Earnings Call Transcript - NMFC Q1 2023

Operator, Operator

Good day. And welcome to the New Mountain Finance Corporation First Quarter 2023 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

John Kline, President and CEO

Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation’s first quarter 2023 Earnings Call. On the line here with me today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Robert Hamwee, Vice Chairman of NMFC; and Laura Holson, COO and Interim CFO of NMFC. Steve is going to make some introductory remarks, but before he does, I’d like to ask Laura to make some important statements regarding today’s call.

Laura Holson, COO and Interim CFO

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 May 8th earnings press release. I would also like to call your attention to the customary safe harbor disclosure in our press release and on page two 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 four of the slide presentation.

Steve Klinsky, Chairman and CEO of New Mountain Capital

Thanks, Laura. It’s great to be able to address you all today, both as NMFC’s Chairman and as a major fellow shareholder. I believe we have some good news to report. Adjusted net investment income for the first quarter was $0.38 per share, more than covering our $0.32 dividend per share that was paid in cash on March 31st. Our earnings improved by $0.08 compared to Q1 of last year and $0.03 sequentially over Q4 of 2022. Our net asset value was $13.14 per share, a $0.12 or 0.9% increase compared to last quarter. The fair value increase is reflective of continued strong credit performance, combined with modestly tighter market spreads, which positively affected the valuation of our assets. We believe our loans are well positioned overall in defensive growth industries that we think are right in all times and particularly attractive in the challenging macro conditions of today. New Mountain’s private equity funds have never had a bankruptcy or missed an interest payment and the firm now manages over $37 billion of assets. Similarly, as shown on page 13 of the presentation, cumulatively NMFC has experienced no net realized default losses since inception. Our 8 basis points per year of net realized default loss have been more than offset by realized gains elsewhere. The rising rate environment continues to be a substantial positive for our quarterly earnings since we chiefly lend on floating rates. As page 12 of the presentation shows, we expect to continue to significantly out-earn our $0.32 per share base dividend at current interest rates if all other factors hold constant. Given our earnings of $0.38 per share this quarter, we will make our first variable supplemental dividend in the amount of $0.03 per share. This is equal to half of the Q1 quarterly earnings in excess of our base dividend of $0.32. This additional $0.03 dividend will raise the total dividend to $0.35 per share, which is at the high end of the range. NMFC will pay these distributions on June 30th to holders of record as of June 16th. The remainder of the excess earnings will remain on our balance sheet and may be paid out in the future. Our annualized dividend yield at $0.35 represents approximately a 12% current dividend yield. Looking forward to Q2, in addition to our base $0.32 dividend, we expect to generate a variable supplemental dividend of $0.03 per share to $0.04 per share payable in Q3. This incremental payout is supported by expected strong credit performance and continued elevated base rates. We believe the strength of New Mountain and of NMFC is driven by the quality of our team. New Mountain overall now numbers 220 members and the firm has developed specialties in attractive defensive growth and cyclical growth sectors, such as life science supplies, healthcare information technology, software, infrastructure services, and digital engineering. When pursuing our credit investing efforts, we utilize our extensive group of industry experts to provide knowledge and expertise that allows us to make very informed, high conviction underwriting decisions. Over the last six months, we have continued to expand the quality of our overall team. Regarding our credit team specifically, we would like to welcome back our COO and Interim CFO, Laura Holson from maternity leave. Additionally, we have hired multiple new credit team members in the areas of business development, operations, and fund finance. Finally, we as management continue as major shareholders of NMFC, owning approximately 13% of NMFC’s total shares personally. Rob, John, Laura, and I have never sold a share of NMFC even as we have been buying.

John Kline, President and CEO

Thank you, Steve. Good morning again, everyone, and thank you for joining us today. I would like to offer some more details on our overall investment strategy, portfolio construction and performance metrics. Starting on page seven, we highlight our disciplined industry selection, which shows exposure to a diversified list of defensive non-cyclical sectors. These sectors and industry niches are characterized by durable growth drivers, predictable revenue streams, margin stability, and great free cash flow conversion. We have successfully avoided cyclical, volatile, and secularly challenged industries, which are certain to underperform in today’s more difficult economic landscape. Our strategy has been consistent over our 12 years as a public company, and it allows us to operate with confidence in any economic environment. Page eight provides a high-level snapshot of our business where we show a long-term track record of delivering consistent enhanced yield to our shareholders by avoiding losses and paying out 100% of excess income to our shareholders. Our current portfolio is exposed to companies in good industries that are performing well and where our last dollar of risk is approximately 40% of the purchase price paid for the business. We lend primarily to businesses owned by financial sponsors who are sophisticated and supportive owners with significant capital that is junior to the loans that we make. Turning to page nine, the internal risk rating of our portfolio improved last quarter. We now have over 93% of our portfolio within our green risk rating, up from over 91% last quarter. Meanwhile, exposure to yellow, orange, and red names decreased as a percentage of the portfolio. Overall in the quarter, we had $59 million of ratings improvement and only $16 million of rating decline. Our most challenged names within the orange and red categories represent only 2% of NMFC’s fair value, and we have de-risked our book by marking these names down to less than 50% of par. So even though the performance of these names continues to be challenged, they do not represent material risk to our book value. The updated heat map is shown in its entirety on page 10. Given our portfolio’s orientation towards defensive sectors like software, business services, and healthcare, we believe our assets are well-positioned to continue to perform no matter how the economic landscape develops. Our team continues to spend significant time and energy on our remaining red and orange names, with the goal of either exiting individual positions or finding ways to improve the performance of the underlying businesses as we have at UniTek and Permian. Both of these companies had headwinds as recently as 12 to 18 months ago, but are now in our green category due to significant operational improvements, which have led to increased earnings and much better future prospects. Both businesses grew at over 30% in 2022, and we believe that momentum will continue in 2023. As shown in the upper right of the heat map, we did put one name, Great Expressions, on nonaccrual this quarter, representing just $3 million of fair value. Turning to page 11, we provide an NAV bridge showing the $0.12 per share or 0.9% increase in book value. Starting on the left, credit-specific movements represent a $0.01 positive change in book value. Consistent with my earlier comments, UniTek’s valuation drove a $0.12 per share increase in book value, offset by an aggregate $0.11 per share decline in Great Expressions and in Sierra, both red names. A slight improvement in credit spreads over the quarter and earnings in excess of the base dividend accounted for an additional $0.11 of book value per share. It’s important to note that if we were to value all of our green-rated loans at par and keep the balance of the portfolio at current fair value, our book value would be $13.82 compared to our actual NAV of $13.14 at 3/31. Page 12 addresses NMFC’s long-term credit performance since its inception. On the left side of the page, we show the current state of the portfolio where we have $3.3 billion of investments at fair value, with $56 million or 1.7% of the portfolio currently on non-accrual. NMFC’s cumulative credit performance shown on the right side of the page remains strong. Since our inception in 2008, we have made almost $10 billion of total investments, of which only $354 million have been placed on non-accrual. Of the non-accruals, only $104 million or about 1% of total investments have become realized losses over the course of our 14-year history. Total realized losses did increase this quarter as we proactively allocated $29 million of NHME, representing 75% of our original investment, and $21 million of Ansira, representing 50% of our initial investment into our realized default loss category. We made this change so we could clearly disclose to our shareholders that we expect to suffer an impairment when we exit these loans. Offsetting these movements were a re-categorization of $25 million of Permian out of realized loss. Given the dramatic turnaround in Permian’s business, we now have line of sight to a full recovery on that investment and possibly a material gain. As we show on the next page, these default losses have been more than offset by realized gains elsewhere in the portfolio. On page 13, we present NMFC’s overall economic performance since IPO. Since inception, we have paid $1.1 billion of total dividends to shareholders while generating $14 million of cumulative net realized gains and only $74 million of net unrealized depreciation, netting to over $1 billion of cumulative value created for shareholders. The detailed performance analysis is included in the appendix of this deck. Page 14 shows a stock chart detailing NMFC’s equity return since its IPO 12 years ago. Over this period, NMFC has generated a compound annual return of 9%, which represents a very strong cash flow-oriented return, well in excess of both the high yield index and an index of BDC peers who have been public at least as long as we have. I will now turn the call over to our Chief Operating Officer and Interim Chief Financial Officer, Laura Holson, to discuss our current portfolio construction and financial results.

Laura Holson, COO and Interim CFO

Thanks, John. The outlook for 2023 and the sponsor-focused direct lending market continues to look positive. While deal flow is down overall, the direct lending market remains the primary financing market available for sponsors, and there are pockets of activity where we have the opportunity to make loans at attractive yields while remaining very selective. We also continue to see good opportunities to make incremental loans to existing, well-performing portfolio companies seeking to pursue accretive M&A. Yield structures remain more lender-friendly across the board, although there is increasing bifurcation in the market based on perceived credit quality. Perhaps most importantly, sponsor equity contributions have remained high, consistently representing 60% to 80% of the enterprise value of the company. Page 16 presents an interest rate analysis that provides insight into the positive effect of increasing base rates on NMFC’s earnings. As a reminder, the NMFC loan portfolio is 89% floating rate and 11% fixed rate, while our liabilities are 56% fixed rate and 44% floating rate. Given this capital structure mix, we are long LIBOR/SOFR and thus have material positive exposure to increasing rates. We have previously discussed the lag in flow-through of base rates, particularly on the asset side. In Q1, we saw base rates closer to current levels, with an average base rate on our assets of 4.6% versus current SOFR of about 5% and about 10 basis points lower than the average rate on our liabilities. To the extent rates continue to rise, we expect to see further benefit to NII. If rates follow the projected LIBOR/SOFR curve and settle in the 3% to 3.5% area, we would still expect our net investment income to exceed our regular dividend as shown on the bottom chart, all else equal. Moving on to origination activity on page 17, in Q1, we originated $77 million of new loans in our core defensive growth verticals, including software, healthcare services, and consumer services. We primarily funded these originations with repayments, keeping us fully invested and at the high end of our target leverage range. Turning to page 18, we show that our asset mix is consistent with prior quarters, where slightly more than two-thirds of our investments, inclusive of first lien, SLPs, and net lease, are senior in nature. Approximately 8% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. Assuming solid operating performance and the supportive valuation environment, we believe these equity positions could continue to increase in value and drive book value appreciation. We hope to monetize certain of these equity positions in the medium term and rotate those dollars into cash-yielding assets. As an example, we have realized a gain of just over $19 million in our restructured Haven position through March 31st, and we will recognize an additional $10 million from another distribution received just this past Friday. We expect the remainder to be fully realized over the next few quarters. Page 19 shows that the average yield of NMFC’s portfolio has decreased slightly from 11.3% in Q4 to 10.9% for Q1, given the shift in the base rate curve, as well as the repayment on a high-yielding asset. Generally speaking, spreads remain wider, and the supply-demand imbalance in the market continues to favor lenders, which helps support our net investment income target. Page 20 highlights the scale and credit trends of our underlying borrowers. As you can see, the weighted average EBITDA of our borrowers has increased over the last several quarters to $141 million. While we first and foremost concentrate on how an opportunity maps against our defensive growth criteria and internal New Mountain knowledge, we believe that larger borrowers tend to be marginally safer, all else equal. We also show the relevant leverage and interest coverage stats across the portfolio. Portfolio company leverage has been consistent over the last three quarters. Loan-to-values continue to be quite compelling, and the current portfolio has an average loan-to-value of just over 41%. From an interest coverage perspective, we have seen modest compression as base rates rise. The weighted average interest coverage on the portfolio declined slightly to 1.8 times from 1.9 times last quarter. We do expect interest coverage to move lower over the rest of 2023 as SOFR contracts reset at today’s rates. Finally, as illustrated on page 21, we have a diversified portfolio across 112 portfolio companies. The top 15 investments, inclusive of our SLP funds, account for 39% of total fair value and represent our highest conviction names. I will now cover our financial results. For more details, please refer to our quarterly report on Form 10-Q that was filed last evening with the SEC. As shown on slide 22, the portfolio had $3.3 billion in investments at fair value at March 31st, and total assets of $3.4 billion, with total liabilities of $2.1 billion, of which total statutory debt outstanding was $1.7 billion, excluding $300 million of drawn SBA guaranteed debentures. Net asset value of $1.3 billion or $13.14 per share was up $0.12 or 0.9% from the prior quarter. At quarter end, our statutory debt-to-equity ratio was 1.29 times to 1 time. However, net of available cash on the balance sheet, net leverage is 1.26 times to 1 time, at the high end of our target leverage range. On slide 23, we show our quarterly income statement results. As a reminder, we believe that our adjusted NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line. For the current quarter, we earned total investment income of $91.7 million, a $5 million increase from the prior quarter. The increase was primarily driven by higher interest income from base rate resets. Total net expenses were approximately $53.6 million, a $2.4 million increase quarter-over-quarter, due primarily to higher base rates on our floating rate debt. As a reminder, the investment adviser has committed to a management fee of 1.25% for the 2023 calendar year. We have also pledged to reduce our incentive fee if and as needed during this period to fully support the $0.32 per share quarterly dividend. Based on our forward view of the earnings power of the business, we do not expect to use this pledge. It is important to note that the investment adviser cannot recoup fees previously waived. Our adjusted NII for the quarter was $0.38 per weighted average share, which meaningfully exceeded our Q1 regular dividend of $0.32 per share. As slide 24 demonstrates, 98% of our total investment income is recurring this quarter. You will see historically that over 90% of our quarterly income is recurring in nature, and on average, over 80% of our income is regularly paid in cash. We believe this consistency shows the stability and predictability of our investment income. Importantly, over 93% of our quarterly PIK income is generated from our green-rated names. Turning to slide 25. The red line shows the coverage of our regular dividend. This quarter, adjusted NII exceeded our Q1 regular dividend by $0.06 per share. For Q2 2023, our Board of Directors has again declared a regular dividend of $0.32 per share, as well as a supplemental dividend of $0.03 per share, which will be paid on June 30, 2023, to shareholders of record on June 16th. As a reminder, our supplemental dividend program pays out at least 50% of any earnings in excess of the regular dividend. Since our Q1 earnings exceeded the regular dividend by $0.06 per share, we are paying a supplemental dividend of $0.03 per share alongside the Q2 regular dividend. On slide 26, we highlight our various financing sources. Taking into account SBA guaranteed debentures, we had almost $2.4 billion of total borrowing capacity at quarter end, with $369 million available on our revolving lines subject to borrowing base limitations. We have a valuable mix of fixed and floating rate debt, and the 56% of fixed rate debt continues to be an earnings tailwind in this rising base rate environment. As a reminder, both our Wells Fargo and Deutsche Bank credit facility covenants are generally tied to the operating performance of the underlying businesses that we lend to rather than the marks of our investments at any given time. Finally, on slide 27, we show our leverage maturity schedule. As we have diversified our debt issuance, we have been successful at laddering our maturities to manage liquidity, and over 85% of our debt matures in or after 2025. During the quarter, we upsized our 2022 convertible notes ahead of our 2023 maturities. Additionally, our multiple investment-grade credit ratings provide us access to various unsecured debt markets that we continue to explore to further ladder our maturities in the most cost-efficient manner.

John Kline, President and CEO

With that, I would like to turn the call back over to John. Thank you, Laura. As we look out over the course of 2023, we remain confident in the quality of our investment portfolio and believe we are on track to deliver great risk-adjusted returns for our shareholders. We once again thank you for your support and look forward to maintaining an open and transparent dialogue with all of our stakeholders. I will now turn things back to the Operator to begin Q&A.

Operator, Operator

At this time, we are showing no questions. I would like to turn the conference back over to John Kline for any closing remarks.

John Kline, President and CEO

I think I see one question in the queue.

Operator, Operator

Oh! There is one question that just popped up. I am going to announce Ryan Lynch with KBW. Please go ahead.

Ryan Lynch, Analyst

Hey. Good morning. Thanks for taking my questions. First 1 I had, I just want to make sure I heard this correctly. Did you say you received a $10 million distribution from one of your equity investments? Did I get that correctly? And then, if so, what investment was that from and how should we expect that to be accounted for in the second quarter?

Laura Holson, COO and Interim CFO

Yeah. Yeah, you did hear that correctly, Ryan. So this was from our Haven position, which was an equity distribution, in addition to the payments that we have already received through Q1. This was one that we received this past Friday for an additional $10 million, and so that will show up as an equity distribution in Q2.

Ryan Lynch, Analyst

Okay. Will that show up as a, like, how would that be accounted for? Will it be a realized gain? Will it come through the dividend income line?

Laura Holson, COO and Interim CFO

It will be a realized gain.

Ryan Lynch, Analyst

Okay. Perfect.

John Kline, President and CEO

And Ryan, this is John. It’s worth noting that in round terms, the valuation we had for Q1 is the correct valuation. So there won’t be a change, but it’s a realized event, which is great.

Ryan Lynch, Analyst

Yeah. Yeah. Totally get it. And then I wanted to talk about Edmentum for a minute. That’s in the education kind of content space. There have been some headwinds from some of the publicly traded education software companies out there, most recognizable being Chegg, with some of the disruption that potentially artificial intelligence is causing to that business. I’d love if you could just provide a little bit of background maybe on the details of what Edmentum’s role is in the education space and how, if any, do you think the potential for artificial intelligence could impact that business.

Robert Hamwee, Vice Chairman

Thank you, John. That’s a great question, Ryan. I actually discussed this topic in our weekly staff meeting yesterday as it’s quite relevant and intriguing. The main point is that Edmentum is very well positioned to take advantage of the trends in artificial intelligence. There is considerable uncertainty around this due to how rapidly things are changing. Edmentum is a digitally native provider of curriculum and assessments mainly for the K-12 market. Being digitally native means they have a software-first approach and have been considering AI for quite some time. Their latest product has significantly incorporated non-generative AI, and in recent months, the company has been proactive in adding generative AI into its offerings. It's important to note that while Chegg is a consumer-facing product, our offerings are aimed at districts. The adoption pace by districts is slower compared to a 14-year-old quickly embracing ChatGPT for assessments and curricula, but they will eventually catch up. Currently, districts are requesting assistance from Edmentum, particularly in the area of plagiarism detection, although many are not yet doing so. Looking ahead two to three years, we believe that the key factor will be evolving assessments beyond simple memorization and traditional paper writing. We see potential in using our software to help districts provide effective solutions in this area, as well as personalized tutoring for students. So, that was a lengthy answer, but we are optimistic about how generative AI will support Edmentum's growth in the future.

Ryan Lynch, Analyst

That’s helpful. And just a follow-up question on that, though. I mean, it sounds like, right now, it’s pretty well, I want to say, protected, but it’s in a pretty good spot. There are maybe some different headwinds facing Chegg, because it’s more directed to student. But do you think that, given how quickly things are changing with artificial intelligence in that space, that that could potentially, even though the business is doing fine today, could weigh on the multiple on that business just as potential sponsors are uncertain of what the world in this space looks like a year or two from now, so they are going to want to have a pretty low multiple on those businesses going forward? Is that a concern of yours?

Robert Hamwee, Vice Chairman

I understand your concern, Ryan. However, I believe that considering our position and our ability to outline a multi-year plan for integrating AI into our products, we can actually drive revenue rather than have it negatively affected. Ultimately, growth influences multiples, and I think we can showcase this when we eventually exit this situation. It's not just about stating it; we will have real evidence demonstrating how AI could benefit Edmentum. While there are no guarantees since this is a new development, I feel we are well positioned to gain advantages rather than suffer disadvantages. I believe our capability to provide both evidence and a clear plan will determine whether our multiple increases or decreases, based on our success.

Ryan Lynch, Analyst

Yeah. Okay. I appreciate that and I fully understand that it’s a very fluid situation that changes by the day, but I do appreciate the comments on that. One question I had is, as you guys had a nice tailwind in operating ROEs from higher rates. I just wanted to know, do you guys have this thought process at all when you manage the business regarding leverage that base rates have increased so much at this point and have been a big tailwind for operating ROEs? We are obviously heading into a more shakier credit period. More certain macroeconomic environment. I understand the deal environment is really good for the deals that are getting down; there’s not a lot of deals getting done. Would you ever consider lowering leverage levels from where you are today as we head into that environment? And given that base rates are still so high today that does a lot of the work for you for generating such a high operating ROE, and then if there is a further dislocation in the marketplace and the Fed has to cut rates, at that point, obviously, rates will be working against your favorite, but you would have further leverage to deploy in probably a better environment. Do you think about the business at all like that if that counterbalance versus leverage and base rates?

John Kline, President and CEO

Yeah. It’s something we talk about a lot, Ryan, and I am glad you brought it up. I think one thing that’s happened over the course of the last couple of quarters is we just see no, or very little or limited portfolio velocity. So to the extent we are entering into an environment where we start to get more repayments, and I think it’s fair to say that we should get more repayments over the next 12 months than the last, that would be my bold prediction. But we could see using that money partially to deploy into new assets, but partially to delever. I think we would be very comfortable being inside of our range right now; as Laura mentioned, we are right at the high end of our range from a leverage perspective. So I think that could be a move that we could make. We probably won’t go to the low end of the range, but if we could be in the middle of the range over the course of the next couple of quarters, that would be a very comfortable place for us to be.

Ryan Lynch, Analyst

Okay. And then maybe I will just ask one more, because I don’t know if anybody else was in the queue. Obviously, the topic as you are right now is kind of the whole banking crisis, the many banking crisis going on. I don’t really believe that banks are probably a primary competitor in your space in the direct lending marketplace, although there’s indirect impact; they obviously hold CLO paper and those sorts of things, which help fund the broadly syndicated loan market, which can be a competitive all that. I would just love to hear if there is a sort of pullback in bank lending, both large and regional banks. I’d love to just hear your opinion of what sort of impacts, if at all, it could have in your marketplace, both from the way you compete in, as well as even from your borrower standpoint or are you guys being able to obtain credit on your liability stack?

John Kline, President and CEO

Sure. Overall, I believe there is a significant role for regional banks in the U.S. economy, as they offer essential services to small and middle-market businesses, which is crucial for our economy. Considering the leverage finance market, especially the sponsor-oriented segment, regional and even larger banks have not played a significant role from a balance sheet standpoint for some time. Many of the larger banks tend to support CLO structures over time, which can be beneficial for the syndicated market. Currently, there is minimal competition for direct lenders, and we view this positively. For fresh buyouts from our sponsor clients, most deals are directed towards direct lenders. There is considerable capital being raised by direct lenders, indicating a promising period ahead. In this cycle, upfront fees are more favorable, leverage is lower, and the documentation is improved. As for the CLO market, it appears that this is presently the main area of competition, rather than a resurgence from regional or larger banks, as robust CLO formation is lacking. This reinforces my belief that direct lenders will play a significant role in deal flow for 2023.

Ryan Lynch, Analyst

Okay. I appreciate those comments. That’s all for me today.

Operator, Operator

The next question comes from Erik Zwick with Hovde Group. Please go ahead.

Erik Zwick, Analyst

Thanks. Good morning. I wanted to first just ask about the pipeline. I am curious if you could provide any commentary in terms of the current mix in terms of the industries that you are seeing to be maybe more prominent and whether there’s any that you are staying away from now just because it appears that maybe the short- or mid-term prospects are not attractive today given the current uncertainty over the economic environment today?

John Kline, President and CEO

We are seeing a gradual increase in our deal pipeline. Over the past year, it has been somewhat subdued. However, based on what we observe across various businesses here at New Mountain, we believe it is improving. The environment remains favorable for add-on investments, and many of our top companies view this as an opportunity to engage in mergers and acquisitions at more favorable prices. We aim to support those businesses within our portfolio that are looking to pursue these opportunities. We have noted good activity in the software sector, and I expect this trend to continue. Additionally, there have been some intriguing developments in healthcare, particularly in healthcare technology, which give us real-time insights into our portfolio. Our stance on industries to avoid has not changed. Our defensive growth philosophy is well-suited for current conditions, allowing us to focus on acquiring high-quality businesses in the best sponsor-backed sectors. These companies exhibit stable revenue drivers, margin stability, and growth potential even in today’s environment. We want to maintain our focus on attractive sectors, which also reassures us about our existing portfolio. We don't have any concerning industries that make us uneasy within it.

Erik Zwick, Analyst

That’s helpful. And then just a second one for me. In terms of the upcoming debt maturities, I think, $15 million in June and $117 million in August. I think you previously mentioned that you have sufficient capacity in the revolver to pay that down. But you also raised $60 million of notes in March and then mentioned some repayments coming through. It looks like cash position was maybe actually down quarter-over-quarter. So just curious is it still kind of the intent to use the revolver to pay down or to kind of repay those maturities as they come due or has something changed since your last comments?

Laura Holson, COO and Interim CFO

Yeah. No. I think you summarized it well. So in 2022, we obviously raised a chunk of convertible notes. We upsized that this past quarter as you alluded to. So between kind of the capital from that, as well as just availability on our revolving lines, we feel pretty comfortable we are in a good position to address the upcoming maturities.

Erik Zwick, Analyst

That’s helpful. And then just maybe as a bit of a follow-on to that last question. It seems like the revolvers are typically funded by banks and on vacation that, the banks are getting a little bit tighter on their willingness to lend. And if we go into an environment where maybe investors are a little bit more skittish if we go into a more severe economic environment. Just curious about your thoughts kind of mid- to longer-term if we were to go into a protracted recession, your thoughts about funding the business over that term?

Laura Holson, COO and Interim CFO

Historically, we have maintained very strong relationships with several banks, including Wells Fargo and Deutsche Bank. We feel confident that we have arranged our financing well, as evident from the maturities on our revolving lines. Additionally, with access to capital markets and our investment-grade credit ratings, we believe we will be in a good position to access those markets when necessary. However, we are closely monitoring the situation and remain proactive in maintaining ongoing dialogue with the banks to ensure our strong relationships are upheld.

Erik Zwick, Analyst

I appreciate the color there, Laura. Thanks for taking my questions today.

Operator, Operator

Next question comes from Bryce Rowe with B. Riley. Please go ahead.

Bryce Rowe, Analyst

Thank you. Good morning. I wanted to maybe touch on the topic of monetization of certain equity investments; obviously, you have had some success here with Haven recently. But curious, of those that are listed on page 18, how do you guys handicap which ones are better candidates versus not? And I kind of asked that question thinking about UniTek and Permian having improved as much as they have in the last 12 months to 18 months. I am just kind of curious what gets them to the point where they are ready for monetization or you would rather just continue to hold them as equity investments?

John Kline, President and CEO

Sure. The first thing to note is that we have significant control over the monetization of UniTek, Benevis, and Permian. It's important to highlight that we are a minority stakeholder and are partnered with others. While the current M&A environment isn't ideal, sponsors and other buyers are becoming eager to acquire strong, well-performing assets. UniTek and Permian are two examples on this list that are growing well and have favorable structural advantages. Therefore, we believe there could be another name on this list that we might consider exiting over the medium term.

Bryce Rowe, Analyst

That’s great, John. I appreciate that. And then maybe a bit of a follow-up. You have the categorization green, yellow, orange, red. And I think, for the first time, perhaps, in the deck, you have shown where each bucket is marked relative to par, and that’s kind of an interesting thing to think about. Of the green bucket market, 94% of par, is that primarily just spread changes that we have seen over the last 12 months to 18 months that have put it at that level of a mark?

Laura Holson, COO and Interim CFO

Yeah. That’s right. So, obviously, every quarter we are comparing the marks or the spreads of the underlying assets to comparable syndicated loans and doing kind of a fulsome valuation process. So as you alluded to, just as spreads have widened a little bit in the market over the last 12 or so months, some of these assets, just even though they are well performing and we think they are ultimately still recoverable at par, they do just get marked down from kind of a technical perspective. And I think John touched on the statistic that if you did mark all the green names at par, book value would be kind of in excess of where we are showing the portfolio today.

John Kline, President and CEO

I want to reiterate that when names change to yellow, orange, or red, we reflect that underperformance in our marks. It's important for our shareholders to be aware of this, and I believe it contributes positively to our overall book. We aim to be transparent about how we approach that fair value assessment.

Bryce Rowe, Analyst

Yeah. Great. I appreciate the comments.

John Kline, President and CEO

Thanks, Bryce.

Operator, Operator

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

John Kline, President and CEO

Thank you for joining us on our call today, and we look forward to speaking to you all again next quarter.

Operator, Operator

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