New Mountain Finance Corporation Aktie

Good day, and welcome to the New Mountain Finance Corporation First Quarter 2026 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Kline, President and CEO. Please go ahead.

Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's First Quarter 2026 Earnings Call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Laura Holson, COO of NMFC; and Kris Corbett, CFO and Treasurer of NMFC. As announced in our 8-K, our CFO, Kris Corbett, will be leaving us at the end of May to pursue another career opportunity. Kris has been a valuable and respected member of the team, and we would like to thank him for his hard work during his time at New Mountain.

Upon Kris' departure, Laura Holson will assume the additional duty of interim CFO until a successor is found. Steve is going to make some introductory remarks, but before he does, I'd like to ask Kris to make some important statements regarding today's call.

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 on our May 4 earnings press release. I would also like to call your attention to the customary safe harbor disclosure in our press release and on Pages 2 and 3 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 6 of the slide presentation. Steve?

Thanks, Chris. It's great to be able to address you all today. Both as NMFC's Chairman and as a major fellow shareholder. Adjusted net investment income for the first quarter was $0.32 per share covering our $0.32 per share dividend that was paid in cash on March 31.

Our net investment income and dividend were supported by consistent recurring income from our loan portfolio and a full voluntary incentive fee waiver of $6.1 million. Looking forward to Q2, consistent with our announcement on our previous earnings call, we would like to announce a $0.25 dividend payable on June 30 to shareholders of record as of June 16.

Based on NMFC's earnings power, we expect this dividend will be more than covered by the earnings from our core business. As also previously discussed, we believe NMFC made a very positive and well-timed strategic pivot several months ago. We sold approximately $470 million of some of our most illiquid and hardest value positions at 94% of December 31 book value.

That transaction closed and was funded in March. With that liquidity, we have now delevered our balance sheet, and have capacity to buy high-quality assets opportunistically at far less than $0.94 on the dollar. Some of those investments were completed by March 31, and some were done or will be done after March 31, but can be judged by their expected pro forma impact.

First, we have been buying back our own stock at roughly $8 per share or about a 27% discount to book value. We had a $95 million buyback authorization in place at year-end 2025. And -- about $57 million of buybacks were completed by March 31, and about $9 million have been executed since leaving us with approximately $30 million remaining in our originally existing program.

Book value per share was $10.92 per share on March 31 and is $10.95 pro forma for the post-March buybacks already done, all else equal. Further, our Board has now authorized an incremental $50 million for buybacks in the future, bringing our total remaining capacity to around $80 million.

Again, all else equal, the math is that every $10 million of buyback at $8 per share can add approximately $0.04 per share of book value. In addition, book value on March 31 was primarily brought down by a general market bearishness in valuations rather than issues of performance in our specific loans.

Today, the average mark of our green rated names is about $0.96 on the dollar, which implies potential upside if the market normalizes and these loans accrete back to par. Third, we have been using the market disruption to buy specific names in the secondary market when they appear to be oversold.

For example, we bought one name, which is a multibillion-dollar public company at a value through the debt of just 2x EBITDA and at $0.65 on the dollar. This loan rapidly traded up approximately 10 points since our first purchase. Fourth, spreads in the market appear to have widened in general, and we are deploying our cash into new loans at significantly higher and more attractive yields than existed 12 months ago.

Last and importantly, we believe we are seeing forward momentum at some of the companies we own from past defaults such as Benevis, UniTek and Permian. Our goal is to ultimately sell these companies at above their current marks and redeploy the proceeds into attractive alternatives.

I and my fellow NMC executives remain the largest shareholders of NMFC stock and our ownership position has been increasing over time. During the first quarter, I purchased 1.5 million shares and other senior NMC leaders bought shares as well.

Overall, New Mountain ownership increased from approximately 14% to approximately 17% of total shares outstanding. I believe we had more insider buying than any publicly traded BDC, our size or larger. We thank you as always for your ownership and partnership and we are working diligently to serve your interest in the months and years ahead.

With that, let me turn the call over to John for more details and comments.

Thank you, Steve. I would like to begin on Page 7, which offers an overview of our differentiated approach to direct lending. First and foremost, we focus only on select parts of the economy that we believe are defensive and have sustainable tailwinds that will benefit companies within these chosen sectors.

We provide heightened transparency into our industry niches as opposed to the standard practice of using broad sector classifications. This enhanced disclosure provides our investors with more clarity into the specific types of companies that we invest in.

Secondly, we have a unique investment model where our credit team partners with in-house industry executives and private equity personnel to underwrite direct lending deals within our chosen sectors. If an investment underperforms and we are compelled to take ownership of the company, New Mountain is well positioned to improve the underlying business using our private equity expertise and in-house operating talent.

As Steve mentioned, there are several situations in that category that are bearing fruit today. As we consider industry exposure, the impact of AI remains a major topic of conversation in the investment community, particularly as it relates to software end markets.

While there will certainly be winners and losers in the software sector, we believe that as a group, NMFC software companies are well positioned to benefit as they implement AI into workflows at a rapid pace and use AI-assisted coding to improve software functionality and the overall user experience.

From our vantage point as lenders, we see our sponsor partners acting proactively across all industries as it relates to AI. It's clear to private equity sponsors that there are more opportunities today than ever before to enhance margins and improve operating efficiency in almost every business.

As a senior lending partner, NMFC can be a big beneficiary of these improvements. Page 8 provides key performance statistics showing a long-term track record of delivering consistent, enhanced yield by minimizing credit losses and distributing virtually all of our excess income to shareholders.

Since our IPO in 2011, MFC has returned over $1.5 billion to shareholders through our dividend program, generating an annualized return of approximately 10%. Our dividend yield at the current stock price is approximately 12% annualized based on the revised $0.25 quarterly payout, which is fully covered by net investment income.

Our loan-to-value ratio is just 47% and includes the latest view of enterprise value at our portfolio companies. We recalculate this metric every quarter to ensure we are accurately reflecting market movements. We do not blindly anchor to loan-to-value ratios based on what the sponsor paid for the business.

Finally, we maintain an investment-grade rating at both Moody's and Fitch, which we have held for more than 5 years. Turning to the next page. We have made really great progress on our strategic priorities so far this year. the portfolio sale catalyzed improvements in a number of areas. It enabled us to reduce the amount of PIK income in the portfolio, increase portfolio diversity and decreased single name exposures and we also moderated our software exposure, which is a sector that has clearly been scrutinized by the market.

Additionally, our team was timely in their efforts to reprice the Wells Fargo credit facility from SOFR plus 195 to SOFR plus 185. This lower pricing maximizes the gap between our assets and liabilities ahead of what we feel will be a wider asset spread environment.

The next step in our process is to focus on monetizing some of our equity winners in the near and medium term. These actions will be dependent on continued strong portfolio performance and an improving M&A marketplace. And of course, redeploying equity proceeds into cash yielding loans could have a powerful impact on NMFC's earnings power and income quality.

As shown on Page 10, 91% of the portfolio is green on our risk rating scale. We continue to focus on transparent and accurate scoring with a few select names migrating negatively during the quarter, but risk ratings for the vast majority of the portfolio were stable. Importantly, our most challenged names, marked orange and red represent only 3.5% of NMFC's fair value, making them a small portion of the portfolio.

Turning to Page 11. We provide a graphical analysis of NAV changes during the quarter, resulting in a book value of $10.92 a $0.23 decline compared to $11.15 for Q4 pro forma for the impact of the secondary sale. The main driver of the decline this quarter was broader market movement, which accounted for 2/3 of the overall write-down.

The remaining 1/3 decrease was related to credit-specific movement. We see continued tailwinds at Benefits and UniTek that are offset by a restructuring process currently taking place at Affordable Care and an adjustment to our wind down assumption on North Star, which is currently in liquidation.

Today, NorthStar is a small position that represents approximately $20 million of value. We expect cash recovery on this name to begin next year. Finally, as Steve discussed, we aggressively repurchased shares this quarter, which represented $0.26 of book value accretion. Today, we maintain approximately $80 million of buyback authorization to repurchase additional shares in the future.

Page 12 addresses NMFC's credit performance. For the quarter, nonaccruals at fair value stood at 2.6%, which was a modest increase from last quarter. During the quarter, Affordable Care's first lien position and convey were added to the list.

Despite these migrations, we see an improving outlook for both names. We expect Affordable Care, a dental business specializing in higher-margin tooth replacement implant services to come off non accrual in the coming quarters as the lending group effectuates a change in control.

The new capital structure will include a smaller sized cash pay first lien loan and a large equity account controlled by the former lenders, the management team and the doctors. We believe a much lower debt burden and more overall financial flexibility will allow affordable care to recruit new talent pursue operational improvement and refocus on growth. CONVEY is a smaller health care services company that has faced operational challenges in some of its business units.

In partnership with the lender group, New Mountain has already recruited a new leader for the business, and we are optimistic about our ability to achieve a strong near-term recovery. In addition to Affordable Care and convey, we see multiple other near-term catalysts for existing nonaccruals to exit the portfolio and expect to be able to report positive migrations next quarter.

Finally, on the right side of the page, we show our cumulative credit performance since IPO. During that time, MFC has made approximately $10.5 billion of investments while realizing losses net of gains of $56 million. We remain focused on reversing unrealized losses through initiatives that we have discussed earlier on this call.

I will now turn the call over to our Chief Operating Officer, Laura Holson, to discuss the current market environment and provide more details on NMFC's quarterly performance.

Thanks, John. Since our call last quarter, the media has increased its scrutiny of the private credit asset class. We thought it would be helpful to address our perspective on some of those headlines. First, [ SaaS apocalypse ] Recent media coverage has implied that all software loans are bad and with private credit having approximately 30% exposure to software on average that such exposure presents significant risk. Consistent with John's commentary, not all software is created equal, particularly when thinking about AI.

While the technology continues to evolve real time, the market seems to be starting to delineate between the software businesses that are true systems of records with data or other moats versus the low-code point solution-type business models that we believe are more at risk.

As a reminder, in order for our primarily senior software loans to be impaired private equity capital junior to us would first need to be wiped out in full. Second, potential systemic credit stress. While the media has highlighted one-off examples, we are not seeing signs that there is a systemic credit stress across the asset class.

As evidenced by default rates that remain below the 10-year average. There are a handful of idiosyncratic challenges across the universe of direct lending loans. However, we have yet to see evidence that overall portfolios or certain subsectors are fundamentally impaired. We expect the primary driver of NAV declines this quarter to be mark-to-market movement in sympathy with the broadly syndicated loan market.

Third, heightened redemptions. There has been significant attention to the redemptions in the perpetual non traded BDCs in Q1. However, there have also been meaningful inflows to the asset class. Note that we don't view this as gating. This is how these funds have been designed to protect remaining investors given the underlying illiquid assets.

Importantly, the majority of the $2 trillion private credit market is funded by institutional investors. We are seeing more sophisticated investors, reconsider new allocation to the asset class as the supply/demand rebalances following the exit of some of the more headline-driven investors. Fourth, a sector-wide lack of transparency.

All PVCs disclosed in their schedule of investments, line-by-line detail of company name, industry, spread, maturity, par, fair value, et cetera. We believe we provide a heightened level of transparency, as John discussed earlier with our heat map, detailed industry classifications and leverage levels for each portfolio company.

All that said, M&A activity was seasonally slower in Q1 as expected, and further impacted by the AI-induced volatility. The backlog of potential private equity exits remains full, and there is still pressure to deploy private equity dry powder. So we remain cautiously optimistic about the outlook for 2026 and have started to see new deal activity pick up again in recent weeks.

We continue to believe direct lending remains an attractive asset class in today's market and provides good risk-adjusted returns and enhanced yield relative to other asset classes. We have seen some spread widening occur as compared to the 2025 type and a more meaningful increase in pricing dispersion.

The more challenging environment underscores the importance of our differentiated underwriting strategy, which allows us to go deeper on diligence, and identify the most compelling credit opportunities, both in the primary and secondary markets.

Page 14 presents an interest rate analysis that provides insight into the effective base rates on NMFC's earnings. As of 3/31, the NMFC loan portfolio was 89% floating rate and 11% fixed rate. While our liabilities were 73% floating rate and 27% fixed rate. As discussed over the last several quarters, we have meaningfully shifted this liability mix to increase the percentage of our liabilities that flow.

We are now nearly achieving our goal of matching our percent of liabilities that float with the percent of assets that float. Last year at this time, our liability mix was just 50% floating rate. As shown on the bottom table, we would expect to see earnings pressure in the scenarios where base rates decrease but the evolution of our liability structure helps to alleviate some of that pressure.

Moving on to Page 15. During Q1, PenamSC originated $117 million of assets offset by $492 million of sales and repayments, primarily related to the secondary portfolio sale. Our originations consisted of investments in our core defensive growth power alleys, including health care, business services and IT infrastructure and security.

We also purchased a few positions at meaningful discounts in the secondary market, where we believe we have a differentiated view and opportunity for meaningful book value upside if our thesis proves correct.

Turning to Page 16. Approximately 81% of our investments, inclusive of first lien, SLTs and net lease are senior in nature up from 77% in the prior year period. Approximately 5% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. We continue to dedicate meaningful time and resources to business building at these companies.

And as Steve mentioned, we believe we are making positive progress. Page 17 shows that the average yield of NMFC's portfolio increased to 11.1% during the quarter due to the higher yield on our originations as compared to our repayments as well as the higher for longer shift in the forward curve.

The higher yield on our originations relates in part to some of the secondary discounted purchases I mentioned when discussing our Q1 originations -- we continue to believe that yields remain attractive for the risk. Finally, as illustrated on Page 18, we have a diversified portfolio across 115 companies.

Excluding our investments in the SLP and net lease funds, the top 10 single name issuers account for just 24% of total fair value, down from 25.7% in the prior year. The progress here largely relates to the benefit of the secondary sale as we discussed last quarter.

I will now turn the call over to our Chief Financial Officer, Kris Corbett, to discuss our financial results.

Thank you, Laura. For more details, please refer to our quarterly report on Form 10-Q that was filed yesterday with the SEC. As shown on Slide 19, the portfolio had $2.3 billion in investments at fair value on March 31 and total assets of $2.4 billion. Total liabilities were $1.4 billion, of which total statutory debt outstanding was $1.2 billion.

Net asset value was $1 billion or $10.92 per share. At quarter end, our net debt-to-equity ratio was 1.08:1, which remains within our target range of 1x to 1.25x. On Slide 20, we show our quarterly income statement results. For the current quarter, we earned total investment income of $69 million, an 11% decrease compared to prior quarter.

Total net expenses of $37 million decreased 18% versus the prior quarter, inclusive of the fee waiver previously mentioned. Our adjusted net investment income for the quarter was $0.32 per weighted average share, which covered our Q1 dividend. Our earnings were driven by our strong core income and incentive fee waiver and the share repurchase program. Slide 21 highlights that 98% of our total investment income is recurring in the first quarter.

On the following page, you can see that 83% of our investment income was paid in cash, up from 77% prior quarter. of investment income was pick income from physicians that included Pick from inception to best enable these borrowers to execute on their strategic growth plans.

Only 3% of investment income is driven by modified PIK from an amendment or restructuring. Importantly, investments generating noncash income during the first quarter are marked at weighted average fair market value of 96% of par. During the quarter, we also collected approximately $35 million of previously accrued PIK income as part of the secondary sale.

Turning to Slide 23. The red line shows the coverage of our dividend. For Q2 2026, our Board of Directors has declared a dividend of $0.25 per share. On Slide 24, we highlight our various financing sources and diversified leverage profile.

As a reminder, our Wells Fargo facility is non-mark-to-market and tied to the operating performance of the underlying companies we lend to. New Mountain Finance Corporation has maintained a long and deep relationship with more than a dozen banks dating back over the course of our nearly 15 years as a public company.

NMFC benefits from the stability provided by these relationships from across the entire New Mountain platform. Taking into account SBA guaranteed debentures, we have over $2 billion of total borrowing capacity with approximately $690 million available on the revolving lines, subject to borrowing base limitations. This molten covers our unfunded commitments of $190 million.

Finally, on Slide 25, we show our leverage maturity schedule. We continue to ladder our maturities with less than 1% of outstanding debt maturing in 2026 and Notably, 60% of our outstanding debt matures in or after 2029. We remain focused on continuing to access the unsecured market in 2026.

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

Thank you, Chris. In closing, we would like to thank all of our stakeholders for the ongoing partnership and look forward to speaking to you again on our second quarter 2026 earnings call in August. I will now turn things back to the operator to begin Q&A. Operator? .

[Operator Instructions] We'll take our first question from Finian O'Shea with Wells Fargo Securities.

Just starting with a couple small items on the deck, the nonaccruals jumped a bit more than just convey would explain, I think, up to 1.43% at cost, seeing if there's anything else in there and then on the new fundings reported yield at 15.5%.

Is that sort of a simple average considering the discounted purchases? Or is there sort of extra economics embedded in something like the health span?

Thanks, Fin. Good morning. On nonaccruals, the 2 new nonaccruals were affordable care first lien I believe last quarter, we put the prep on nonaccrual, and we had mentioned on last quarter's call that Affordable Care would be going through a restructuring process, and that's still happening.

So the first lien is a new nonaccrual this quarter along with convey. So I think that would bridge the gap. And then as I mentioned in my comments, both of those, particularly affordable care should be coming off accrual in the near future over the next order.

As we set a new capital structure in place in conjunction with the rest of the lender group, which we feel very positive about. So we feel that this is a good moment for Affordable Care despite the fact that it is currently a nonaccrual.

And to your question, just around the yields of the Q1 originations. So it is a weighted average based on the dollars deployed. But there's no kind of in economics or anything, but it does take into account the OID or in some cases, for the secondary purchases, the material discount at which we bought those assets.

So what made it 15.5% then?

Yes. So if you look at our originations on Page 15 of the slide deck, you can see a couple of those originations were done at meaningful discounts because they were done in the secondary market.

As we touched on, we did find some more opportunistic investments over the course of the quarter were loans that we thought were misunderstood by the market. We had a differentiated view on. And so that accounts for the uptick in the yield this quarter.

Okay. And just a follow-up. SBIC II, you repaid some early, can you give us the sort of why on that and what that means for your go-forward debt stack?

It was a pretty modest amount that we repeat early there. As you know, the SBIC 1 and 2 are kind of out of their reinvestment period. And so just from a mechanical perspective, in some cases, to maximize liquidity, it makes more sense for us to do that. .

But we also have our third SBIC license that we can use from a ramp perspective as well. So there are some puts and takes when we look at our overall liability stack. But ultimately, that's what we did in Q1.

We'll move to our next question from Ethan Kaye with Lucid Capital Markets.

And congrats on the asset sale. But kind of with the asset sale in the rearview mirror now, already seeing some kind of progress deleveraging, diversifying and reducing PIC, et cetera. Hoping you can just talk about kind of the path forward with respect to these initiatives.

Like was the asset sale a first step, albeit a big one there's more to be done? Or do you kind of feel that the bulk of what needed to be done has been taken care of with the sale?

Sure. Thanks for the question. We think it was a big step forward, as Steve talked about, and we think that there's ongoing benefits from that asset sale that are even occurring today as we redeploy the proceeds. Really, the next step for us is some of the other positions that we talked about. When we think about our PIK income and some of our concentration in equity positions.

A lot of that is derived from a couple of big positions that are actually performing pretty well. We mentioned Benevis and UniTek and there are a couple of other small ones as well. And we're very focused on monetizing some of the PICC positions that are performing well as at nonyielding equity.

And I think we showed that in the deck a little bit. And we feel like that is the next step to becoming even more conforming having more cash income as a percentage of our total income, having more diversity. And we're really excited for that next step.

We think we're on the doorstep of really transforming the company as we monetize those positions over the next medium -- short to medium term.

Great. And then one on yields and spreads. So there is an uptick in portfolio yields quarter-on-quarter, sentinally some of that's due to the rotation of some of those non-income-producing assets, but you did also -- you guys mentioned redeploying some proceeds and higher spread widening, right?

So I'm wondering if you kind of have a sense of what share of that call it, 60 to 70 basis point yield increase was from rotating -- simply rotating those nonincome-producing assets versus how much was maybe attributable to kind of higher spread opportunities and then if you can just kind of quantify the increase in kind of spreads you're seeing on some of the on-the-run deals here, that would be helpful.

Sure. Yes. If you look at Page 17 of our deck, I think we try to lay out kind of the bridge, if you will. So it's not any one thing, I would say, when you look at the uptick in yield. It was a bit of the SOFR curve movement, a bit of the origination activity and a bit of the rotation piece. So it kind of all contributes to it.

I think the main driving factor as we talked about of the increase in Q1 origination yields related to some of those secondary opportunities. But stepping back a little bit to answer your broader question about what are we seeing in spreads.

I think in general, we've seen spreads for regular way deals probably widen to the tune of 25 to 50 basis points. So what was the SOFR 450 unitranche loan in late last year would probably be a silver 500 unitranche loan today with maybe a little bit more -- so that's kind of the generic loan.

And then if you look at anything more on the software ecosystem, we're probably seeing a little bit broader spread widening even than that. So instead of $500 million, that's probably 550 plus -- so directionally, that's kind of what we've been seeing in terms of opportunities, and that's why as John said, when we think about some of the benefits of the secondary sale, certainly redeploying into some of these newer assets is also a key component of that.

[Operator Instructions] We'll take our next question from Robert Dodd with Raymond James.

Congrats on getting the asset sales done and you've been kind of aggressive on the buyback. And I also want to say best of luck. I don't want to Chris on whatever he's heading off to. So a couple of questions.

I mean one of them ties in the context of Beavis and UniTek and some of the others, you talked about maybe monetizing those in the short to medium term or near to medium term, whatever the exact wording was.

And then Leo's comments that the M&A market is starting to pick back up. I mean -- what's the confidence level in moving some because obviously, I mean, the market has been a little suffice to say choppy. And normally, when it rebounds from a period like that, it's premium.

As assets that move first not to knock [indiscernible] but they have had issues in the past. I mean are they -- so what's the kind of where does the confidence come from that may be monetizable in the near to medium term, what I would have thought maybe a little longer for assets that have had issues in the past, given how the market tends to respond to that?

Sure. Thank you, Robert. That's a great question. I think the confidence really comes from the underlying performance of the businesses. So Benefit is in a more challenged sector. It's a dental business.

But we really feel we have a great management team. We have improving numbers, and we think that we've built a winner in what has been a more difficult space. And I think there should be really good value to investing in winters generally.

So that's where our confidence is derived from. I think the obvious challenge is that it has been a more difficult space. So we'll have to navigate that. And we believe that we have a good plan to do so as we think about the exit.

With regard to UniTek, that has been a bit of a long road, but we've really positioned the business to be right in the center of broadband build and this data center explosion and we're doing just a lot of work as it relates to multiple broadband initiatives around the country that have a lot of private and public funding, and we have a big backlog of projects that enact existing and new data centers.

And I think that boom as well discussed and well known about. So UniTek is just in a really good position, and it's executing well in what is, I think, a honesty. So that, I think, has all the positive elements going forward.

Got it. I'm kind of tied to the whole as the market is going to do most. I mean , Lou mentioned more dispersion in loan pricing. And that spread expansion, I mean, obviously, 25 to 50, 50-plus for software. I mean how why is the dispersion and kind of what's your appetite to play at the tight end of that versus the middle versus the wider end of that dispersion in terms of risk?

Yes. Well, I think like last year, for example, and we've talked about this in some of our calls last year, really no dispersion, right? Everything was pricing, and that's over 450 to 475 and that, we thought was a challenging dynamic, and we had the philosophy very much of staying safe because you're -- particularly last year, you're not getting paid for any extra incremental risk.

This year, so far, as I said, we are starting to see more dispersion. Some of that industry, as I alluded to, where software is now pricing wider but even just in general, I think we are starting to see a little bit more dispersion by industry, by size of the company, sponsor, et cetera.

Look, our philosophy hasn't changed. We're always focused on staying safe. As you know, we like the most defensive sectors of the economy. We do feel like our research engine is differentiated and allows us to pick the best credits within those safer sectors. So that continues to be our philosophy.

We're definitely not -- our goal is not to chase yield at the risk of credit. That being said, some of the opportunistic stuff that we did in Q1, we felt like we had high conviction on and really benefited from the knowledge base that the New Mountain ecosystem has. So that's how I would categorize it.

Robert, the only thing I would add...

The only quick thing I'd add is when you think about the dispersion within software, I perceive right now, it is pretty wide. I think it could be anywhere, as Laura was saying from 550 to 1,000. And that dispersion is driven by real and perceived views on the quality of the business model within different within the software ecosystem.

And I think that's a more exciting environment to invest in versus the environment that Laura was talking about earlier, where everything is pricing at $475 so I think lenders have the opportunity to take differentiated views in software and potentially get rewarded for making the good credit picks.

That's the one thing I would add to that commentary.

Got it, understood. And one more quick one, if I can. But obviously, it's pretty attractive. If we can get a high-quality loan at 65% in the secondary market and your stock trading at sometimes all at into the secondary and getting the appreciation that way might be attractive.

But you did just increase the buyback. You bought a lot in the first quarter. What's kind of your thinking right now on how attractive that buyback versus general deployments versus opportunistic secondary purchases kind of shake out?

Sure. I think we want to be balanced between managing the business at an appropriate leverage level, taking advantage of opportunities in the secondary market that we see continuing to support sponsor clients. .

As well as buying back stock when it's trading at a level that we think is too cheap. So I just think it's a balance of each and I think that's what we've done historically in the first quarter, and that's what we'll continue to do. So I guess that's the way I would answer that question.

[Operator Instructions] We'll go to our next question from Paul Johnson with KBW.

Just in terms of the credit statistics you provide on the PI portfolio, which is very helpful. I was wondering if you can kind of explain that it looked like there was a bigger drop within just the -- it looked like the green rated names of income generation within could drop to about 83% or so of that -- of those investments. With that because of something to do with just the asset sale or any new names that were placed on pick this quarter or if you can kind of maybe explain the change quarter-over-quarter.

Yes. I think the biggest driver, I mean, obviously, as folks have highlighted, our PIC percentage did come down pretty meaningfully. In the quarter, right, we were around 20% last quarter. This quarter, we're at about 15%. A large driver of that was the secondary sales we talked about.

That was one of the key focus areas, one of the drivers behind the secondary sale, amongst other reasons. And so just as the PIC composition just changed pretty meaningfully in 1 single quarter, that was the main driver of the decrease in percentage green versus anything -- any kind of dramatic movement.

We did see a little bit of heat map movement this quarter, as John talked about, but it was really more to former the secondary sales.

Got it. Okay. That's helpful. And then just on EBITDA trends within the portfolio, it looks like EBITDA kind of year-over-year up around 11% leverage declined a little bit, insurance coverage improved a little bit.

I mean is that pretty reflective in your opinion, just the underlying kind of trends within the portfolio here this quarter, I mean, we're within, I guess, just the broader context of a little bit more noise within the mark-to-market stuff as well as some credit-related marks this quarter as well. I'm wondering if you can kind of flip the 2 between just kind of the NAV marks and just in general, it looks like credit improvement on the quarter.

Yes. No, I think the takeaway that you're alluding to around just the EBITDA growth, the deleveraging in general, is consistent with what we're seeing. It's kind of a we get the benefit of this time of the year where we're getting a lot of Q4, Q1 and budget reporting from a lot of our portfolio companies.

And generally speaking, we think the portfolio is largely performing well. When we think about the NAV movement and John talked about this, but a good chunk of the NAV moving in the quarter, the majority of it related more to just peer mark-to-market and just reflecting the -- where the BSL market is currently trading as opposed to credit specific.

So in general, I do look at these trends and think it's illustrative of the portfolio. we did have the modest heat map degradation that I just talked about, but that, to me, was a little bit more idiosyncratic and also trying to reflect some of just the latest enterprise value multiples from the software market in particular.

[Operator Instructions] We'll take our next question from Sean-Paul Adams with B. Riley Securities.

It sounds like there was a couple of portfolio positives this quarter. It looks like there was a large wave of buybacks, it looks like you guys kind of alluded to that nonaccruals could go down in the next couple of quarters.

On just the origination volatility, I guess, what are your thoughts as far as just balancing out the current volume over the next couple of quarters? It looks like you guys got back to a lower leverage ratio. There's been some sizable like portfolio benefits in terms of spread.

But where you're looking at in terms of getting back to a target leverage range? Do you have thoughts about continuing the portfolio expansion given opportunistic levels? Or are you kind of more comfortable at your current levels and just looking for more opportunistic deals?

Yes. Thanks for the question. I would say when we think about our target leverage range, I think we've been pretty consistent in articulating the 1x to 1.25x, that's been our target leverage range for a long time at this point. And we are comfortable operating anywhere in that range. we obviously, post secondary sale had delevered slightly below that range as we talked about on last quarter's call and through the combination of some buybacks and some origination activity kind of migrated back to within the range.

Look, it's something that's hard to predict and pinpoint exactly, right, because just from a timing of origination and repayment perspective, those things are typically outside of our control. So I can't say that we have a specific target within the range. We are comfortable within the range.

And we certainly don't want to be -- there's a few quarters, I think, over the past few years that we were at the high end of the range every quarter, and that is not our goal. We want to be kind of within the range in general.

[Operator Instructions] It appears there are no further questions at this time. I'd like to turn the conference back over to John for any additional or closing remarks.

Great. Well, I would just like to thank everyone for joining our call today, and we look forward to speaking to everyone again in August. Thank you.

This concludes today's call. Thank you again for your participation. You may now disconnect, and have a great

Good day, and welcome to the New Mountain Finance Corporation Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. John Kline. Please go ahead.

Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's Fourth Quarter 2025 Earnings Call. On the line here with me today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Laura Holson, COO of NMFC; and Kris Corbett, CFO and Treasurer of NMFC. Steve is going to make some introductory remarks, but before he does, I'd like to ask Kris to make some important statements regarding today's call.

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 on our February 24 earnings press release. I would also like to call your attention to the customary safe harbor disclosure in our press release on Pages 2 and 3 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 referring to 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 7 of the slide presentation. Steve?

Thanks, Kris. It's great to be able to address you all today, both as NMFC's Chairman and as a major fellow shareholder. My belief is that NMFC is in a good position overall relative to general market conditions and particularly relative to where our stock trades today.

Adjusted net investment income for the fourth quarter was $0.32 per share covering our $0.32 per share dividend that was paid in cash on December 31. Our net investment income and dividend were supported by consistent recurring income from our loan portfolio, full utilization of the dividend protection program, which reduces our performance fee to 15% until the end of 2026, plus an additional and voluntary fee waiver by the manager of $2.4 million.

Looking forward to Q1, we would like to announce a $0.32 dividend payable on March 31 to shareholders of record as of March 17. Again, we as managers will reduce the performance fee to 15% pursuant to our pledge under the dividend protection program. We have also volunteered to make an additional optional waiver in order to fully cover this dividend.

Our December 31, 2025, net asset value declined to $11.52 per share compared to $12.06 per share, chiefly due to a lower valuation on the common equity piece of Edmentum. For broader perspective, Edmentum is actually a company that has grown well under NMFC's leadership participation. We inherited the keys to Edmentum when the company defaulted in 2015. We and other partners subsequently improved the business over the course of the next 5 years and then sold a majority stake to another sponsor and monetized a significant portion of our stake. We retained approximately a 10% common equity ownership stake after the sale, which reached a peak in value during the COVID years when Edmentum's virtual learning solutions were most in demand and which has since given back its value as earnings normalize post COVID and as noncash pay interest and dividends have accrued ahead of our common equity.

Altogether, NMFC historically invested $29 million into Edmentum's first lien, which was fully repaid at par with interest. NMFC has also invested $174 million into Edmentum related to our initial second lien investment from inception to date. We've realized back $166 million of cash proceeds to date against that $174 million comprised of $131 million of principal repayments and $36 million of interest and fees collected for nearly a onetime cash recovery. We've now reduced the valuation of the equity piece to just $5 million, but we also still hold $27 million in subordinated notes and $9 million of the most senior preferred equity tranche, which are valued at par.

So while the Edmentum position is down from last quarter, we do believe that business building has made the position more valuable than it might have been when it was one of our few defaults. Our goal is to help build back enterprise value and potential equity from here.

More generally, approximately 95% of NMFC's loan portfolio is ranked green on our heat map, approximately 5% is yellow or orange, and no names are ranked red. Approximately $17 million of positions improved in rating last quarter and no positions worsened.

New Mountain Capital itself as a firm has grown from 0 in assets under management in 2000 to approximately $60 billion today with a team of 300 people. Our private equity portfolio companies have produced over $100 billion of enterprise value gains for all shareholders while we have owned them while minimizing losses. More than ever, we see opportunities to use our expertise as owners and builders of businesses to select great credit investments.

Regarding the market's particular issues around software loans, I would make these personal observations. My career began in 1981 when the 10-year treasury rate was at a record high of 15.84%. And I have lived through multiple technology shifts including the introduction of personal computers, the Internet, the cloud and now AI. As a private equity firm, New Mountain has successfully owned, managed and built a number of software companies as a control shareholder. We have experienced successfully adding AI and machine learning to the product offerings of the businesses we own.

For many years, New Mountain private equity has been generally cautious in acquiring software companies because of the risk of enterprise value multiple compression from the roughly 20x EBITDA type averages to something lower as may, in fact, be occurring now. However, this is exactly why we have liked software loans where we can be under 40% of loan to value and some great performing names and therefore, sheltered for multiple compression. Also, all software companies and loans are not the same. The best software companies have thousands of repeat customers in place and therefore, may be in the best position to add AI agents and upgrades for their client base as these innovations come just as we added AI to certain of New Mountain's owned businesses.

These companies often also provide services or data far beyond pure software code in a way that AI simply cannot duplicate. We believe NMFC software loan portfolio fits this general description for high quality overall. So looking forward, what guidance can we give about NMFC's long-term performance? As a major shareholder myself, I believe there are a number of positive factors that justify NMFC shares trading back towards book value, and significantly higher than the roughly $8 or so level where they trade today.

First, as promised, we will continue to utilize the full dividend protection program, where we have pledged to reduce our incentive fee from 20% to 15% to the end of 2026. Further, we are now announcing that after the dividend protection period ends, we intend to voluntarily and permanently reduce our incentive fee to the same 15% level from its long-standing 20% level to show alignment with our shareholders.

Second, we have now signed an agreement to sell approximately $477 million of many of our hardest to value assets at a price meaningfully above where our stock trades. This sale is scheduled to close in March and will include a sizable piece of our Benevis term loan, several PIK and subordinated positions and some of our other most concentrated and illiquid assets, all at a price of 94% of our 12/31/25 marks, which we believe is essentially par less a normal transaction discount for a large concentrated block of this sale. The 6% discount on this sale will initially take our book value down by another approximately $0.35 to $11.17 per share, but with a more diversified and improved asset mix going forward. And again, at a level that is very meaningfully above where the stock market values us.

At the 15% performance fee rate, the long-term sustainable dividend rate for NMFC is now expected to be roughly $0.25 per share per quarter beginning in Q2 2026, due to continued base rate compression, lower market spreads and a reduction in some of our higher earning PIK securities. This assumes around $0.27 per share of quarterly net investment income, which will allow us to perhaps over-earn our dividend and build book value. A $1 per year dividend equates to a 9% yield on our pro forma book value and a 12% yield on our current share price. There are then potential paths to try to improve earnings and book value from there. The company will have more cash available for accretive stock buybacks. There is the chance for equity appreciation at companies like UniTek that are now projected by company management to be growing at a good rate. We also see opportunities to lend at slightly higher spreads and in some cases, to purchase specifically well-chosen loans at attractive discounts given this more uncertain environment in the debt markets.

I and my fellow NMC executives remain the largest shareholders of NMFC stock and our ownership position has been increasing over time. NMFC itself repurchased approximately $52 million of shares in 2025, approximately $15 million worth of shares thus far in 2026, and we have board authorization in place to buy approximately $80 million more. We thank you, as always, for your ownership and partnership, and we are working diligently to serve your interest in the months and years ahead.

With that, let me turn the call over to John for more details and comments.

Thank you, Steve. I would like to begin by offering more details on the $477 million asset sale, which we believe meaningfully diversifies our portfolio, reduces PIK income and enhances NMFC's financial flexibility. Starting on Page 9, you'll find a pie chart with the positions that we sold to a newly formed vehicle backed by Coller Capital. The portfolio is comprised of many of our largest positions, including Benevis, Dealer Tire, Alliance Animal Health and iCIMS. Overall, we sold 15 positions in the sale and reduced exposure to 7 of our 10 largest names.

Subordinated positions represented nearly 25% of the value of the secondary portfolio. 37% of these assets generate PIK income, including Benevis and Dealer Tire. 60% of the loans were originated in 2021 or earlier, and 33% of the portfolio are software-related companies. It's important to note that we believe these names are high-quality loans, but in nearly all cases, they had characteristics that were scrutinized by the market for reasons such as PIK interest, seniority, industry type or concentration.

Page 10 provides an overall update on the progress we have made on our strategic initiatives. Pro forma for the sale, our top 5 positions are now just 14% of NMFC's portfolio value. We expect this percentage to decrease as we redeploy proceeds from the sale primarily in first lien assets. Our senior oriented assets will now represent 81% of NMFC's portfolio up from 75% in the prior year.

Our post-sale leverage will decrease to 0.9x from 1.21x at the end of Q4. And during the quarter, we repaid our higher-cost convertible notes with proceeds from lower-cost credit lines. Overall, PIK income is expected to decrease by 20% to 25% as we redeploy the cash proceeds. It's worth noting that approximately 41% of our pro forma PIK income will be generated by Benevis and UniTek, which are performing very well. Benevis is in the midst of an impressive turnaround and UniTek can be an AI winner with good execution in 2026 and '27. Both are companies where New Mountain has control or co-control with another investor. Finally, as we consider our non-yielding positions, we see opportunities to monetize 1 or 2 other equity positions in coming quarters.

On Page 11, we show a pie chart of our industry exposure to our defensive growth-oriented sectors. We provide industry-specific classifications, including some new classifications so that our stakeholders have a clear understanding of our end markets, which we believe is particularly important in today's environment where there is heightened scrutiny on certain sectors. We want to continue to be a leader in providing investors with transparency on our investment exposures. As always, these sectors are areas of the economy where New Mountain private equity owns businesses and has differentiated insights and resources.

As we consider industry exposure, the impact of AI has been a major topic of conversation in the investing community, particularly as it relates to the software end market. On Page 12, we offer more details on our approach to AI at New Mountain. First and foremost, we acknowledge that there is an increased level of risk across various sectors related to AI, but there will also be great opportunities for well-informed lenders. We have consistently highlighted that the pace of technological change is one of our biggest focus areas as it relates to underwriting credit, constructing our portfolio and controlling risk. Our specific focus on AI is not new. In fact, we have had a firm-wide task force consisting of many of our both tech forward leaders and executive partners in place since the early days of ChatGPT.

Within the credit business, we have a standardized system for evaluating new investments and existing portfolio companies for AI-driven disruption. And as Steve highlighted, as a firm, we have 20-plus years of industry experience managing and owning software businesses. When we consider the capital structures of software loans within NMFC, it's important to remember that these positions have significantly higher sponsor equity contributions and lower loan to values than both our non-software loans and the marketplace in general.

If we apply a 25% discount to the enterprise value of every software loan in our portfolio, the capital structures remain in line with the rest of the portfolio and the market in general. As it relates to the underlying characteristics of our software portfolio companies, we believe that most of our investments sell sticky solutions at a fair price to a large and diversified set of customers. Additionally, many of our portfolio companies offer compelling expertise in specific industry verticals and hold valuable proprietary data that serves underlying customers or have material network effects.

In some cases, shorter maturities can be a catalyst for near-term takeouts on certain of our performing positions. As shown on Page 13, the internal risk ratings remain consistent with approximately 95% of the portfolio green rated. We had 2 investments migrate positively on our rating scale due to improved capital structure and outlook. Importantly, there are no names in the portfolio rated in the red category, and our most challenged names, marked orange represent only 3.2% of NMFC's fair value, making them a small portion of the portfolio.

Turning to Page 14. We provide a graphical analysis of NAV changes during the quarter, resulting in a book value of $11.52, a $0.54 decline compared to last quarter. The main drivers of the decline this quarter were Edmentum and Affordable Care, partially offset by a handful of unrealized gains and accretive share repurchases. Biggest mover representing 2/3 of the Q4 book value decline was in Edmentum, which was covered by Steve earlier in the call. While we have reduced the value of the common equity meaningfully, we are maintaining consistent valuations on the subordinated debt and preferred equity, which are meaningfully more senior in the capital structure.

The other material valuation change representing approximately 20% of the Q4 decline was Affordable Care, a specialty dental practice management business that has been orange on our heat map for a while. Due to the continuing operating underperformance, combined with a highly leveraged capital structure, we expect this business to restructure in the near term. While performance has been challenged, we are hopeful that a debt for equity swap could be a catalyst for improved overall prospects.

Page 15 addresses NMFC's non-accrual performance. During the quarter, we completed the restructuring of Beauty Industries, reinstating a portion of the debt on full accrual and equitizing the rest providing us with a significant ownership stake and an opportunity to achieve upside over time. Offsetting this, we moved our preferred equity investment in Affordable Care and our first lien debt position in DCA to nonaccrual status. We expect DCA to be back on accrual in Q2.

Overall, non-accruals continue to be very low, comprising just 1.4% of the portfolio at fair value. On the right side of the page, we show our cumulative credit performance since IPO. During that time, NMFC has made nearly $10.4 billion of investments while realizing losses, net of realized gains of $24 million.

On Page 16, we present NMFC's consistent returns over the last 15 years. Cumulatively, NMFC has earned $1.5 billion in net investment income while generating $24 million of cumulative net realized losses and $211 million of cumulative net unrealized depreciation, resulting in approximately $1.3 billion of value created for shareholders. While the realized loss rate remains very strong, we, as a management team, are focused on reversing the unrealized depreciation within the existing portfolio.

I will now turn the call over to our Chief Operating Officer, Laura Holson, to discuss the current market environment and provide more details on NMFC's quarterly performance.

Thanks, John. As previewed on last quarter's call, we saw a flurry of deal activity at the end of 2025. The backlog of potential private equity exits remains full and there is ongoing pressure to deploy private equity dry powder. That said, the recent AI-induced market volatility will likely impact M&A activity for the foreseeable future. We continue to believe direct lending remains an attractive asset class in today's market and provides good risk-adjusted returns and enhanced yield relative to other asset classes.

We also think the value proposition of direct lending, particularly resonates with sponsors during periods of volatility. Direct lending spreads were reasonably stable in 2025, albeit at the tighter end of spreads over the course of unitranche history. We are starting to see signs of some spread widening as well as an increase in pricing dispersion. We are excited about the prospect of having some dry powder from the portfolio sale to deploy into these conditions. However, our underwriting bar remains higher than ever, and our pass rate on deals has increased. The more challenging environment underscores the importance of our differentiated underwriting strategy, which allows us to go deeper on diligence and identify the most compelling credit opportunities.

Page 18 presents an interest rate analysis that provides insight into the effect of base rates on NMFC's earnings. As of 12/31, the NMFC loan portfolio was 85% floating rate and 15% fixed rate, while our liabilities were 65% floating rate and 35% fixed rate. Pro forma for the anticipated refinancing activity in 2026, we expect our mix will shift meaningfully to approximately 79% floating and 21% fixed. This will more closely align us with our target of matching our percent of liabilities that float with the percent of our assets that float. As shown in the bottom table, while we would expect to see earnings pressure in the scenarios where base rates decrease, the ongoing evolution of our liability structure helps to alleviate some of that pressure.

Moving on to Page 19, despite the active Q4 across New Mountain's credit platform overall, NMFC saw modest originations in the fourth quarter. As previewed on our last call, we remain reasonably fully invested and therefore, originated just $30 million of assets during the quarter, which was offset by $195 million of repayments and sales. Repayment velocity remains strong, and we have line of sight into some additional expected repayments in the coming quarters. As mentioned earlier, the portfolio sale provides meaningful capacity for us to deploy in the coming quarters.

Turning to Page 20. Pro forma for the portfolio sale approximately 81% of our investments, inclusive of first lien, SLPs and net lease or senior in nature, up from 75% in the prior year period. The secondary sale provides meaningful capacity for deployment, which we anticipate investing primarily in first lien assets. Approximately 4% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. We continue to dedicate meaningful time and resources to business building at these companies, as Steve discussed earlier.

Finally, as illustrated on Page 21, pro forma for the portfolio sale with a meaningfully more diversified portfolio across 113 companies. Excluding our investments in the SLPs and net lease funds, the top 10 single name issuers account for just 22.8% of total fair value, down from 25.6% last quarter. As we redeploy the secondary sale proceeds, we anticipate the diversification of the portfolio to improve further.

I will now turn the call over to our Chief Financial Officer, Kris Corbett, to discuss our financial results.

Thank you, Laura. For more details, please refer to our quarterly report on Form 10-K that was filed yesterday with the SEC.

As shown on Slide 22, the portfolio had $2.8 billion of investments at fair value on December 31 and total assets of $2.9 billion. Total liabilities were $1.7 billion, of which total statutory debt outstanding was $1.5 billion. Net asset value of $1.2 billion or $11.52 per share was down 4.5% compared to prior quarter. At quarter end, our net debt-to-equity ratio was 1.21:1 and pro forma for the secondary sale, our net debt-to-equity ratio decreases to approximately 0.9x.

On Slide 23, we show our quarterly income statement results. For the current quarter, we earned total investment income of $77 million, a 4% decrease compared to prior quarter. Total net expenses of $44 million, decreased 5% versus prior quarter, inclusive of the fee waiver previously mentioned. Our adjusted net investment income for the quarter was $0.32 per weighted average share, which covered our Q4 dividend. Our earnings were driven by our strong core income and effective incentive fee rate of 8.4% and the share repurchase program.

Slide 24 highlights that 97% of our total investment income is recurring in the fourth quarter. On the following page, you can see that 77% of our investment income was paid in cash and 15% was PIK income from positions that included PIK from inception to best enable these borrowers to execute on their strategic growth plans. Only 4% of investment income is driven by modified PIK from an amendment or restructuring. Importantly, investments generating noncash income during the fourth quarter are marked at a weighted average fair market value of approximately 98% of par and approximately 94% of this income is generated from our green rated names. In addition, 2025 year-to-date, we collected approximately $35 million of previously accrued PIK income in cash.

Turning to Slide 26. The red line shows the coverage of our dividend. For Q1 2026, our Board of Directors has again declared a dividend of $0.32 per share.

On Slide 27, we highlight our various financing sources and diversified leverage profile. As John noted, during the quarter, we repaid the 7.5% convertible notes. And subsequent to year-end, we also repaid the 2021 unsecured bond using our lower-cost revolver and holdings credit facilities. Taking into account, SBA guaranteed debentures, we have $2.3 billion of total borrowing capacity with approximately $650 million available on our revolving lines subject to borrowing base limitations as of January 30. This more than covers our unfunded commitments of $210 million as well as our near-term bond maturity.

Finally, on Slide 28, we show our leverage maturity schedule. We continue to ladder our maturities and has sufficient liquidity to manage upcoming maturities. Notably, 65% of our debt matures in or after 2028. We remain focused on continuing to access the unsecured market.

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

Thank you, Kris. In closing, we would like to thank all of our stakeholders for the ongoing partnership and look forward to speaking to you again on our first quarter 2026 earnings call in May.

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

[Operator Instructions] And the first question will come from Finian O'Shea with Wells Fargo.

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?

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.

Okay. That's helpful. And just a follow-up. Looking at the portfolio, there's a couple of names that most of us are probably happy to see go. Benevis, that was a big restructuring. It has overall deeper vintage, so more good than bad. But it wasn't, say, totally the group of names that were more likely really holding you down on a stock price perspective. So I guess sort of question is, did you try to sell any of the more struggling depressed, so forth assets? Or was this more of a, hey, let's move the clean, easy to explain kind of stuff?

Sure. Thanks for that. I mean, overall, we like our portfolio. We think we have a lot of good assets. Steve talked about some assets that -- where we have hopes for equity gains in the future. I spoke about the same thing. So our portfolio is roughly 95% green. So we like our portfolio. We don't think there are a lot of terrible assets we're looking to unload on someone. That's not the mindset we have. The mindset around this transaction, and we previewed this for many, many quarters is that we feel, if we're self-critical, we feel like we have a little bit too much concentration in this, in NMFC. Our biggest positions are way too big. They're bigger than we want them to be. And we have PIK income that is higher than what our targets are. So we just felt like the sale overnight enables us to deliver on our strategic initiatives very quickly. And I think in some ways, Benevis has been a position that's probably been scrutinized by a lot of investors because it is a restructuring. It's gotten very big. In a lot of ways, I think this is extremely validating of the value and the progress we've made on Benevis. So we're quite pleased with that.

And it's important to note that we retain all the upside and Benevis to the extent we can continue to steer that company in what we think is a good direction. So it's really driven by the fact that we can reduce our PIK. We can reduce subordinated positions. We talked about how we did that. And there is some earlier vintage assets, which isn't necessarily a bad thing. But again, I think it's very much scrutinized by the market. So that's the way we think about the sale. I think it's worth noting as well that in an environment where software is heavily scrutinized, we did sell a bunch of software loans. Now we think they're good software loans. But the margin, I'm sure there are some investors that feel better about the fact that we're slightly lower in our software exposure. So that's just an additional point I want to make to you.

[Operator Instructions] Our next question will come from Ethan Kaye with Lucid Capital Markets.

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.

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.

Got it. Okay. So it was more of a -- you selected the assets and shopped them as opposed to more of a, I guess, bilateral type process.

Yes, that's a good point. I mean, it wasn't -- it was very much driven by our goals and desires, which we've talked about very openly. So that's a great point. I'm happy you helped us clarify that is that we really chose the assets that we felt were the most concentrated or in some cases, had the PIK characteristics. It wasn't that people were reverse inquiring to us on the assets that they wanted to buy.

The other final thing I'd say, I think this was talked about in our comments is some of these assets are just I think in the eyes of our shareholders, tougher to value, tougher to have transparency into. And so again, we feel like on some of these tougher to value assets or -- I don't want to say opaque, but these assets that are a little bit less obvious and in some cases, in assets that have had a material turnaround, we thought it was incredibly validating to have a third party come in and price those assets at a price that is very supportive of our marks.

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?

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.

Okay. It looks like there are no more questions in the queue. We'll conclude today's call. Thank you for everyone's participation, and we look forward to speaking to you again very soon.

Goodbye.

Good morning, and welcome to the New Mountain Finance Corporation's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO of NMFC. Please go ahead.

Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's Third Quarter 2025 Earnings Call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Laura Holson, COO of NMFC; and Kris Corbett, CFO and Treasurer of NMFC. Steve is going to make some introductory remarks, but before he does, I'd like to ask Kris to make some important statements regarding today's call.

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 November 3 press release.

I would also like to call your attention to the customary safe harbor disclosures in our press release and on Pages 2 and 3 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'll 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 5 of the slide presentation. Steve?

Thanks, Kris. It's great to be able to address you all today, both as NMFC's Chairman and as a major fellow shareholder. Adjusted net investment income for the quarter was $0.32 per share, covering our $0.32 per share dividend that was paid in cash on September 30. Our net investment income and dividend were supported by consistent recurring income from our loan portfolio, full utilization of the dividend protection program, which remains in place through the fourth quarter of 2026 and an incremental fee waiver. Looking forward to Q4, we would like to announce a $0.32 dividend payable on December 31 to shareholders of record on December 17.

Our net asset value per share declined $0.15 compared to Q2, to $12.06 as NMFC experienced modest decline across four investments, which John will address later in the call. Importantly, however, approximately 95% of our investments are green on our heat map. As a reminder, NMFC lends chiefly in defensive growth sectors such as health care information technology software, insurance services and infrastructure services, which New Mountain Capital knows well from its private equity ownership activities. Furthermore, NMFC's portfolio loan to value stands at just 45%. Our lending lines are being refinanced at lower rates and our percentage of first lien assets is growing.

Since our IPO of NMFC in 2011, our stock has generally been a strong performer with consistent earnings and just a 1 basis point total net realized loss rate. I and my fellow managers at New Mountain are the largest shareholders of NMFC and have steadily increased our ownership level over time. Despite these strengths, NMFC's current stock price implies a 20% discount to book value and the dividend of $0.32 quarterly or $1.28 annually, represents more than a 13% yield. Therefore, over the course of the past 7 months, NMFC has fully utilized the $50 million 10b5-1 stock repurchase program with total shares repurchased this year of approximately $47 million at an average price of approximately $10. Our Board recently has approved a new share buyback program totaling an additional $100 million. Additionally, we are also now exploring a portfolio sale of up to $500 million of NMFC assets to a third party, which would accelerate our progress on our strategic initiatives meaningfully. For example, we could potentially sell assets of well-performing names in order to reduce concentrations in our portfolio and to reduce PIK income. This would enhance our financial flexibility in what could be a better deal environment in 2026 as well as provide us with an opportunity to evaluate debt paydowns and/or increase the size of our stock buyback program. While it is early in the process and the outcome is uncertain, we expect to be able to provide a fulsome update on our next call in February, if not before.

As a reminder, New Mountain Capital overall now manages about $60 billion in assets. We have generated an estimated $100 billion of enterprise value gains for all shareholders at our private equity company since the firm's inception, and we currently employ over 90,000 people at our PE companies in the field, which is roughly equivalent to #78 on the Fortune 1000. New Mountain's own team has now grown to nearly 300 employees and senior advisers, plus approximately 70 more members on our Executive Advisory Council. Our goal is to apply the same PE business building skill and knowledge to benefit NMFC and our credit platform as a whole. We thank you for your ownership and partnership and we are working diligently to serve your interests in the months and years ahead. With that, let me turn the call to John.

Thank you, Steve. I would like to begin on Page 8, which offers an overview of our differentiated approach to direct lending. First and foremost, we focus only on sectors of the economy that we believe are defensive and have sustainable tailwinds that will benefit companies within these chosen sectors. We do not invest in industries that are volatile, cyclical or secularly challenged. Secondly, we believe that we have a better model for research as New Mountain uses in-house industry executives and private equity personnel to underwrite direct lending deals within our chosen sectors. If an investment underperforms and we are compelled to take an ownership stake, New Mountain is well positioned to improve the business as an equity owner, utilizing our private equity expertise and in-house operating talent. Finally, we continue to have very strong shareholder alignment with 14% of our outstanding shares owned by NMC employees and senior advisers, and we actively support shareholder returns through the dividend protection program, additional fee waivers and the incremental share repurchase program Steve just announced.

Page 9 provides key performance statistics showing a long-term track record of delivering consistent, enhanced yield by minimizing credit losses and distributing virtually all of our excess income to shareholders. Since our IPO in 2011, NMFC has returned approximately $1.5 billion to shareholders through our dividend program, generating an annualized return of 10%. Today, our dividend yield is over 13% annualized based on the $0.32 quarterly payout, which is fully covered by net investment income.

We have been a good steward of capital with negligible net realized losses over 14-plus years, and we maintain investment-grade ratings at Moody's and Fitch.

Turning to Page 10. NMFC continues to make progress on its strategic priorities which focus on improving the quality and diversity of our asset base, optimizing our liabilities and enhancing the quality and character of our income. To that end, in Q3, we increased our senior oriented assets to 80% of the overall portfolio, up from 78% in the prior quarter. As Steve mentioned earlier, if successful, the potential secondary sale is designed to improve portfolio diversity by reducing exposure to certain more concentrated positions and to decrease our exposure to PIK assets.

On the liability side, subsequent to quarter end, we repaid the 7.5% convertible notes at maturity and see an opportunity to refinance the 8.25% unsecured notes in the coming quarters. Finally, we continue to focus on reducing non-yielding assets in 2026. Notably, many of our non-yielding assets are associated with companies with improving performance including Benevis, UniTek and Applied Cleveland.

As shown on Pages 11 and 12, the internal risk ratings of our portfolio decreased slightly during the quarter with approximately 95% of the portfolio green rated. At the margin, we did see a few select names migrate down our rating scale, representing $49 million or less than 2% of the portfolio. These migrations, including two health care services names that continue to experience lower growth and higher operating costs as well as a commercial restoration services company that has been impacted by a lack of severe weather activity. Despite the modest negative move in overall risk ratings, our most challenged names, marked orange and red represent only 3.6% of NMFC's fair value, making them a small portion of the portfolio.

Turning to Page 13. We provide a graphical analysis of NAV changes during the quarter, resulting in a book value of $12.06, a $0.15 decline compared to last quarter. The main drivers of the decline this quarter were Edmentum, TriMark and Beauty Industry Group, partially offset by a handful of unrealized gains and accretive share repurchases. The biggest negative mover Edmentum is performing well but our mark continues to be pressured by the expensive PIK securities that sit senior to our common equity exposure.

We are in the process of exploring a capital structure refinancing to reduce the overall cost of capital and limit future dilution from these securities. Additionally, Edmentum continues to be active on the M&A front and recently completed a tuck-in acquisition that will accelerate its career learning product portfolio, a growth area of the business. We are excited about the acquisition and believe Edmentum is well positioned in this area.

Page 14 addresses NMFC's nonaccrual performance. During the quarter, we moved our first lien debt position in Beauty Industry Group to nonaccrual status and expect to equitize a portion of this debt position in the coming months. The company has experienced persistent earnings headwinds due to weaker consumer demand, specific go-to-market challenges and tariffs on its China-oriented supply chain. In coordination with the other lender, we have built a large New Mountain team that will be focused on improving this investment. The team includes members of the core credit team, the PE Consumer Group, NMC operating partners and additional industry executives that we work with. Our goal is to, over time, recover at least our full principal value on this investment. Overall, nonaccruals continue to be very low with only $51 million or 1.7% of the portfolio on nonaccrual at fair value.

On the right side of the page, we show our cumulative credit performance since IPO. During that time, NMFC has made over $10.3 billion of investments while realizing losses net of realized gains of just $16 million over the course of our history as a public company.

On Page 15, we present NMFC's consistent returns over the last 14-plus years. Cumulatively, NMFC has earned approximately $1.5 billion in net investment income while generating only $16 million of cumulative net realized losses and $159 million of cumulative net realized depreciation, resulting in $1.3 billion of value created for shareholders. While the realized loss rate remains very strong, we, as a management team, are focused on reversing the unrealized depreciation within the existing portfolio. I will now turn the call over to our Chief Operating Officer, Laura Holson, to discuss the current market environment and provide more details on NMFC's quarterly performance.

Thanks, John. As previewed on last quarter's call, we have seen deal activity pick up modestly over the last few months. The pipeline of potential PE exits remains exceptionally full given the extended hold times for many PE-owned assets. The pressure to both deploy dry powder and return capital to LPs are key drivers of sponsor activity. As confidence builds, we think 2026 could be a productive period for LBO activity and have already started seeing signs of that.

We believe direct lending remains an attractive asset class in today's market, and continues to provide good risk-adjusted returns relative to other asset classes, including the syndicated loan market, which continues to experience meaningful repricing waves. Direct lending spreads, while tighter than 12 months ago, have been reasonably stable despite the lack of significant M&A. That said, one result of the supply/demand imbalance is a notable lack of dispersion in pricing. Most unitranche loans are pricing at the SOFR plus 450 to 500 range even for lower quality or smaller companies. While we continue to find opportunities in our defensive growth verticals where we can make loans that attach $1.01 in the capital structure at 8.5% plus unlevered returns, our underwriting bar remains higher than ever, and our pass rate on deals has increased.

The more challenging environment underscores the importance of our differentiated underwriting strategy, which allows us to go deeper on diligence and identify the best credit opportunities. Deal structures generally remain attractive with significant sponsor equity contribution, representing the majority of the capital structures.

Page 17 presents an interest rate analysis that provides insight into the effective base rates on NMFC's earnings. The NMFC loan portfolio is 85% floating rate and 15% fixed rate, while our liabilities are 53% floating rate and 47% fixed rate. Pro forma for the expected upcoming refinancing activity over the next several months, we expect our mix will shift meaningfully to approximately 85% floating and 15% fixed. This will align us with our target of matching our percent of liabilities that float with the percent of our assets that float. As shown in the bottom tables, while we would expect to see earnings pressure in the scenarios where base rates decrease, the ongoing evolution of our liability structure helps to alleviate some of that pressure.

Moving on to Page 18. The third quarter was a modest origination quarter. We originated $127 million of assets, offset by $177 million of repayments. Our originations consisted of investments in our core defensive growth power alleys including ERP and IT software, data and information services and financial services. Notable repayments in the quarter included 3 second lien positions, which we've rotated into predominantly first lien securities. Repayment velocity remains strong, and we have line of sight into some additional expected repayments in the coming quarters. While we remain reasonably fully invested, as we receive repayments, we'll likely continue to prioritize share repurchases over new investments if our stock remains at current levels.

Turning to Page 19. Approximately 80% of our investments, inclusive of first lien SLPs and net lease are senior in nature, up from 75% in the prior year period and up from 78% in Q2. Second lien positions now represent just 4% of our portfolio given the continued repayment activity we've seen in our second lien names. Approximately 5% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. We continue to dedicate meaningful time and resources to business building at these companies and are pleased with the progress we are seeing.

Page 20 shows that the average yield of NMFC's portfolio decreased slightly to 10.4% due to lower yields on our originations compared to our repayments as we continue to rotate more senior. Despite this, we believe total yields remain attractive for the risk.

Page 21 highlights the scale and positive credit trends of our underlying borrowers, which remain largely consistent with prior quarters. The weighted average EBITDA of our portfolio companies increased slightly in the third quarter to $180 million due to growth at the individual companies we lend to and realization of some smaller companies during the quarter. We also show the relevant leverage and interest coverage stats across the portfolio. Loan-to-value continues to be quite compelling, and the current portfolio has an average loan-to-value of 45%.

Finally, as illustrated on Page 22, we have a diversified portfolio across 127 portfolio companies. Excluding our investments in the SLPs and net lease funds the top 10 single name issuers account for 26% of total fair value. I will now turn the call over to our Chief Financial Officer, Kris Corbett, to discuss our financial results.

Thank you, Laura. For more details, please refer to our quarterly report on Form 10-Q that was filed yesterday with the SEC. As shown on Slide 23, the portfolio had $3 billion in investments at fair value on September 30 and total assets of $3.1 billion. Total liabilities were $1.8 billion, of which total statutory debt outstanding was $1.6 billion. Net asset value of $1.3 billion or $12.06 per share was down slightly compared to the prior quarter. At quarter end, our net debt-to-equity ratio was 1.23:1, within our target range of 1:1.25. We remain committed to maintaining leverage within this range.

On Slide 24, we show our quarterly income statement results. For the current quarter, we earned total investment income of $80 million, a 4% decrease compared to prior quarter. Total net expenses of $47 million, decreased 5% versus the prior quarter, inclusive of the fee waiver previously mentioned. Our adjusted net investment income for the quarter was $0.32 per weighted average share, which covered our Q3 dividend. Our earnings were driven by our strong core income and effective incentive fee rate of 7.6% and the share repurchase program.

Slide 25 represents that 97% of our total investment income is recurring in the third quarter. On the following page, you can see that 80% of our investment income was paid in cash and 15% was PIK income from positions that included PIK from inception to best enable these borrowers to execute on their strategic growth plans. Only 3% of investment income is driven by modified PIK from an amendment or restructuring. Importantly, investments generating noncash income during the third quarter are marked at a weighted average fair market value of 95% of par and over 92% of this income is generated from our green rated names.

Turning to Slide 27. The red line shows the coverage of our dividend. For Q4 2025, our Board of Directors has again declared a dividend of $0.32 per share.

On Slide 29, we highlight our various financing sources and diversified leverage profile. Taking into account SBA guaranteed debentures, we have $2.5 billion of total borrowing capacity with over $700 million available on our revolving lines subject to borrowing base limitations pro forma for the convertible note that was repaid in October. This more than covers our unfunded commitments of $256 million as well as our near-term bond maturity. As John noted, subsequent to quarter end, we repaid the 7.5% convertible notes utilizing our lower-cost revolver. Looking forward to the next few months, the facilities outlined it red and the recently repaid convertible notes provide us with an opportunity to refinance and either maintain or potentially reduce our cost of financing in the near term. We believe this contrasts with the industry, which faces an increased cost of financing as debt issued in 2020 and 2021 mature.

Finally, on Slide 30, we show our leverage maturity schedule. We continue to ladder our maturities and have sufficient liquidity to manage upcoming maturities in early 2026. Notably, approximately 60% of our outstanding debt matures in or after 2028, with near-term maturities representing an opportunity to continue to access the investment-grade bond market. With that, I'd like to turn the call back over to John.

Thank you, Kris. In closing, we would like to thank all of our stakeholders for the ongoing partnership and look forward to speaking to you again on our fourth quarter 2025 earnings call in February. I will now turn things back to the operator to begin Q&A. Operator?

[Operator Instructions] The first question comes from Finian O'Shea with Wells Fargo.

A question on the potential portfolio sale, $500 million seems to imply perhaps a little bit of the affiliate or control book. Correct me if I'm wrong there. And -- if so, would it be sort of centered around that, the legacy equity names? Or should we think more regular way participation or just -- regular way debt deals on the portfolio sale.

Sure. Fin, thanks for the question. The way we're thinking about the sale is, we're focused on our biggest positions. As you know, we really want to diversify our portfolio. So if you were to look at the top 10 or 20 positions, there'll be names from within that group as well as some other names throughout the book. And it would -- the portfolio sale would address PIK names, but also cash-yielding names that are our larger exposures for NMFC. So that's really our goal. Our goal is to diversify and also reduce PIK income. But the portfolio is a group of well-performing quality names with a mix of interest, characteristics, PIK and cash.

Okay. That's helpful. And then a follow-up on the buyback. You were more aggressive this quarter at lower prices, which is great and then announced a larger program. Should we expect you to continue to be aggressive? Or maybe has that sort of run its course for now at your leverage levels and then overall and in consideration for a potential portfolio sale?

Sure. So I'd say the most important thing as we just think about managing the portfolio and the company is we want to stay within the leverage levels. That is very important to us. At the end of the quarter, you'll see that we were at the high end of our range, but still within the range. So we remain committed to that range going forward. We also see good deal environment or a deal environment that's getting better in the fourth quarter. So there will be -- we expect a lot of repayments throughout the portfolio, both in Q4 and into 2026. So at the margin, as Laura talked about, that does free us up to potentially focus using some of the proceeds from repayments to buy back stock, but we do want to remain, as I said earlier, remain very committed to our leverage range.

The next question comes from Ethan Kaye with Lucid Capital Markets.

I wanted to ask about kind of deployment capacity or strategy, kind of following up on the last question here. And Laura, you may have touched on this a bit in your prepared remarks, but given that leverage is at the high end of the range and you're repurchasing shares. I guess my question is like, are you still allocating to kind of all the deals that you maybe would have in the absence of these constraints? Or are you kind of shifting the goalpost a bit and becoming more selective on kind of the deals you're pursuing?

Yes. I mean I think when we look at NMFC specifically, we do remain focused, as John said, on staying within our leverage range, and we are prioritizing share repurchases assuming our stock price remains kind of at this level. That said, that's not a black or white thing, right? We're evaluating each deal opportunity that comes in. We have a broader credit platform, as you know. So we're definitely active in the market regardless even when NMFC is not as active. We do see spreads, as I talked about. While they're reasonably stable, they're definitely a bit on the tighter end of where they have been over the course of the history of unitranche loans. But we still think, in general, still attractive risk-adjusted return. But given the desire around leverage, given the desire around our share repurchase program, those are some of the factors that we're thinking about when allocating.

Okay. Great. I appreciate that. And then just kind of switching gears a little on the potential secondary sale. So hit on it briefly, but I guess can you talk a little bit more maybe about how you would kind of prioritize the use of the proceeds from that sale? Would the idea be to kind of redeploy those into new investments or pay down debt or something else? Yes, I'll leave it there.

Sure. I think it could be any of three things. It could be paying down debt. It could be stock repurchases, depending on where our stock is trading, if and when we consummate the sale, and we could also use the proceeds to buy new loans. And those new loans would be a diversifier compared to where we are today. So we're excited about all three options.

The next question comes from Paul Johnson with KBW.

Just one or two more on the portfolio sale. I'm just wondering when you do the portfolio sale, is this going to be something that's kind of like a strip of -- sale of a strip of investments where you're kind of partially selling existing positions or kind of more of a selective whole position sort of sale to the third party of those debt investments?

Sure. Thanks, Paul. So I just want to clarify, the sale is still in very early stages, so it may or may not happen. As you may be aware, some of the trade press picked up on the fact that we were doing it. So we thought it was appropriate to tell our shareholders about it, but it is still pretty early stages. So I just wanted to make that note. And if I were to characterize the way we're thinking about it, I would think about it more as a partial sale of existing quality, well-performing positions that focus on more diversifying our portfolio as well as reducing PIK. So we're not blowing out of names, so to speak. Instead, we're focused on rightsizing a well-performing group of positions to add more diversity to the portfolio with less PIK income, just to be super clear.

Got it. Appreciate that. And then on the diversification, I guess, how would you kind of focus on that going forward? Would it be smaller? Would you be looking to hold smaller position sizes on new deployment going forward?

Yes. So we have a vibrant direct lending business, both within NMFC and in institutional funds that we manage. So we've grown over the course of the last 5 to 7 years pretty nicely, which has allowed us to speak for bigger hold sizes, but we're not totally reliant on NMFC effectuating those hold sizes. So the way we manage a lot of our institutional funds, and we've done this over the last 4 or 5 years, and it has been our focus in NMFC as well is that we generally want to have our position sizes be 2% or lower, and the average position size across our funds, whether it's NMFC or our institutional funds, we want to be 1% or lower. We've been going in that direction for a long period of time in NMFC. We just need to -- we feel, accelerate that and just finalize the movement towards a 2% max and a 1% or less average. This sale won't totally get us there, but it will get us almost there. And I think that's a big milestone for NMFC. That's really the way we want to manage the portfolio. What we're trying to deliver our investors across all of our funds is a New Mountain Best Ideas fund, but we don't want any of the positions to be as big as 2.5%, 3%, 4%. We do have some positions that big today in NMFC and our goal is to change that.

Got it. Appreciate it. Congrats on the share repurchases and the progress on those matters.

The next question comes from Robert Dodd with Raymond James.

Focusing on credit, if I can, for a moment. Obviously, notorious or Beauty Supply was put on nonaccrual this quarter. You put it on the red list last quarter, so you kind of flagged it. You do have some other portfolio positions like Lash OpCo that are in kind of the same business that also import from China, et cetera. I mean, should we be concerned about the same themes that hit Beauty Supply applying to other portfolio positions that are in kind of the same niche industry?

Yes. I mean, I think we've talked about in the past that we think our portfolio is quite well positioned when we think about an issue like tariffs. And we've talked, I think, on prior calls that Beauty Industry Group really is our one material name that has exposure to tariffs because of its China-oriented supply chain. So I don't see any kind of look through to other subsectors in our portfolio in that regard. We think the rest of the portfolio is quite insulated from a primary impact perspective, and we think that's reflected in the 95% green.

Got it. And on the other comment -- I think it was John, you said your goal over time was to recover at least full principal. I mean that sounds -- you're going to equitize some of the debt, et cetera. But I mean, going to recover at least, it sounds like you're actually long term quite optimistic about business despite the fact that obviously it's on nonaccrual.

I think it's a little too soon for us to have all the details that an owner of a business would have. We'll have that over the course of the next months and quarters. But I think it's more of a reflection of our mindset around problem positions. This is a problem position. It's a first lien unitranche loan, we and one other lender are going to take control of the asset. And whenever we do that, we bring the full power of the New Mountain platform to bear on managing the asset. And our mindset is that we are going to get all of our investors' money back. So I think it's more of a mindset than having all the facts, our ducks in a row as it relates to managing the business. We just feel very confident that we have the ability to do it in a differentiated way. And we already have a full, I think, 8-person team, as I mentioned on the call, that's ready to go in and take a very active hand in helping the management team at Beauty Industry to improve their business.

Got it. And then one more, if I can, on the potential portfolio sale. I mean if that were to occur, you would obviously have quite a large influx of -- depending on how it's structured, potentially have a large influx of cash all at once. To your point, you could use that to delever potentially buy back stock. Would the potential buyback structure change, right? I mean, as it is, you buy it in the market. But if you had an extra couple of hundred million dollars of cash sitting there, would you consider something more like a Dutch tender or some other mechanism to maybe buy back a larger chunk at once? Or would that not be kind of how you'd be thinking about utilizing that capital?

I think we're going to think about a broad range of alternatives, but it's a little premature to give any specificity around those alternatives or how we're thinking about it. But we'll have a -- we'll be thinking about a broad range of things.

And we have a follow-up from Paul Johnson from KBW.

Yes. One more question from me. I was wondering if you could just provide maybe a little bit more color on the -- just the Edmentum investment and the markdown this quarter. So is this a case where the multiple or the valuation of this company, the EBITDA is stable. You said it's performing fine, but just the preferred is obviously the claim from the preferred side is growing every quarter. So the [ com ] is essentially getting squeezed out of its value a little bit? Or I mean, I guess, overall, how would you kind of describe the performance of the company at this point? And is this more of a situation where our capital structure was put in place after restructuring and maybe just unforeseen for kind of a victim of its own success, if that makes sense. But any color there would be helpful.

I mean, I think how you described it is largely accurate when we think about the capital structure. I think the good news is that the performance of the company is stable, right? We've talked a lot of times in the past as to how this business had some peaks really during COVID, just given the underlying product and the end market that they serve and then that has since normalized. But performance is definitely quite stable. The business is growing and performing we think, overall well. It's -- they have high-quality products and a good value proposition. So I think those are all positives. I think the challenge from our perspective is, as you described, in the capital structure, and that is something, as John alluded to, that we're in the early stages also of trying to help and work with the company and the other sponsors here to address. So more to come on that.

And just to zoom out quickly on Edmentum. Edmentum has a big picture been a success story for us. We took ownership of that business years ago, and we sold a significant chunk of the business to another private equity firm. So we've had, in the past, material gains on Edmentum. And I think what's happened over the past couple of years is Edmentum got highly valued during COVID and has had a little bit -- and earnings have come off a little bit since COVID. And now we're working with the company to find its base earnings. And then we're working, as I mentioned in my prepared comments on doing really smart, targeted M&A to grow off a very -- what we think is a very solid base. But big picture Edmentum has been a success story. We're just in a more difficult time right now, but we're still fighting hard to grow the business with the management team.

And we have a follow-up from Finian O'Shea with Wells Fargo.

Just jumping in on the follow-ups. A question on the ATM distribution agreement. I think you haven't used this in a few quarters at least, but upsized it not too long ago. Can you give us any color on the sort of ongoing or maintenance fees that the BDC incurs here? What line item that hits? And further if BDCs, if the space remains below book, if that's something you could let roll off or contain?

I would say overall, I mean, the ongoing maintenance fees to keep that program going are minimal. As you know, we haven't been above book value for a few quarters now, so we haven't actually utilized that. But generally, we want to keep that open and up. So that's -- when and if the share price gets above book that we can start to utilize that again and start growing the fund by issuing shares.

This concludes our question-and-answer session. I would like to turn the conference back over to John Kline, President and CEO of NMFC for any closing remarks.

Great. Thanks, everyone, for joining our call today, and we look forward to speaking to you again on our next call in February. Thanks.

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

Good day, and welcome to the New Mountain Finance Corporation Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO. Please go ahead.

Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's Second Quarter 2025 Earnings Call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Laura Holson, COO of NMFC; and Kris Corbett, CFO and Treasurer of NMFC. Steve is going to make some introductory remarks, but before he does, I'd like to ask Kris to make some important statements regarding today's call.

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 August 4 earnings press release. I would like to call your attention to the customary safe harbor disclosures in our press release and on Pages 2 and 3 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'll 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 5 of the slide presentation. Steve?

Thanks, Kris. It's great to be able to address you all today, both as NMFC's Chairman and as a major fellow shareholder. Adjusted net investment income for the quarter was $0.32 per share, covering our $0.32 per share dividend that was paid in cash on June 30. NII was supported by consistent recurring income from our loan portfolio, no new non-accruals, full utilization of the dividend protection program and a modest incremental fee waiver. Our net asset value per share of $12.21 declined $0.24 compared to Q1. While overall credit performance was strong across the majority of our portfolio, NMFC did experience modest declines across 3 positions, which John will address later in the call. Importantly, 95% of our investments are green on our heat map and our portfolio has nearly 80% exposure to senior-oriented assets.

NMFC lends chiefly in sectors such as health care information technology, software, insurance services and infrastructure services, which we believe are well positioned in today's economic environment. NMFC's portfolio loan-to-value stands at just 45%. Our lending lines are being refinanced at lower rates and our percentage of First Lien assets is growing, while our PIK income is falling. Looking forward to Q3, we would like to announce a $0.32 dividend payable on September 30 to shareholders of record on September 16. NMFC's dividend is supported by our strong recurring earnings from our well-performing credit portfolio, increased portfolio activity compared to Q2 and the dividend protection program, which we have in place through the fourth quarter of 2026. The dividend protection program represents a shareholder-friendly way to stabilize the dividend in a period of time that is characterized by tighter new issue spreads and lower fees that have been the result of below normal private equity deal activity.

Our view at New Mountain is that these trends are likely to normalize as deal flow picks up. Our current stock price implies a 15% discount to book value and the dividend of $0.32 quarterly or $1.28 annually represents over a 12% yield all with a 14-year track record of just a 1 basis point total net realized loss rate since IPO. As a result of the ongoing discount, NMFC entered into a stock repurchase program where the company has repurchased approximately $16 million of shares year-to-date with an additional $31 million of Board authorization remaining. Additionally, I and my fellow managers at New Mountain are the largest shareholders of NMFC and have steadily increased our ownership level over time. We believe that our current share price represents a compelling entry point for prospective investors as we seek to deliver stable, consistent yield and exhibits clear opportunity for equity upside in the months ahead through further advancing our strategic initiatives.

As a reminder, New Mountain's flagship private equity funds have never had a bankruptcy or missed an interest payment and the firm now manages over $55 billion of assets. We employ over 90,000 people at our PE portfolio companies in the field, and our New Mountain team has now grown to over 280 employees and senior advisers and approximately 70 members of our Executive Advisory Council. Our goal is to apply the same PE business building skill and knowledge to benefit NMFC and our credit platform as a whole. We thank you for your ownership and partnership, and we are working diligently to serve your interest in the months and years ahead. With that, let me turn the call to John.

Thank you, Steve. I would like to begin on Page 8, which offers an overview of our differentiated approach to direct lending. First and foremost, we focus only on sectors of the economy that we believe are defensive and have stable tailwinds that will benefit companies within these chosen sectors. We do not invest in industries that are volatile, cyclical or secularly challenged. Secondly, we believe that we have a better model for research as New Mountain uses in-house industry executives and private equity personnel to underwrite direct lending deals within our chosen sectors. Finally, we continue to have very strong shareholder alignment with 14% of our outstanding shares owned by NMC employees and senior advisers, and we actively support shareholder returns through our dividend protection program.

Page 9 provides key performance statistics showing a long-term track record of delivering consistent enhanced yield by minimizing credit losses and distributing virtually all of our excess income to shareholders. Since our IPO in 2011, NMFC has returned approximately $1.4 billion to shareholders through our dividend program, generating an annualized return of 10%. Today, our dividend yield is over 12% annualized based on the $0.32 quarterly payout. We have been a good steward of capital with negligible net realized losses over 14-plus years and maintain investment-grade ratings at Moody's and Fitch.

Turning to Page 10. NMFC continues to make progress on strategic priorities, which focus on improving the quality and diversity of our asset base, optimizing our liabilities with low-cost floating rate debt and enhancing the quality and character of our income. To that end, in Q2, we increased senior-oriented assets to nearly 80% of the overall portfolio and further diversified our top holdings with the full repayment of Office Ally, previously a 2.5% position. On the liability side, our team is preparing to refinance the 7.5% convertible notes and the 8.25% unsecured notes, both of which mature or are callable in Q4 of this year.

We expect to access the unsecured debt market and lock in interest rate hedges on the notional amount of these transactions. Finally, we continue to sell equity positions and exit PIK assets. In Q2, we monetized NMFC's $15 million position in Office Ally's common equity and received a full repayment on our position in ARCOS preferred shares, including all previously accrued PIK. We will seek to exit more PIK positions in the coming quarters. As shown on Pages 11 and 12, the internal risk ratings of our portfolio decreased slightly during the quarter with approximately 95% of the portfolio rated green. At the margin, we did see a few select names migrate down on our rating scale, representing $79 million or less than 3% of the portfolio.

Perhaps the most notable movement was the migration from yellow to red of a consumer products company in the portfolio. While this company is still current on its interest, its performance has been significantly impacted by tariffs on its predominantly China-oriented supply chain and will need liquidity support before year-end. It's worth noting that NMFC's loan is at the top of the capital structure, and there is no material debt ahead of our position. Despite the modest negative move in overall risk ratings, our most challenged names marked orange and red represent only 2.1% of NMFC's fair value, making them a small part of the portfolio.

Turning to Page 13, we provide a graphical analysis of NAV changes during the quarter, resulting in a book value of $12.21, a $0.24 decline compared to last quarter. Overall, the quarter benefited from good core credit performance, offset by declines in Edmentum, a dental health care business and the aforementioned consumer products business. Edmentum continues to deliver steady operating performance. However, there is debt and preferred equity that is accreting senior to our common equity position, which is pressuring our valuation. Edmentum continues to work on new growth levers, including a career learning offering and other operating initiatives to enhance top and bottom line performance.

We have started to see M&A activity pick up in the sector and believe Edmentum remains an attractive and well-positioned platform. The dental business has faced challenging labor inflation against the backdrop of lower patient volumes combined with price pressure. The company's financial sponsors have given the business a meaningful liquidity runway to improve operations and have made management changes that we hope will catalyze better execution. Page 14 addresses NMFC's non-accrual performance. On the left side of the page, we show that non-accruals continue to be very low with only $38 million or 1.2% of the portfolio on non-accrual. On the right side of the page, we show our cumulative credit performance since IPO. During that time, NMFC has made $10.2 billion of investments while realizing losses net of realized gains of just $16 million over the course of our history as a public company.

On Page 15, we present NMFC's consistent returns over the last 14 years. Cumulatively, NMFC has earned over $1.4 billion in net investment income while generating only $16 million of cumulative net realized losses and only $138 million of cumulative net unrealized depreciation, resulting in nearly $1.3 billion of value created for shareholders. While the realized loss rate remains very strong, we, as a management team, are focused on reversing the unrealized depreciation within the existing portfolio. I will now turn the call over to our Chief Operating Officer, Laura Holson, to discuss the current market environment and provide more details on NMFC's quarterly performance.

Thanks, John. While deal activity remained constrained in Q2 given tariffs and regulatory uncertainty, we have seen an increase in deal volume over the past several weeks. A combination of IPOs, take privates as well as general LBO activity indicates an unfreezing of the post-liberation day markets. The pipeline of potential PE exits remains exceptionally full given the extended hold times for many PE-owned assets. The pressure to both deploy dry powder and return capital to LPs are key drivers of sponsor activity. As some of the headline noise stabilizes, we think the remainder of the year could be a productive period for LBO activity. We believe Direct Lending remains an attractive asset class in today's market and continues to provide good risk-adjusted returns relative to other asset classes, including the syndicated loan market, which has continued to experience meaningful repricing waves.

Direct Lending Spreads, while tighter than 12 months ago, have largely stabilized. We have particularly noted the lack of dispersion in pricing based on both asset quality and asset size. Most Unitranche loans are pricing at the SOFR plus 4.75% to 5.25% range, even for slightly lower quality or smaller companies. While we continue to find opportunities in our defensive growth verticals where we can make loans that attach a $1.1 in the capital structure at 9% to 10% unlevered returns, our underwriting bar remains higher than ever, and our pass rate on deals has increased.

Deal structures generally remain compelling with significant sponsor equity contribution representing the vast majority of the capital structures.

Page 17 presents an interest rate analysis that provides insight into the effect of base rates on NMFC's earnings. The NMFC loan portfolio is 86% floating rate and 14% fixed rate, while our liabilities are 49% floating rate and 51% fixed rate. Pro forma for the expected upcoming refinancing activity over the next 6 months, we expect our mix will shift meaningfully to 81% floating and 19% fixed. This will nearly align us with our target of matching our percentage of liabilities that float with the percentage of our assets that float.

As shown in the bottom table, while we would expect to see earnings pressure in the scenarios where base rates decrease, we are evolving our capital structure to help offset some of that pressure. Moving on to Page 18. Q2 was a lighter quarter in origination activity, given what I mentioned on deal flow and quality. In Q2, we originated $122 million of assets, offset by $155 million of repayments and sales. Our originations consisted of investments in our core defensive growth power alleys, including niches of business services like insurance and utility services. Notable repayments in the quarter included our First Lien and equity positions in Office Ally, which, as mentioned previously, provided us the opportunity to rotate into senior cash-yielding loans. As John noted, we also received a repayment in our preferred equity investment in ARCOS, collecting our previously accrued PIK in full.

Turning to Page 19. Approximately 78% of our investments, inclusive of First Lien, SLPs and net lease are senior in nature, up from 75% in the prior year. 2nd Lien positions represent just 6% of our portfolio. Approximately 7% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. We continue to dedicate meaningful time and resources to business building at these companies. Page 20 shows that the average yield of NMFC's portfolio decreased slightly to 10.6% for Q2, partially due to a small downward shift in the forward SOFR curve. Despite lower yields on our originations compared to on our repayments, we believe total yields remain attractive for the risk.

Page 21 highlights the scale and positive credit trends of our underlying borrowers. The weighted average EBITDA of our portfolio companies increased slightly in the second quarter to $176 million, primarily due to growth at the individual companies we lend to. We also show the relevance leverage and interest coverage stats across the portfolio. These metrics have remained relatively consistent over the last several quarters. Loan to values continue to be quite compelling, and the current portfolio has an average loan-to-value of 45%. Finally, as illustrated on Page 22, we have a diversified portfolio across 124 portfolio companies. Excluding our investments in the SLPs and net lease funds, the top 10 single-name issuers account for 25% of total fair value. I will now turn the call over to our Chief Financial Officer, Kris Corbett, to discuss our financial results.

Thank you, Laura. For more details, please refer to our quarterly report on Form 10-Q that was filed yesterday with the SEC. As shown on Slide 23, the portfolio had $3 billion in investments at fair value on June 30 and total assets of $3.2 billion. Total liabilities were $1.9 billion, of which statutory debt outstanding was $1.5 billion. Net asset value of $1.3 billion or $12.21 per share was down slightly compared to prior quarter. At quarter end, our statutory debt-to-equity ratio was 1.17:1 and 1.13:1 net of available cash on the balance sheet, which is in the middle of our target range of 1 to 1.25x. On Slide 24, we show our quarterly income statement results. For the current quarter, we earned total investment income of $83 million, a 12% decrease over prior year. Total net expenses of $49 million decreased 13% versus prior year, inclusive of the fee waiver previously mentioned.

Our effective incentive fee rate for the quarter was 13.5%. Our adjusted net investment income for the quarter was $0.32 per weighted average share, which covered our Q2 dividend. Slide 25 highlights that 95% of our total investment income is recurring in the second quarter. On the following page, you can see that over 80% of our investment income was paid in cash and 14% was PIK income from positions that included PIK from inception to best enable these borrowers to execute on their strategic growth plans. Only 3% of investment income is driven by modified PIK from an amendment or restructuring. Importantly, investments generating noncash income during the second quarter are marked at a weighted average fair market value of 96% of par and 92% of this income is generated from our green-rated names.

In the second quarter, we collected $8 million of PIK income, primarily associated with the aforementioned ARCOS preferred share repayment. We continue to make progress in monetizing PIK income and see continued opportunities to do so in the coming quarters. Turning to Slide 27. The red line shows the coverage of our dividend. For Q3 2025, our Board of Directors has again declared a dividend of $0.32 per share. On Slide 29, we highlight our various financing sources and diversified leverage profile. Taking into account SBA-guaranteed debentures, we have $2.9 billion of total borrowing capacity with nearly $1.1 billion available on our revolving lines, subject to borrowing base limitations. This more than covers our unfunded commitments of $262 million as well as all of our near-term bond maturities. Looking forward to the remainder of 2025, the facilities outlined in red represent opportunities we see to refinance and either maintain or potentially reduce our cost of financing in the near term.

We believe this contrasts with the industry, which faces an increased cost of financing as debt issued in 2020 and 2021 mature. Finally, on Slide 30, we show our leverage maturity schedule. We continue to ladder our maturities and have sufficient liquidity to manage upcoming maturities in 2025 and early 2026. Notably, over 67% of our debt matures in or after 2027 with near-term maturities representing an opportunity to continue to access the investment-grade bond market. With that, I would like to turn the call back over to John.

Thank you, Kris. In closing, we once again would like to thank all of our stakeholders for the ongoing partnership and support and look forward to speaking to you again on our next call in November. I will now turn things back to the operator to begin Q&A. Operator?

[Operator Instructions] The first question comes from Finian O'Shea with Wells Fargo.

A question on the health care names. I know you highlighted the dental downgrade. It sounds idiosyncratic, but seeing if there's any industry headwinds there when noticing there are a couple more health care names on your Slide 33 that are downgraded on a business characteristics perspective. And then sort of another add-on there. Alliance Animal Health, one of your larger names, continues to hold up well. We're seeing some challenges across the veterinary -- the vet industry and seeing if these sort of headwinds relate to that as well. Hello?

[Technical Difficulty] Sorry, we're just kind of reconnecting the speaker line. Just a second.

Are you able to hear us?

Yes.

Great. Sorry about that, Fin.

Yes, sorry. Technical difficulties over here. But just starting on the...

Did you hear the question or?

I did, yes. Just starting on the dental side and physician business practice businesses, generally speaking, that is a sector that we've studied a lot at the firm level. It does have some good secular tailwinds when we think about just some of the demographics and the a cyclicality of a lot of those underlying niches. But I think as we've owned businesses in the space, as we've invested in many over the years as well, I think some of the learnings around that sector, in particular, is, number one, just at the top line, it's a business that you don't have a lot of pricing levers to pull, right, when you think about just reimbursement, and that's not a lever that really is available despite the fact that there are some good volume trends in many of these underlying sectors.

And then I think more importantly, on the expense side, it's a business that's very operationally intensive and does really require excellent execution when you think about just managing the expense base, and it does have a decent amount of operating leverage in these businesses. So as we've kind of lived with this sector and gotten deeper on it, it is one that's very management sensitive also. And so it's an area that we've spent less time on as of late. When talking about the specific one that we downgraded, it is a bit more idiosyncratic. We don't think, in general, we're seeing headwinds across the stage for large. But certainly, as I said, because of how operationally intensive it is, it does require very specific execution. And therefore, just as a lender, it's not a space that we've been prioritizing on a go-forward basis.

But that really is the one that we did downgrade, again, for some idiosyncratic reasons that John alluded to, specifically around just some underperformance on the volume side, but not necessarily a trend that we think is impacting overall. But again, just on a go-forward basis, less of a focus for us as we originate new deals.

And then switching gears to the veterinary side of things. Again, another space that has a lot of good secular tailwinds, things that we like about it, just more people are getting pets. These pets are living longer. There's more types of procedures and things that you can do to help pets. So again, a lot of good things here. And then the additional benefit versus maybe the dental space is that you don't have that limitation from a top line perspective because it's typically cash pay, no reimbursement risk, et cetera.

So there's a lot of things here that we do like about this space. You mentioned Alliance Animal Health, in particular, is one of our larger positions. It is, generally speaking, we feel like that space is performing quite well overall. We have seen some volume trends, not on that company, in particular, but just in general, the industry come off a little bit from what the COVID peak was, a lot of people got puppies and kittens during COVID, and those pets go to the vet 3 to 4 times in their first year of life, and then it's more like once a year thereafter. But as those pets age, we will expect to see the other side of that from a volume perspective. But again, more levers here, a little less execution intensive. And it's a space that we like quite a bit.

Okay. That's helpful. And then just hitting on the dividend protection. You waived a little extra this quarter. Can you just talk about how you're thinking about that high level? I know there are a few levers that you outlined to improve NOI, but there's headwinds as well, of course, seeing how you're kind of thinking about this during the protection program and after.

Sure. The dividend protection program is meant to be a form of shareholder support where we can give our shareholders really good visibility on what the dividend is going to be. We've had this in place for a while, and we're committed to keeping the program in place through the end of '26. So very shareholder friendly. And we are in an environment, as you know, where spreads have come off a little bit. OIDs have come off or are actually higher than they were. Deal flow is not quite what we've wanted it to be, just given some volatility around the Trump tariffs.

So that's why I think the dividend protection program is so important. It really gets us through periods of time like right now, where it does feel a little bit tight out there. And so as we look forward, the big focus for our team is really to optimize our leverage across both the core fund as well as our JVs. We're in the process of optimizing in both areas. We do see better velocity, which is good for fee income in Q3 and Q4, and that really dovetails with more activity that we see in our pipeline right now. So that's a real positive. We see a big catalyst around refinancing or higher cost debt. I know we showed that in our deck. And I think that's a real positive catalyst for NMFC. We have a new SBIC coming online. And then, of course, we have the buyback as well.

So there are a bunch of things that we have on the top of our mind to offset some of the pressures that we do see. And it feels great to have the New Mountain firm support around the dividend protection program. And as you mentioned in this quarter, we did go a little bit above and beyond because we do feel strongly about maintaining that consistency of dividend.

Okay. So I mean it sounds like the incremental fee kind of forget the 15% number yield wave incremental to make the [ 32 ] through '26. And then just -- and correct me if I'm wrong there. How do you -- how should we think about...

The policy in place is the core dividend protection, and then of course, we have the option to do more if we see fit. And I think what I was trying to describe is we do see some positive catalysts as it relates to our core earnings capability that should help support the overall dividend. So we have the announced program and that's what we're committing to.

[Operator Instructions] The next question comes from Robert Dodd with Raymond James.

On the red downgrade, the consumer products business, you highlighted obviously tariffs exposure. I presume that was one of the businesses you had already identified as being at risk from tariffs, given the nature of what it does. So what kind of -- it looks like you also done like operational performance as well as -- is that tariff related? Or was there something beyond the tariffs that kind of caught you by surprise with that business? Because it just seems you already knew about the tariff risk, and it was flagged presumably, internally based on that, and it seems to have been worse than you expected. So can you give us any color about like general terms, what happened there? And is there -- to extend the question, is there a risk that those kind of things happen to other businesses in the portfolio as well as we go forward?

Great. Robert, thank you for the question. I'll give a couple of comments, and Laura can support my comments. But great question. The name in question is the name that we've been upfront about from the beginning of the tariffs. This is our one name that we feel like does have material exposure. I believe we talked about it last quarter. And going into the tariffs, it was not a green name. It was, I believe, a yellow name. And so there was some operating underperformance already present at the company, and that was borne out in our ratings.

And then from our perspective, really the tariff situation, which is still out there. There's still a fair amount of tariff volatility, even though it doesn't feel quite as present in the headlines of the Wall Street Journal there, there are still some headwinds. And this company is materially exposed to a Chinese and Asian-centric supply chain and the business is working through that. But really, it was an underperformer, and I think the tariffs hurt it even more. And I think there's still a lot yet to be known about the end state of this company.

In my own head, it's not a long-term impairment. I still have a personal optimism that we can get a full recovery on this name. But it's important to be very transparent and honest about the current state of the company, which is, in our view, a red. The business, as we said in our comments, will need some more liquidity. And so the sponsor can put that liquidity in or the lenders may have to put it in. We're not sure which direction that's going to go. But over a long period of time, we do or a longer period of time, we do feel like there's plenty of opportunity for this business to recover full par. But the fair value has been moved lower, and we do have it as a red.

And only the other thing to add, just to your question about is there a risk of -- was this a surprise. And was there -- is there a risk of any other kind of surprising news from a tariff perspective. As John said, this is one that we flagged last quarter but we did not move the risk rating at that point, just given the massive amount of uncertainty at that particular moment. But now that they're -- even though it's not totally certain, we have a little bit more of a view as to what the tariff impact is likely to be. But from the rest of the portfolio perspective, we've continued to refresh perspective on tariff exposure, and we continue to think that otherwise, it's very minimal across the rest of the portfolio.

Got it. One more, if I can. On to Steve's points on the opening remarks, I mean, spreads are tight. The half view seems to be that, that is likely to normalize. Obviously, it does -- even if origination spreads widen, it takes a while, depending on, to your point, velocity of activity, it takes a while for that to progress through the full portfolio. And then you've got a lot that you're doing on the optimization of the liability side as well.

I mean given the time frame that you've committed to on the dividend protection program end of 2026, do you think you can complete all your activities in terms of optimizing the liability stack, having maybe some spread widening make its way through the portfolio and maybe monetize some of the equity? Do you think all of that can be completed by the end of '26, sufficient to the point that the dividend protection program maybe hypothetically might not be necessary at that point?

I think we've been very clear about all the different things that we're doing to improve our company. And I think we've reported on the cadence of improvement over the last few quarters, and I continue to feel very good about it. So when I think about the next 6 quarters, I think that we'll continue to show really good improvement on the asset quality and the character of the assets, the liability mix. I think we'll continue to show improvement on our PIK income. We're incredibly focused on monetizing some of the largest positions.

So I do feel very, very optimistic and positive personally that we're going to be able to make some real progress. It's going to be. There's some hard work to be done, but we've gotten off to a good start. And I see, particularly in a deal environment, that we think will be good over the course of the next 6 to 12 months. I am optimistic about improvements on all fronts.

When you think about the overall yield characteristics of just the Direct Lending environment, that's obviously a little tougher to predict overall. So we're just going to focus on the parts of our business that we can control. And again, I feel good about the trajectory there.

The next question comes from Sean-Paul Adams with B. Riley.

On Edmentum, it just seems that there's been a continued trend of write-downs on the name. Is this just more of a unwinding that you forecast throughout the rest of the year? Or any secular trends in the education space?

Yes. No, in terms of Edmentum, just as a reminder, the business is an EdTech business, serving the K-12 end market. I think the market is very much there, right? There's more learning loss than ever, right, on the year of COVID. We think the company remains well positioned in that market to address some of that learning loss. And as John mentioned, we do have some other -- outside of just the core business of Edmentum, continuing to expand vectors of the business to attack the career market in addition to that.

We do think it's a scaled platform. It's well positioned in the space. The underlying performance has been -- has stabilized, right? If you remember, this is a business that was performing fine pre-COVID, then had a big spike during COVID, given part of the business relates to virtual learning, which obviously experienced a tremendous uptick during COVID. And at this point now, that kind of uptick is kind of just renormalized and the business is stable and on a stable trajectory. But as John mentioned, we just have some securities ahead of us in the capital structure that are accreting ahead of us, which modestly impacts the equity where we sit in the capital stack.

So right now, the company is in the midst of its key buying season just from a summer perspective. And I think we'll continue to know more as that evolves over the next coming months. But again, I think big picture, we view it as well performing and stable underlying performance, just has some of this kind of unique capital structure dynamics.

This concludes our question-and-answer session. I would like to turn the conference back over to John Kline for any closing remarks. Please go ahead.

Great. Thank you again for your participation in our earnings call, and we look forward to speaking to you again in November. Have a great day. Thanks.

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