New Mountain Finance Corporation Q4 FY2025 earnings call

• Steve Klinsky noted NMFC is in good position relative to market conditions, adjusted net investment income covered dividend, will continue dividend protection program and voluntarily reduce incentive fee. Edmentum's position down but business building made it more valuable. New Mountain Capital grew from $0 in AUM in 2000 to $60 billion today. - John Kline provided details on $477 million asset sale, portfolio diversification, strategic initiatives progress, industry exposure, AI approach, internal risk ratings, NAV changes, non-accrual performance. - Laura Holson discussed market environment, direct lending as attractive asset class, spread trends, underwriting strategy, interest rate analysis, portfolio originations and repayments. - Kris Corbett discussed financial results, portfolio fair value, income statement, dividend coverage, financing sources, leverage profile.

Adjusted net investment income for the fourth quarter was $0.32 per share. Net asset value declined to $11.52 per share on December 31, 2025, compared to $12.06 per share. Approximately 95% of NMFC's loan portfolio is ranked green on the heat map, approximately 5% is yellow or orange, and no names are ranked red. For Edmentum, NMFC historically invested $29 million into its first lien (fully repaid at par with interest) and $174 million into related second lien, with $166 million cash proceeds realized. The equity piece of Edmentum is now valued at $5 million, but subordinated notes and senior preferred equity tranche are valued at par. Portfolio had $2.8 billion of investments at fair value on December 31, total assets $2.9 billion, total liabilities $1.7 billion, net asset value $1.2 billion or $11.52 per share (down 4.5% from prior quarter). Adjusted net investment income covered Q4 dividend. 97% of total investment income was recurring in Q4, 77% paid in cash, 15% PIK income, 4% from modified PIK. 2025 year-to-date, $35 million of previously accrued PIK income collected in cash. Post-sale of $477 million assets, top 5 positions are 14% of portfolio value, senior oriented assets 81% of portfolio, post-sale leverage 0.9x, PIK income expected to decrease 20%-25%, top 10 single name issuers 22.8% of total fair value (down from 25.6% last quarter).

• Intend to continue full dividend protection program reducing incentive fee to 15% until end of 2026 and then voluntarily and permanently reduce to 15%. - Sale of $477 million assets scheduled to close in March, book value to be affected but portfolio to be more diversified. - Long-term sustainable dividend rate expected to be roughly $0.25 per share per quarter beginning in Q2 2026 assuming around $0.27 per share of quarterly net investment income. - Company has board authorization to buy approximately $80 million more shares, and will redeploy proceeds from sale primarily in first lien assets, look to lend at slightly higher spreads and purchase loans at attractive discounts.

Q: Just to start with a couple on the portfolio sale. One is the 94% discount inclusive of an advisory fee or might that be an extra sort of income statement hit next quarter. And then from the sound of it, it sounds like mostly redeployment, maybe buyback less so than delevering, if I heard that right? Or will there be any updated leverage posture?

A: Thanks for the question. The 94% of par was the purchase price of the assets. There will be fees and expenses associated with that transaction. And those are expected to be about $7 million. On the overall posture around the leverage target that we have, we're maintaining our target between 1 and 1.25. The sale puts us under our stated leverage target. And going forward, we expect to operate within the target that we've always operated within. What we're excited about is that we have the opportunity to deploy the proceeds of the sale into what we think will be a better market to invest in credit and direct lending. And we also have the opportunity to buy back stock to the extent we feel the stock is cheap. And I think we've made statements that we do feel like the stock is undervalued. So we want to -- our strategy remains unchanged, and we plan to deploy the proceeds of the sale in different ways that serve our shareholders.

Q: Congrats on the asset sales. Just a couple of questions on, I guess, specifics. Curious whether I guess, specific to the process here, curious whether there were multiple bidders here? Was it kind of an auction-type process? How are the assets selected and priced? Any kind of information you can give on kind of that process would be helpful.

A: Sure. It was a competitive process that was led by a bank that we hired, Evercore. And we went out to a number of bidders, and we did get multiple bids. This -- the overall bid from Coller was the most attractive overall solution for us. And we feel good about the completion of that sale. As it relates to the way we selected assets, it really ties back to the comments that I just made to Fin, which is we really wanted to reduce PIK income and we wanted to get a lot more diversified amongst our top positions. So if you look at a lot of the biggest, most important names that we sold in the sale, they were our largest positions and we thought it was particularly important to get Benevis, which is on an improving track down from over 5% of the portfolio to -- in the 3s. We thought that was very important. Just from a portfolio management perspective. So that was the thinking around how we pick the names. It was really our over concentrated names with high PIK and in some cases, subordinated names.

Q: Yes. That actually is a good kind of segue into kind of my next question. I wanted to get some thoughts on like how you interpret the pricing of these assets relative to the internal marks? Obviously, on one hand, the assets are being sold at a slight discount. On the other hand, as you mentioned, there are some characteristics to these assets like PIK and software that we know investors are going to discount and extensively, there's some sort of deal discount that is kind of regular way here. But -- can you just kind of help us think about how you see the 94% kind of valuation here?

A: Look, we think it was a fair deal for both sides. The buyer got some great assets at a slight discount, and that's very commercially normal in this market. And we feel like we were able to, as I said, validate our remarks and reduce concentration and improve the overall portfolio composition of our vehicle, of our company. And we're doing it. And again, Steve made this point, we're doing it in an environment where our stock price trades at, I don't know, under 70% of book or so. And so we just feel like this was the right move given the implicit scrutiny on NMFC.