about repaying loans based on M&A activity, et cetera. So I think there is some randomness to it, but I do think it was secondarily a function of the volatile market in Q4 which bled into Q1 and that dampens the type of activity, whether it's refinancing, whether it's sales transactions that typically lead to repayment. So I think that's the main rationale behind it. And I don't think it speaks to long-term change in the multiyear velocity over which we are likely to get repaid on these loans.

Ryan Lynch

Sure, it makes sense. The other question I had was on Slide number 11 where you guys kind of outline New Mountain’s leverage ratios start as – purchased and then currently, and I just was looking through a couple of those and just two companies, company AN and AQ, most were both company purchases made in 2018, and they both had over 9x leverage on those companies. So just from kind of a – from a higher level, companies with over 9x leverage on those businesses, can you maybe just speak to what are the underlying characteristics you guys see in those companies that allow you to get comfortable making investments in those companies with relatively high leverage levels?

Robert Hamwee

Yes. And there are two different things going on. So AN is actually National HME, which we recall we restructured last year. So that's the function and we obviously are recognizing an unrealized loss on that in terms of our holding value. So that's a function of the restructuring we went through on a National HME.

Now AQ is a relatively new buyout that is – of a business that we know very, very well from private equity underwriting, that it was transacted and I think it was a 16x multiple from a purchase perspective. And we participated in pretty modest size, but in a layer of preferred stock there, where are we getting, what I say is attractive yield relative to the balance of the portfolio.

And look, we're willing to do that, when one, we have that type of loan to value pushing. Two, when we have a business whose business model we really understand intimately from extensive private equity underwriting. And three, where we believe with high conviction based on that underwriting that there is limited volatility around the business performance, both historically and prospectively as a function typically of contracted revenue base, and variable expenses and other factors that allow us to have that degree of confidence to go that deep into the capital structure.

So it's something we do sparingly, but we do feel that there are opportunities where the risk reward is in our favor and we're frankly excited about taking those opportunities and putting them in the portfolio.

Ryan Lynch

Okay. That makes sense. And then one last one, as you guys kind of hit your leverage target range in the first quarter, as I look at Slide 13, as your portfolio, as you guys have grown leverage, you guys have shifted the portfolio mix as you guys have discussed into more first lien loans.

As we sit here today, is this the kind of portfolio composition that that you guys expect to kind of have going forward or should we still expect as more second lien loans runoff your books and you guys continue to add more first lien loans at this portfolio, even grows more, the first lien composition actually grows more, you kind of happy with it as we sit here today.

Robert Hamwee

Yes. No, we feel pretty good about the mix today and we relatively constantly reevaluating based on the opportunities in the market. But no, I would currently got that the mix sort of sitting here today, and it still jump around rights plus or minus 2%, 3%, 5%, but that that rock 60, 40 mix is sort of a niche I'm very comfortable with. But ultimately, we manage the business not targeting a specific mix, but building up the portfolio of the best possible investments that we see in the marketplace given our very targeted strategy.

Ryan Lynch

Okay. Those are all my questions. I appreciate the time today.

Robert Hamwee

Great. Thanks, Ryan.

Operator

[Operator Instructions] The next question comes from Finian O'Shea of Wells Fargo. Please go ahead.

Robert Hamwee

Hi, Finian.

Finian O'Shea

Hi guys. Good morning and thanks. I guess I’ll start continue on the credit performance slide, which is very – most of the names are within plus or minus a half a churn, which you'd expect for a newer issue. See a lot of these for 2019, but for some of these there are 2015, 2016, and 2017. How do we read a generally consistent leverage, multiple, assuming if a company grew and recapped, you'd be taken out? Is there a lot of that happening where you stay in or is this, or are these kind of naturally flat issuers, if you could give any color on that or a breakdown perhaps?

Robert Hamwee

Yes. I think we were saying – and it's good question, but I think what you're seeing in the seasoned issuers where you have a broadly consistent leverage profile is the utilization of incremental leverage to fund M&A, right. A lot of the lending we do are the private equity platforms that will utilize it consisted mix of debt or equity. Frankly, just the same way we run our business, to grow both organically and through M&A.

So that's not applicable to every single name that is the broad theme when you think about issuers that are two, three, four years old. Where you've had significant organic growth, but you're using the balance sheet capacity as governed by a agreed upon up front multiple to add debt to the capital structure and in that ratio to allow the business to be inquisitive.

Finian O'Shea

That's helpful. Thanks. And I just another question on non-cash dividends components, as an earnings driver. The interest driver for you guys. Correct me if I'm wrong, this looks to come from the net lease real estate holdings. If that's right can you explain that the driver as to why you have those structured as non-cash dividends?

Robert Hamwee

No, the net just to be clear, the net lease which is structured as I think – as they REIT that fits underneath the BDC and that REIT intern I had the collection of SPVs, each SPV houses a specific net lease transaction. The dividends we get from the REIT or actually in cash and reflect the upstreaming of the net lease payments from the SPVs to the REIT and then that cash from the week two the public company.

So really the source of the non-cash income and I think the best place to see this is probably on Page 25. And you can see the percent of total investment income that isn't cash. The non-cash component is going to be the handful of pick issuers that we have. And you can see that there's been a meaningful step up as he got repaid out of income at the end of last year. We went from sort of that 82%, 83% to now kind of 88%, 87%.

So you've got a combination of the handful of issuers where we are utilizing pick interest income/dividends on some preferred. And then obviously a little bit of OID accretion that rolls through is effectively non-cash. Does that make sense?

Finian O'Shea

Yes. It’s helpful. I was first listening to the Q it’s the non-cash comes from collect outside of the SLP equity holding. But it looks like to be beyond the control names. So are these the preferred equity holding?

Robert Hamwee

Yes, it's primarily the preferred equity. And again, of course, we've had a handful of restructurings in the portfolio the way we green stated that, but with some component of tech. So it's a combination of those two sources.

Finian O'Shea

Sure. And then just one more on the net lease. The newer platform fund you raised or raising, this is the same vertical and this speed area you find attractive looking forward today?

Robert Hamwee

Yes. So we did raise that approximately $500 million fund to invest directly in the net lease assets, which is really always the intention of building that business. We do find that area quite attractive and we'd expect future net lease origination to be in the standalone fund as well as in certain instances, some portion of them to find their way into the BDC consistent with past practices. Yes, we continue to find that business to be attractive. And then what we've always said the BDC would have small but meaningful exposure to that piece is just a further diversifier in a way to get a little bit of duration into the portfolio.

Finian O'Shea

Okay. Thanks so much guys.

Robert Hamwee

Yes. You’re very welcome.

Operator

[Operator Instructions] The next question comes from Angela Guarino, a Private Investor. Please go ahead.

Unidentified Analyst

Good morning and thanks for taking my call.

Robert Hamwee

Good morning.

Unidentified Analyst

On the fee waiver – the fees waived for management. As far as I can tell categorically, since your IPO, they have been really consistent. And I guess the questions or kind of a broad question is to the extent that that those fees exist, it is a sort of a – if you think about the hammer over the head of the company that never drops, and quantitatively that's going to have some effect on the market perception of the company even though it continuously gets waived. My question is, since it's been continuously waived through thick and thin, why isn't that just – why don't we just all agree that that's not going to happen and take that hammer away in the next negotiation for the management agreement?

Robert Hamwee

Right. It's a good question. Let me just clarify one thing just for everyone. So again, the fees waived historically can never be recollected. So there's no contingent liability around that for the company. So when you speak of the hammer, you're referring to the chance that in a future quarter a fee might not be waived.

Unidentified Analyst

Correct, yes.

Robert Hamwee

Okay, great. So look, we think about this as well. Obviously, we want to get the benefit of – into the stock price of the fees that are not being collected. I will say though that the rationale behind doing it in a way we do do it is it is a variable component and you can really see how that's played out even in the last five quarters, right.

If you go back to Q1 and then you can actually see this on Page 24. On Q1 of 2018, the fee was 1.46%. That's the implied fee as opposed to the headline of 1.75%. And that was a function of the mix of the portfolio, right, because we've effectively waived the fees on the senior assets and not on the junior assets. And as the mix shifted that percent decline modestly, but meaningfully from 1.46% to 1.32% this most recent quarter to the benefit of the shareholders.

If we just said, hey, 18 months ago we're running at approximately 1.5% fee, let's get rid of the waiver, simplify everyone delight, which I know people would like and just call our base fee 1.5%, then we wouldn't have had the kind of dynamic as the portfolio shifted getting the benefits of the shareholder. Yes, we've added leverage, we've added bills, but we've decreased our percentage fee to try to keep the dollar fee in a roughly consistent place.

And so having that dynamic – and again, look people worked both ways, right, because there may be a point in time that we delever to the way the market goes, a year from now and we're more junior mixed and may not think we do feel, because those junior assets are higher yield and more work intensive, less leverage. The fee percentage should probably move back the other way. So that would be the rationale.

By the way, we do talk internally like maybe that trade off is something that that we should reconsider. But that just so we're not being completely blind to it, but that is the, that's the cost benefit, right. The simplicity and the clear cut element of having a fixed, but reduced management fee again, the dynamism where they're actually is rationale of that fee moving up or down as the portfolio moved in different ways.

Unidentified Analyst

Do you feel just that bad visibility has some tangible value?

Robert Hamwee

We do that the dynamism has some tangible value. But we do take the point and you're not the first one to make it that there is value in the other side if we had the simplicity and the direct known number. So there's something that we continue to evaluate as management.

Unidentified Analyst

Yes. Thanks. I mean it just seems to me that we've seen it – we've seen it operate over the last eight years through a variety of market conditions and the consistency is not to drop it, right. So at some point it just seems – in a way and end up in unnecessary complication. But that would be my only comment, but congratulations on your great performance. Thanks.

Robert Hamwee

Thank you. Appreciate that.

Operator

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

Robert Hamwee

Hey, Chris.

Chris Kotowski

Yes. Good morning. And I guess kind of along the same lines of the last question, which, I kind of agree with the fee waivers are it just unlike things we see at other, BDCs, it's – you've increased the leverage right from 0.79 to 1.25 and I guess is the goal of using more leverage at some point to kind of drive the core level of net investment income above that $0.34, $0.35 levels so that there is a chance of increasing the dividend at some point in the future or is the goal of using the increased leverage primarily just that you think you can shift the acid mixed to higher quality assets and generate the same $0.34, $0.35 quarterly dividend with a lower risk asset base?

Robert Hamwee

Yes. It's really the ladder, Chris. And I think we've been pretty consistent with that messaging. Going back to when we went out to the shareholder base to get the approval, year or so ago, that we feel we can consistently deliver the $0.34, $0.35, which is a 10% ROE in this rate environment at least. That's a great value proposition for everybody.

And so when you do that with de minimis credit losses. And so our goal is not to drive to 11%, 12%. The goal of the increase in the leverage is to allow us to be even more selective at the asset level, perhaps with the over time at lower asset yield and derisk on the asset side, while it's clearly adding from the liability side, we think system wide, we're optimizing around the lowest possible risk point could deliver that 10% hardly.

Chris Kotowski

Okay. All right. That's it for me. Thank you.

Robert Hamwee

Great, thank you.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Hamwee for closing remarks.

Robert Hamwee

Great. Well, thanks again everyone. Always appreciate the time and the support and look forward to speaking again next quarter. Have a great day. Bye-bye.

Operator

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