New Mountain Finance Corporation (NMFC) Q4 2022 Earnings Call Transcript

New Mountain Finance Corporation (NASDAQ:NMFC) Q4 2022 Earnings Conference Call February 28, 2023 10:00 AM ET

Company Participants

John Kline - President and Chief Executive Officer

Steve Klinsky - Chairman, NMFC and Chief Executive Officer, New Mountain Capital

Robert Hamwee - Vice Chairman

Shiraz Kajee - Chief Financial Officer

Conference Call Participants

Ryan Lynch - KBW

Derek Hewett - Bank of America

Erik Zwick - Hovde Group

Bryce Rowe - B. Riley

Operator

Good morning and welcome to the New Mountain Finance Corporation Fourth Quarter and Full Year 2022 Earnings Call. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to John Kline, President and Chief Executive Officer. Please go ahead, sir.

John Kline

Thank you and good morning, everyone. Welcome to New Mountain Finance Corporation’s fourth quarter 2022 earnings call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Robert Hamwee, Vice Chairman of NMFC; and Shiraz Kajee, CFO of NMFC. Laura Holson, our COO, is on maternity leave and will return on next quarter’s earnings call. Steve 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, John. 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 27 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?

Steve Klinsky

Thanks, Shiraz. It’s great to be able to address you all today, both as NMFC’s Chairman and as a major fellow shareholder. I believe we have good news to report despite the difficult U.S. economic conditions of recent months.

Adjusted net investment income for the third quarter was $0.35 per share, more than covering our $0.32 dividend per share that was paid in cash on December 30. Our annualized dividend yield at the $0.32 core dividend rate is approximately 10%. Our net asset value was $13.02 per share, just an $0.18 or a 1.4% decrease. As we will discuss in more detail, most of the fair value change reflects widening market spreads in Q4, which caused a markdown on our existing book of loans despite continued good credit performance. We believe our loans are well positioned overall in defensive growth industries that we think are right in all times and particularly attractive in the challenging macro conditions of today. New Mountain’s private equity funds have never had a bankruptcy or missed an interest payment and the firm now manages $37 billion of assets. Similarly, NMFC has experienced just 6 basis points of net default loss per year since our IPO in 2011.

Looking forward, the rising rate environment continues to be a substantial positive for our quarterly earnings since we cheerfully lend on floating rates. As Page 12 of the presentation shows, there is also the potential to significantly out-earn this $0.32 per share dividend at current interest rates, if all other factors hold constant. With this in mind, we are now announcing a formal supplemental dividend program. It will begin in Q1 2023, the payables starting in Q2 and we intend to continue it into future quarters.

Specifically, we pledged to pay a variable supplemental dividend each quarter to at least one half of earnings in excess of the current dividend. So for example, if we earn $0.40 a quarter or $0.08 more than our $0.32 dividend, we will pay at least $0.36 of cash dividends that quarter and retain the other $0.04 for the balance sheet or for special dividends later. Based on our view of Q1 earnings, we expect that our first supplemental dividend will be $0.02 to $0.03 per share, raising our next dividend to $0.34 to $0.35 per share all-in and to be potentially more in future quarters. For clarity, this policy is based on current interest rates. And as always, management in conjunction with our Board will review NMFC’s dividend policy on a regular basis and make adjustments as necessary. We believe the strength of New Mountain and of NMFC is driven by the quality of our team. New Mountain overall now numbers 215 members and the firm has developed specialties in attractive defensive growth that is acyclical growth sectors, such as life science supplies, healthcare information technology, software infrastructure services and digital engineering.

Regarding our credit team specifically, we promoted Joy Xu to Managing Director this year and gave Josh Porter the additional title of Head of Special Situations. As described in our press release, our CFO, Shiraz Kajee, will be leaving us in April to pursue another career opportunity. Shiraz has been a valuable and respected member of the team and we part on good terms. Upon Shiraz’ departure, Laura Holson, NMFC’s COO, will assume the additional duty of Interim CFO until a successor is found. Laura has been a senior leader in our credit group for many years and has a great command of NMFC’s business and financials. Additionally, Adam Weinstein, former CFO of NMFC and current CFO of New Mountain Capital, remains active and supportive. He will partner with Laura to ensure an orderly transition. We have engaged an executive search firm to identify a permanent successor as CFO and we will update you in the coming months. Finally, we as management, continue as major shareholders of NMFC, owning over 11% of NMFC’s total shares personally. Rob, John and I have never sold a share of NMFC even as we have been buying.

With that, let me turn the call to Rob.

Robert Hamwee

Thank you, Steve. On Page 7, we highlight our leading credit metrics and our strong return track record over our 14-year history. Additionally, we have included the detailed breakout of NMFC’s industry exposure. We believe these sectors are well positioned in an inflationary environment given the pricing power and margin profile that comes along with the largely tech and services nature of these industries. In our view, the chart demonstrates the differentiated domain expertise our team has developed and shows why we operate with confidence in any economic cycle.

On Slide 8, I will highlight three competitive advantages that set New Mountain Finance apart from other direct lenders. First, we focus on businesses that are quality defensive growth companies in acyclical industries that have been targeted, researched and invested in by New Mountain over the course of two decades. We believe this process results in deep expertise and a broad executive network that allows New Mountain, the first-mover advantage in these attractive sectors.

Second, NMFC benefits from the unique connectivity between credit and private equity. We find this enables a deeper level of due diligence and stronger conviction in our investments. Simply stated, New Mountain’s integrated approach results in a bigger, more robust credit selection engine. Third is shareholder alignment, which Steve touched on already. As fellow shareholders, New Mountain team members own over 11 million shares, creating strong accountability that ensures decision-making will always be aligned with our stakeholders.

Turning to Page 9, we believe our portfolio continues to be well positioned overall, particularly for periods of uncertainty. The updated heat map shows the relatively flat risk migration this quarter with one position representing $4 million of fair value, improving in rating and two positions, representing just $25 million worsening in rating. We are pleased that over 91% of our portfolio is rated green on our risk rating scale. Conversely, our red and orange names, which represent our most challenged positions, now represent just 2.4% of the portfolio.

The updated heat map is shown on Page 10. Given our portfolio’s strong bias towards defensive sectors like software, business services and healthcare, we believe the vast majority of our assets are well-positioned to continue to perform no matter how the economic landscape develops. Specifically, these industries, along with our other core verticals benefit from predictable revenue models, margin stability and great free cash flow generation. We continue to spend significant time and energy on our remaining red and orange names with the goal of either exiting individual positions or finding ways to improve the performance of the underlying businesses as we have, for example, at Permian, which was a red name at the beginning of 2022, but is now yellow due to operational improvements and new customer wins.

With that, I will turn it back to John to discuss market conditions and other important performance metrics.

John Kline

Thanks, Rob. It’s a pleasure to address my fellow shareholders for the first time as CEO. I am proud of the business that our team has built over the course of the last 12 years as a public company. We believe that our best days are ahead of us due to the competitive advantages that Rob outlined in his opening remarks.

We have industry discipline, a superior underwriting model and proprietary sourcing channels that provide access to many of the best deals in the direct lending market. The outlook for 2023 in the sponsor-focused direct lending market looks positive. While deal flow is down overall, there are pockets of activity where we have the opportunity to make loans at very attractive spreads. Our sponsor clients are particularly active in software, business services and infrastructure services. Additionally, we continue to see good opportunities to make incremental loans to existing well-performing portfolio companies seeking to pursue accretive M&A.

Overall, direct lending has continued to increase its share of the financing market as sponsors seek ease of execution, single debt tranches and committed capital for future acquisitions. Deal structures have become more lender-friendly across the board, characterized by attractive spreads, higher fees, lower leverage and more robust documentation. In general, sponsor equity contributions have remained generous, consistently representing 60% to 80% of the enterprise value of the company.

Page 12 presents an interest rate analysis that provides insight into the positive effect of increasing base rates on NMFC’s earnings. We have updated this page to provide more clarity into the impact of increasing base rates on our portfolio as well as the timing of that impact. As a reminder, the NMFC loan portfolio is 89% floating rate and 11% fixed rate, while our liabilities are 58% fixed rate and 42% floating rate. Given this capital structure mix, we are long LIBOR and thus have material positive exposure to increasing rates.

Despite being positively exposed to increasing base rates, there is a lag in the flow-through of higher rates for two reasons. First, our borrowers can choose to delay the impact of rising rates by selecting 3-month or 6-month SOFR contracts; and second, many of our liabilities reprice at more rapid intervals. The result in Q4 was that we realized an average base rate on our assets of 3.6% which was 40 basis points lower than the average rate on our liabilities. This temporary mismatch caused a $0.02 per share headwind during the quarter compared to a hypothetical scenario where base rates were 4% on both assets and liabilities. SOFR base rates have now risen to nearly 5%, which should generate a material uplift in earnings, all else being equal.

Turning to Page 13, we present more detail behind the $0.18 decline in our book value this quarter. Starting on the left side of the page, we show that credit-driven fair value changes positively impacted NAV by $0.02 per share from Q3 to Q4. As Steve mentioned earlier, the overall decrease relates to fair valuing, well-performing names based on higher market spreads as of 12/31. It is important to note that if we were to value all of our green rated loans at par and keep the balance of the portfolio at current fair value, our book value would be $13.81 compared to our actual NAV of $13.02 at 12/31. While the timing is hard to predict, we believe that NMFC’s book value will benefit from these higher quality names converging to par.

Page 14 addresses NMFC’s long-term credit performance since its inception. On the left side of the page, we show the current state of the portfolio, where we have $3.2 billion of investments at fair value, with $58 million or 1.8% of the portfolio currently on non-accrual. We had no new non-accruals this quarter. NMFC’s cumulative credit performance shown on the right side of the page remains strong. Since our inception in 2008, we have made $9.9 billion of total investments, of which only $347 million have been placed on non-accrual. Of the non-accruals, only $79 million or less than 1% of our total investments have become realized losses over the course of our 14-year history. As shown on the next page, default losses have been more than offset by realized gains elsewhere in the portfolio.

The chart on Page 15 tracks the company’s overall economic performance since its IPO in 2011. As you can see at the top of the page, since our initial listing, NMFC has paid approximately $1.1 billion of regular dividends to our shareholders, which have been fully supported by over $1.1 billion of adjusted net investment income. On the lower half of the page, we focus on below the line items where we show that since inception, highlighted in blue, we have a cumulative net realized gain of $21 million, which is up $5 million from last quarter. This cumulative realized gain is offset by $89 million of cumulative unrealized depreciation on our portfolio, which increased this quarter by about $15 million largely driven by valuation changes previously discussed.

On the bottom of the page, in yellow, we show how cumulative net realized and unrealized loss stands at just $67 million, which remains a tiny fraction of the $1.1 billion of net investment income we have generated since our IPO. As we look forward, our team remains very focused on reversing the small cumulative loss and maintaining best-in-class credit quality throughout the portfolio.

Page 16 shows a stock chart detailing NMFC’s equity returns since its IPO over 11 years ago. Over this period, NMFC has generated a compound annual return of 10%, which represents a very strong cash flow-oriented return. Over the last 12 months, NMFC’s performance has compared favorably to most equity indexes and has materially exceeded that of the high-yield index as well as an index of BDC peers that have been public for at least as long as we have.

Moving on to origination activity. In Q4, we originated $94 million of new loans in our core defensive growth verticals, including software, financial services and consumer services. We primarily funded these originations with repayments, keeping us fully invested at the high end of our leverage range.

Turning to Page 18. We show that our asset mix is consistent with prior quarters where slightly more than two-thirds of our investments, inclusive of first lien SLPs net lease and net lease are senior in nature. Approximately 8% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. Assuming solid operating performance and a supportive valuation environment, we believe these equity positions could continue to increase in value and drive book value appreciation. We hope to monetize certain of these equity investments in the medium term and rotate those dollars into cash-yielding assets. As an example, we expect our common equity ownership in Haven to be fully realized over the next two quarters.

Page 19 shows that the average yield of NMFC’s portfolio remained flat from 11.3% in Q3. Spreads remain wider and the supply/demand imbalance in the market continues to favor lenders, which helps support our net investment income target.

Page 20 highlights the scale and credit trends of our underlying borrowers. As you can see, the weighted average EBITDA of our borrowers has increased over the last several quarters to $138 million. While we first and foremost concentrate on how an opportunity maps against our defensive growth criteria and internal New Mountain knowledge, we believe that larger borrowers tend to be marginally safer, all else equal.

We also show the relevant leverage and interest coverage stats across the portfolio. Portfolio company leverage has been consistent over the last three quarters. Loan to values continue to be quite compelling, and the current portfolio has an average loan-to-value of just 41%. From an interest coverage perspective, we have seen modest compression as base rate rise. The weighted average interest coverage on the portfolio declined slightly to 1.9x from 2.1x last quarter. We do expect interest coverages to move lower in 2023 as SOFR contracts reset at today’s rates. Based on sensitivities that we have run, interest coverage at 5.5% SOFR implies approximately 1.6x coverage based on LTM EBITDA. However, we believe the earnings growth profiles of the companies in our portfolio created a valuable offset to this negative trend.

Finally, as illustrated on Page 21, we have a diversified portfolio across over 100 portfolio companies. The top 15 investments inclusive of our SLP funds account for 39% of total fair value and represent our highest conviction names.

I will now turn the call over to our CFO, Shiraz Kajee, to discuss our current portfolio construction and financial results. Shiraz?

Shiraz Kajee

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

Moving to the financial results on Slide 22. The portfolio had over $3.2 billion in investments at fair value at December 31 and total assets of $3.4 billion, with total liabilities of $2 billion, of which total statutory debt outstanding was $1.7 billion, excluding $300 million of drawn SBA-guaranteed debentures. Net asset value of $1.3 billion or $13.02 per share was down $0.18 or 1.4% from the prior quarter. At quarter end, our statutory debt-to-equity ratio was 1.29:1. However, net of available cash on the balance sheet, net leverage is 1.25:1 within our target leverage range.

On Slide 23, we 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 realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line.

For the current quarter, we earned total investment income of $86.7 million, an $8.6 million increase from the prior quarter. This increase was primarily driven by higher interest income from base rate resets, offset by lower fee income this quarter. Total net expenses were approximately $51.2 million, a $5.6 million increase quarter-over-quarter due primarily to higher base rates on our floating rate debt. As a reminder, the investment adviser has committed to a management fee of 1.25% for the 2022 and 2023 calendar years. We have also pledged to reduce our incentive fee, if and as needed, during this period to fully support the $0.32 per share quarterly dividend. Based on a forward view of the earnings power of the business, we do not expect to use this pledge. It is important to note that the investment adviser cannot recoup fees previously waived.

Our GAAP NII per weighted average share for the quarter was $0.25 per weighted average share. However, including – excluding one-time non-cash charges, we earned $0.35 per weighted average share, which exceeded our Q4 regular dividend of $0.32 per share. The majority of the one-time items relate to NHME which has been a challenging investment that we have marked down by 80% during 2022 to a carrying value of only $5.4 million, which represents just 0.4% of current NAV. We also reevaluated our PIK income and determined the income accrued in prior periods to likely be uncollectible. And as a result, we proactively chose to write off $12.7 million of PIK income at year-end. And consistent with our prior practices, we elected to offset this write-off with a $2.6 million incentive fee rebate to our shareholders.

On Slide 24, I’d like to give a summary of our annual performance for 2022. For the year ended December 31, 2022, total investment income of over $305 million and total net expenses of $177 million. This results in 2022 total adjusted net investment income of $128 million or $1.28 per weighted average share, which more than covered our $1.22 regular dividend paid in 2022.

As Slide 25 demonstrates 95% of our total investment income is recurring this quarter, you’ll see historically over 90% of our quarterly income is recurring in nature. At an average, over 80% of our income is regularly paid in cash. We believe this consistency shows the stability and predictability of our investment income.

Turning to Slide 26. The red line shows our dividend coverage. This quarter, adjusted NII exceeded our Q4 regular dividend by $0.03 per share. For Q1 2023, our Board of Directors has again declared a regular dividend of $0.32 per share, which will be paid on March 31, 2023, to shareholders of record on March 17, 2023. Based on our preliminary estimates, we expect our Q1 2023 NII will be in excess of $0.32 per share. Given that, we are pleased to implement our supplemental dividend program beginning in 2023 to pay out at least 50% of any earnings in excess of our regular dividend. We expect the first distribution to be made in the second quarter.

On Slide 27, we highlight our variance financing sources. Taking into account SBA-guaranteed debentures, we had almost $2.4 billion of total borrowing capacity at quarter end with over $413 million available on our revolving lines subject to borrowing base limitations. We have a valuable mix of fixed and floating rate debt and the 58% of fixed rate debt continues to be an earnings tailwind in this rising base rate environment. As a reminder, both our Wells Fargo and Deutsche Bank 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.

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 and approximately 70% of our debt matures on or after 2025. As you may recall, we raised a $200 million convertible note in October to address our 2023 maturities. As such, post quarter end, we repaid $90 million of unsecured notes that matured and have earmarked additional liquidity for the remaining 2023 maturities.

Lastly, our multiple investment-grade credit ratings provide us access to various unsecured debt markets, and we continue to explore to further ladder our maturities in the most cost-efficient manner.

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

John Kline

Thank you, Shiraz. As we look out over the course of 2023, we are confident New Mountain is well positioned to execute our defensive growth strategy and to maintain superior risk-adjusted returns while driving long-term value for our shareholders. We once again thank you for your support and look forward to maintaining an open and transparent dialogue with all of our stakeholders in the days ahead.

I will now turn things back to the operator to begin Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question here will come from Ryan Lynch with KBW. Please go ahead, sir.

Ryan Lynch

Hey, good morning. First, I just wanted to say, I appreciate you while HME was probably not an outcome that you guys are happy about our shareholders. I do appreciate you guys making the reverse of pick income and the incentive fee rebate, which is, I think, the right way to account for that ensure that the incentive fee is not getting paid on income that you guys will probably never collect in cash. So I appreciate that. Moving to the – my first question, though, with the dividend – new dividend supplemental policy. Can you just talk about why you guys decided on a 50% payout ratio? Different BDCs have set that ratio at different levels. I’m not sure if there is necessarily a right or wrong answer would probably depend on you ask 10 different investors, you may get 10 different answers, but just love to hear your thoughts on why it was set at that 50% ratio?

John Kline

Sure, Ryan, this is John, and thanks for the complement on HME even though it was not our best investment. But just in terms of the variable special, I mean, essentially, the mindset is we want to continue our track record of returning capital in an efficient and pretty high manner to our shareholders. And when we look out, we basically see the opportunity to have a lot more income and a lot of that income is be associated with these higher base rates. It’s difficult for us to figure out how long those base rates are going to be in existence. And so we just think the variable special is, overall, the best way to deliver that income while not getting out over our skis too much and raising the dividend too high where we can’t cover in all scenarios. So we feel like we uncover the $0.32 in all scenarios. We think we have the opportunity to really out earn over the next couple of quarters just given everything we see in the environment. And I think 50% was just rough justice. We want to both return capital but also provide good cushion and be able to keep some of the excess dividend on the balance sheet while still, as I mentioned, be relatively aggressive in delivering capital back to our shareholders. So it’s 50% was just rough justice.

Ryan Lynch

Okay. That makes sense and help – helpful explanation. I like the slide you guys provided on the weighted average interest coverage and EBITDA and net leverage multiple. But you talked about looking forward to the forward SOFR curve of 5.5% would equate to 1.6x weighted average interest coverage, which is kind of helpful to just see kind of directionally how interest coverage is moving. But obviously, you guys aren’t managing your portfolio on an average basis. I mean the real risk is going to be in the tails of kind of being able to pay – make interest payments in a stressed – or a more uncertain economic environment with higher rates. And so I would love to hear, did you guys – as part of this analysis, did you guys look with rates at 5.5%, what percentage of your portfolio would potentially be below 1x interest coverage?

John Kline

I mean we do look at every name, we monitor every name very intently and interest coverage is just one metric. I mean here is the way I think about the current environment we are in. The number one things we focused on when looking at our portfolio companies and really coming up with our heat map which is almost 92% green is we focus on great businesses that operate in businesses that have really good secular tailwinds. And we really focus on revenue growth, margin stability and free cash flow. And really, if you have those things in place, which the vast majority of our companies do, interest coverage is just not going to be the thing that kills these businesses. And on top of that, if you layer on backing businesses that are essentially equitized with twice as much equity as debt, we are just in a position where volatility and interest is really the sponsor’s problem even more than our problem. So, the way I think about that is our portfolio is just very well positioned in this environment. We are in the right industries. We have companies that produce free cash flow, and we have companies that are still growing even though the economy is spotty in certain sectors. And so it’s a metric that we feel comfortable about. And really – I really think about that $1.6 billion as being an accurate metric for the vast majority of our portfolio and really all of our green names.

Ryan Lynch

Okay. That’s helpful. And then the last question I had was you mentioned the $90 million of unsecured notes repaid in January. You guys have about $257 million of total maturities coming due in 2023. I believe you said you guys have the available liquidity when I look on the availability on your credit facilities, there is enough to cover that. But it does start to get – it feels like a little tighter from after that point on available capital, remaining under credit facilities. Is the – are you guys anticipating repaying these unsecured notes by just drawing on the credit facilities throughout the year? And do you feel that you would draw on the credit facilities to repay these unsecured notes. Do you feel like you guys have to – not you guys would be forced to expand the credit facility, but would you like to expand the commitments on the credit facility to give you guys more buffer going forward?

Steve Klinsky

Yes. I think we – so for the rest of the year, we have about $160 million, $170 million coming due. We have sufficient availability under the credit facilities currently to deal with that. So, we feel good, at least we are not rushed to do something unnatural from a financing perspective. But we are still looking at unsecured debt. We might potentially do something else there to replace that debt, we could back leverage draw down on the facilities, pay down the debt when they come due and lever up again when the environment is better. So, I think we are continuously looking at both the secured and unsecured market to see what’s available to us. But we feel comfortable at least we have enough availability currently on the revolvers to take care of what we need to this year.

Robert Hamwee

I also might add one other thing, which is that while it’s obviously not the most robust environment for repayments, we do expect to have some repayments come through. And we are – given the earnings profile that we are demonstrating now, we feel we can use some of those repayments to just modestly de-lever a little bit, and that’s another source of funds to address near-term repayments as well as to address this overall liquidity position. So, I don’t want to lose sight of that as another important arrow in the quiver.

Ryan Lynch

Okay. Understood. I appreciate the time today.

John Kline

Thanks Ryan. Appreciate the questions.

Operator

[Operator Instructions] This will conclude our question-and-answer session. Pardon me. Our next question comes from Art Winston with Bank of America – pardon me, Derek Hewett with Bank of America. Please go ahead.

Derek Hewett

Good morning everyone. Could you talk a little bit more about the supplemental dividend? Is there any sort of governor so that if you were in a situation where you had some unrealized losses and book value went lower, would that impact the calculation for the supplemental dividend?

John Kline

Hi Derek, this is John. Thanks for the question. So, we chose to enact our variable supplemental dividend using effectively just one prong where we take, as Steve mentioned, 50% of the over earnings, and we pay that 50% out in terms of – in the special in the supplement variable – supplemental dividend. And then the other 50% would go to stay within the company and increase book value. And so we did not have a second prong to that test. And the reason that we didn’t do that is, I guess two-fold. One, is we wanted this dividend to be easily modeled by our shareholders and the analysts that follow us. And we also feel like mark-to-market changes don’t necessarily affect our dividend policy or our ability to pay the dividend. The ability to pay the dividend is more affected by real non-accruals and losses, which is a little bit separate. So, we have confidence in our book, and we want to keep it very simple.

Derek Hewett

Okay. Thank you.

Operator

Our next question will come from Erik Zwick with Hovde Group. Please go ahead. Erik Zwick, your line is open for questions.

Erik Zwick

Thank you. Good morning. Wondering if I could just maybe expand on some of the earlier discussions about the capital allocation and optionality you mentioned in the press release and some of the uses of liquidity to pay-down some notes in the remainder of the year. I am curious of how you are thinking about the opportunity to buy back shares in this environment, or does the economic uncertainty maybe keep you on the sidelines with regard to that option today?

Robert Hamwee

Yes. Hey Erik, this is Rob. Thanks for the question. We have historically talked about buying back shares when the stock was certainly below 80% of NAV and thinking about it between 80% and 90% of NAV. I think that remains our guideline for that. So, it’s not really operational in this moment in time. Obviously, if the market became further dislocated, and we had that incremental liquidity, it’s something we would consider like we have done in the past. But it’s really got to be the intersection of us having material excess liquidity as well as having the stock be dislocated. Obviously, our number one priority is to maintain our liquidity and our leverage in such a way as to maintain the investment-grade rating. So, we are obviously super – hyper conscious of that as well. So, I don’t see that as a near to medium-term likelihood. But of course, the markets can change at any moment. So, it is something that’s always on the long-term radar, if you will.

Erik Zwick

Thanks. That’s helpful. And just one more for me. When you repaid the notes in January, I am curious if you went out to the market all to see, what the opportunity would be there to raise additional unsecured debt and chose not to either because of the rate environment or demand still just not there, curious kind of the tenor of the market today, if you are able to gauge that.

John Kline

So, the market continues to be open for companies that the market perceives to be good credit risk. I think we are in that camp. We are constantly evaluating the market. We are very confident that we have access to multiple different segments of the market, and it’s just an ongoing discussion. So, we feel very good that when we look at our liquidity and we look at our capital structure, we have a lot of different options to choose from. And when we think about the convert that we did, it really, I think really allowed – addressed a really big chunk of the upcoming maturities and lessened the overall magnitude of debt that we have to think about in 2023 and as Shiraz said, we can just go in a lot of different directions, whether it’s the secured market, unsecured market, convert market, etcetera.

Erik Zwick

Thanks for taking my questions.

Operator

Our next question will be a follow-up from Ryan Lynch with KBW. Please go ahead.

Ryan Lynch

I just had one follow-up on Slide #12. This is the slide you guys provided last quarter as well. And I am just curious as far as the resets from your assets versus liabilities, are your liabilities being reset on a daily basis as I kind of look at that line chart on the top right of the slide, are your liabilities being reset on a daily basis? And then are your assets been being reset on a three-month to six-month basis? Is that how it’s working?

John Kline

Sure. I can take a shot at that. Assets are being reset on a three-month to six-month basis. In some cases, one-month, but it’s a mix. And so you are right there. On our liabilities, the biggest facility that we have is with Wells Fargo, and that is reset to one-month LIBOR on a daily basis. So, that is I’d say, the number one driver of this mismatch that we see. Now, when rates go the other way, it will be good for us. But as rates continuously go up, it has been a headwind as we show on Page 12.

Ryan Lynch

Do most of your borrowers have the ability to switch to resetting on a monthly basis so that if rates do go the other way, you will still have a nice positive spread if your largest facility is resetting on a daily basis, but the spread won’t be quite as big if all your borrowers then switch to a monthly reset?

John Kline

Yes. So, borrowers in most credit agreements have the ability to do one-month, three-month or six-month. And so that’s a decision that CFOs at all of our borrowers are constantly making. And they don’t make this – they don’t all make the same decision at once. So, it’s a mix. But in the context of our main credit facility re-pricing daily in sort of a deflationary base rate environment regardless of whether the CFOs choose one, three or six, it will be a tailwind. Hopefully, that makes sense.

Ryan Lynch

Yes, that makes sense. Alright. Thanks for the clarification.

Operator

And our next question will come from Bryce Rowe with B. Riley. Please go ahead.

Bryce Rowe

Good morning guys. I wanted to maybe ask about the senior loan funds. You had kind of a nice uptick in dividends from the senior loan funds or programs. John or Rob, just curious if that same kind of lag exists within those funds that you see kind of with your on-balance sheet assets.

John Kline

It’s actually a lot less pronounced, namely because the leverage in the SLP or the LF [ph], the senior loan funds that invest in syndicated loans is much more matched. So, when you think about just the overall, I guess the leverage in the funds it’s really 3:1 on average or a little bit less than 3:1. And so generally, just the – we are just less sensitive to that dynamic. And the only one of our SLPs does re-price on a daily basis.

Bryce Rowe

Okay. And then maybe one more for me. You had some nice realized activity here in the fourth quarter. I think last quarter, in November – in November’s call, you talked about being able to monetize. There were some highlights of that here as we look out over the next couple of quarters. Can you kind of talk about what’s – maybe what’s driving that? Is that kind of from the sponsor side of things, or are you actively looking to help to monetize some of these equity investments. Thanks.

John Kline

Sure. So, the equity investments that we have the ability to monetize and where we have a control or at least a lot of influence are really listed on Page 18. And so the names that you see on Page 18 are the names that were over the medium-term focused on selling and then using those proceeds to reinvest in cash yielding loans. So, it is an opportunity. The first of those assets that will be monetized should be Haven, and you can see the value of that. And then when you look at these other names, we think that over the next 12 months to 18 months, there could be another monetization, which could I think really drive a positive evolution of our book from either non-yielding or PIK yielding assets to cash-yielding assets.

Bryce Rowe

Got it. Okay. Thank you guys much. Take care.

Operator

This will conclude our question-and-answer session. I would like to turn the conference back over to John Kline for closing remarks.

John Kline

Great. Thank you very much for your time and joining our call, and we look forward to speaking with you next quarter.

Operator

The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect your lines.