Earnings Call Transcript - NMFC Q2 2020

Rob Hamwee, CEO

Thank you, and good morning everyone, and welcome to New Mountain Finance Corporation’s Second Quarter Earnings Call for 2020. On the line with me here today are Adam Weinstein, Board Member of NMFC, John Kline, President and COO of NMFC, and Shiraz Kajee, CFO of NMFC. Our Chairman, Steve Klinsky, is unable to join the call today but will rejoin us on future calls. Before diving into the business update, we do want to recognize that we continue to live through a public health crisis that is taking a significant human toll on our community, across our country and around the globe. We hope that everyone is staying safe and that you and your families remain in good health. Turning to business, Adam Weinstein is going to make some introductory remarks, but before he does, I’d like to ask Shiraz to make some important statements regarding today’s call.

Shiraz Kajee, CFO

Thanks, Rob. Good morning everyone. Before we get into the presentation, I would like to advise everyone that today’s call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our August 5 earnings press release. I would also like to call your attention to the customary safe harbor disclosure in our press release and on Page 2 of the slide presentation regarding forward-looking statements. Today’s conference call and webcast may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time, I’d like to turn the call over to Adam Weinstein, who will give some highlights beginning on Page 4 of the slide presentation. Adam?

Adam Weinstein, Board Member

Thanks, Shiraz. Steve apologizes he’s unable to join this call, and as Rob said, he will return on the next quarterly call. It’s great to be able to speak to all of you today as both the Manager of NMFC and as a fellow shareholder. The COVID pandemic has caused a great crisis for the nation, both in human and economic terms. I want to express all of our hopes that you and your families are safe. Second, I want to summarize the overview charts on Page 4 and 5 to explain how NMFC itself is working to stay safe and secure throughout this period. New Mountain as an organization has always sought to explicitly emphasize downside safety and risk control as well as upside returns and therefore has emphasized defensive growth industries that can best survive unexpected market downturns. New Mountain started with private equity 20 years ago and now manages over $25 billion of assets including both private equity and credit. Risk control was at the heart of our founding mission. Happily, we’ve never had a portfolio company bankruptcy or missed an interest payment in the history of our private equity effort. Similarly, as of today we’ve had only $74 million of realized default losses for just a 0.4% loss rate on nearly $8 billion of total debt we have bought since beginning our credit arm in 2008. Meanwhile, we’ve had significant gains both in private equity and credit. NMFC has paid $781 million of total cash dividends since NMFC went public in 2011 or about $12.97 of dividends per share in all. As investment managers, our general belief is that the greatest mistakes in private equity or credit come when the industry melts beneath you. We have sought to avoid such mistakes by being laser-focused on our sector deep dive process where we proactively identify and study sectors years in advance of making investments, so that we understand the dynamics of the industry well. I believe NMFC was built with defensive growth industries and risk control in mind long before COVID hit. The great bulk of NMFC’s loans are in areas that might best be described as repetitive, tech-enabled business services such as enterprise software. Our companies often have large installed client bases of repeat users who depend on their service day in and day out. These are the types of defensive growth industries that we think are the right ones in all times and particularly attractive in difficult times. With that background, let me turn to Slide 5 and the specifics of this earnings report. Adjusted net investment income for the second quarter of 2020 ended June 30, 2020 was $0.30 per share fully covering our dividend of $0.30 per share and at the higher end of our guidance of $0.27 to $0.31 per share. Only one new asset dental practice management company, Benevis, which we discussed on last quarter’s call has been placed on non-accrual. Every other borrower paid their interest for Q2, 2020. We currently do not anticipate any additional portfolio companies going on non-accrual in Q3. The regular Q2, 2020 dividend of $0.30 per share was paid in cash on June 30. Our June 30, net asset value was $11.63 per share, an increase of $0.49 per share from the March 31 NAV of $11.14 per share. Notably, the change in book value was primarily driven by stable credit trends portfolio-wide, interest rate spread movements and company valuations in the economy overall. The regular dividend for Q3, 2020 was again set at $0.30 per share and will be payable on September 30, 2020 to holders of record as of September 16. NMFC’s liquidity position remains strong as we currently have approximately $200 million of cash and immediately available liquidity to handle future needs. New Mountain as the Manager has been highly supportive of NMFC and if it became necessary has significant resources, including a strong balance sheet, to further support NMFC. Steve and I and other members of New Mountain continue to be the largest shareholders of the company with ownership of approximately 13%. In conclusion, we in no way want to minimize the COVID crisis. With that said, we remain proud of the work that our credit team did in carefully building a portfolio to withstand a crisis and I remain hopeful about NMFC’s own competitive advantages and future prospects. With that, let me turn the call back to Rob Hamwee, CEO of NMFC.

Rob Hamwee, CEO

Thank you, Adam. While key quarterly highlights and our standard review of NMFC are detailed on Pages 6 and 7 respectively. Once again, this quarter, I would like to focus my time on getting into more detail on the crisis’ impact on asset quality, net asset value and leverage migration, liquidity and net investment income. As detailed on Page 8, in order to assess how the crisis is impacting our borrowers throughout the quarter. We’ve had extensive conversations with both company management and sponsors. Based on those discussions we have updated each portfolio company's scores on the two metrics we use to generate our overall risk rating. As a reminder, the first metric COVID exposure ranks from one to four, the degree to which a company has been directly impacted by COVID. The second metric, overall company strength, is a combination of three sub-metrics. Pre-COVID business performance, liquidity and balance sheet strength and sponsor support which we rank on a scale of A to C. Based on our rankings for the two metrics and the resulting risk rating for each company, we once again plotted the overall portfolio accordingly to create the risk rating heat maps. The updated heat maps show that risk migration has been largely positive as summarized on Page 9. $377 million of assets have improved their ratings while only $90 million of assets have worsened in rating. One primary driver of these changes is the significant reopening of our retail healthcare portfolio companies, where average utilization is now generally running at 75% to 95% of pre-COVID levels. Another driver is momentum, which as a leading provider of distant learning and credit recoveries software and services, has seen a large benefit in the current environment. Offsetting this to some degree is ongoing COVID-induced weakness primarily at UniTek and our one small hospitality name. Overall total green assets have increased from 78% to 83% of the portfolio, and the red assets have decreased from 6% to 4%. Risk migration details are shown on Page 10, and the updated heat map itself is shown on Page 11. As you can see from the heat map, given our portfolio's strong bias towards the sensitive sectors like software, business and federal services, and tech-enabled healthcare, we believe our assets are very well positioned to continue to perform no matter how the public health and economic landscape develops. Page 12 attempts to describe what we believe is, to a significant degree, a temporary decline in net asset value, largely driven by market spread movement and comparable company valuations not underlying credit problems. In Q2, we recovered $0.49 of the dramatic decline we witnessed in Q1. $52 million remained as yield-driven price movement in our green and yellow-rated loans, which if our risk assessment is correct should continue to recover in coming quarters as the world normalizes. Even in our orange and red current pay securities representing another $15 million of potential NAV recovery, while risks are clearly elevated, we would expect the significant majority of those to continue to pay full interest in principal. Finally, off the remaining of roughly $77 million value change in restructured securities, the bulk of the value change is in Edmentum, UniTek, and Benevis. As Edmentum is performing particularly well, Benevis continues to have COVID risk but is recovering quickly, and while COVID-induced risk remains elevated for UniTek, there’s also a path towards value recovery. Page 13 shows the significant success we’ve had bringing down our statutory leverage ratio from 1.56 to 1.29. The primary driver of this move was a debt pay down to our lenders of $234 million, which in turn was largely driven by $259 million of asset sales and repayments. Given the high quality and strong ongoing credit performance of the back majority of our asset base, we were able to realize an average price of $0.98 on the dollar on these disposals despite the volatile market environment. I would also note that revolver activity was a source of cash as revolver repayments exceeded any draws we had and the late draw activity was a modest use of cash as a number of our well-positioned portfolio companies restarted acquisition activity. Finally, beyond the debt repayment to our lenders, we ended the quarter with a significant cash balance of $56 million. On a net basis, if this balance sheet cash was applied to further pay down debt, our pro forma statutory leverage ratio would be 1.24 times. While our first priority in this crisis has been to focus on our assets, liquidity, and leverage, we also want to continue to maximize net investment income while preserving enterprise safety throughout the current crisis, however long it may last. Page 14 gives a bridge from our Q1 net investment income of $34 million or $0.35 per share to our Q2 NII of $29 million or $0.30 per share. You can see that off the $7 million decrease in gross NII prior to the offsetting impact of lower SG&A and fees. Only $2 million is the function of non-accruals in last quarter and this quarter primarily Benevis, UniTek and Permian, while the rest is from deleveraging rate changes and generally lower activity. While we expect the full quarter impact of deleveraging and lower base rate to remain headwinds into Q3, we’re confident absent a dramatic change in market conditions and our ability to generate approximately $0.30 of NII per quarter going forward to support the dividend. With that, I’ll turn it over to John Kline to discuss market conditions and other elements of the business.

John Kline, President and COO

Thanks Rob. Since our last call, market conditions have continued to materially improve. While direct lending deal flow continues to be sluggish, secondary trading levels in the broader sub-investment grade credit markets have nearly returned to pre-COVID levels. This is particularly true in many of our core defensive growth sectors such as software, healthcare technology, and technology-enabled business services. While it’s hard to entirely explain the market strength, clearly all risk assets are benefitting from tremendous liquidity in the system, the expectation for more Federal Reserve support and the fact that the base rate is almost zero. Given these factors, asset classes like direct lending, broadly syndicated loans, and high yield remain obvious places to receive enhanced yield over the risk-free rate. With regard to new deal flow, we believe the timing of new issue sponsor-backed deals remains somewhat uncertain and is predicated on a decrease in infection rates and a resumption of more normal business activities. Turning to Page 16, we show how potential changes in the base rate could impact NMFC’s future earnings. As you can see, the vast majority of our assets are floating rate loans with our liabilities evenly split between fixed and floating rate instruments. As of our last call in May, three months LIBOR was 54 basis points; since then it has declined to 30 basis points as of June 30th and approximately 25 basis points today. While this decline has been an earnings headwind for our business in 2020, NMFC has benefitted from 1% LIBOR floors on 75% of its assets. Given where rates are today, there is negligible downside from further rate decreases. Conversely, if rates rise over time, the earnings power of NMFC could materially improve. Page 17 addresses historical credit performance on the left side of the page. We show the current state of the portfolio, where we have about $2.8 billion of investments at fair value, $71 million of which are non-accrual. This quarter, as mentioned earlier, a portion of our Benevis term loan was added to non-accrual representing $33.9 million of fair value. On the right side of the page, we show NMFC’s cumulative credit performance since inception, which shows that across nearly $8 billion of total investments, we have $600 million that have been placed on our watch list with $220 million of that amount migrating to non-accrual. Off the non-accruals, only $74 million have become realized losses. The non-accruals that have not become credit losses represent about $145 million of cost. While some of these troubled names have risk of becoming permanently impaired, we do have optimism that over time, with the ongoing support of our private equity group, we’ll be able to take actions to achieve material credit recoveries and, in some cases, gains on these assets. Page 18 is a view of our credit performance based on underlying Portfolio Company leverage relative to LTM EBITDA. As you can see, the majority of our positions have shown performance that is very consistent with our underwriting projections, exhibiting either very minor leverage increases or in many cases, leverage decreases. There are four names that have more than 2.5 turns of negative leverage drift. Three of these names, including UniTek, Edmentum, and Benevis, were covered in Rob’s comments. The fourth name is company CE, which is a marketing services business that has underperformed over the past 12 months due to various internal operational challenges. Still, company CE continues to receive sponsor support and has benefitted from recent management upgrades and strategic acquisitions. The chart on Page 19 tracks the company’s overall economic performance since its IPO. At the top of the page, we show that our net investment income has always covered our regular quarterly dividend. On the lower half of the page, we focus on below the line items. First, we look at realized gains and realized credit and other losses. As you can see looking at the row highlighted in green, we’ve had success generating real economic gains every year through a combination of equity gains, portfolio company dividends, and trading profits. Moving down the page, the orange section of the chart shows year-to-date realized losses of $36.2 million, $32.3 million of which were crystallized in Q1. In Q2, we’ve experienced just $3.9 million of additional realized losses related to our balance sheet deleveraging program, which is now complete. As a result of this activity, we now have cumulative net realized losses since inception, highlighted in blue, of $16.7 million. While we do everything in our power to avoid them, over the long term, we do expect to incur realized credit losses on our investment portfolio, which we hope to largely offset with realized gains just as we have historically accomplished throughout our nearly 10 years as a public company. Looking further down the page, we show the material impact from unrealized portfolio markdowns of $187 million since inception and cumulative net realized and unrealized losses of $204 million, highlighted in yellow. This bottom-line number represents a $49 million improvement compared to last quarter, driven by the positive change in our portfolio marks that we discussed earlier in the presentation. We continue to believe that most of the cumulative unrealized loss is reflective of temporary marketing conditions and will recover in time. Page 20 presents a stock chart detailing NMFC’s performance since IPO. While the performance of our stock, inclusive of our quarterly dividend, has historically been very strong compared to relevant benchmarks, over the past five months, NMFC’s stock price has underperformed versus certain benchmarks. Still, our overall track record remains strong relative to the high yield index and the index of BDCs that we’ve followed since our IPO. Page 21 provides a final look at the stock performance compared to the individual stocks of our peers that have been public at least as long as we have. While we seek to improve our performance going forward, this chart shows that we remain a top performer among this cohort of competitors. Finally, we break down NMFC’s total return attribution since inception on Page 22. We’re in the far-right side of the page. We show that the core of our value creation has been cash distributions of $12.97 per share supported by consistent income from our defensive growth-oriented lending portfolio. Offsetting this dividend performance has been a $2.45 per share decline in book value, most of which has occurred in 2020, and the $2.01 per share decline related to the contraction of our price to book multiple since our IPO. As we’ve mentioned, we believe that NMFC has good prospects to improve in both areas of underperformance while maintaining a compelling and consistent dividend. Turning to our investment activity tracker on Page 23, we show a detailed schedule of the sales and repayments which supported our post-COVID deleveraging plan. As you can see, we are able to exit a number of positions at or around par even during the height of the crisis. Additionally, we had two of our high quality COVID-resistant portfolio companies repay as a result of M&A during the quarter. In aggregate, we raised $259 million of cash exiting assets at an average price of $98.1. While the quarter was highlighted by our exits, we did originate $49 million of assets primarily consisting of delayed draw funding supporting M&A for our clients. Overall, we believe that the success of this deleveraging initiative is reflective of the quality and safety of our portfolio which is populated with loans issued by a diverse group of highly defensive recession-resistant businesses. On Page 24, we have several detailed breakouts of NMFC’s industry exposure. The center of the pie chart shows overall industry exposure, while the charts on the right and left give more insight into the diversity within our services and healthcare verticals. As you can see, we have successfully avoided nearly all of the most troubled sectors while maintaining high exposure to the most defensive and structurally advantaged sectors within the US economy. On the lower half of the page, we show that the portfolio continues to have a high degree of first lien exposure with nearly 70% of our portfolio invested in senior-oriented assets. Additionally, we present a breakout of risk ratings that match the heat maps shown at the beginning of our presentation. Finally, as illustrated on Page 25, we have a diversified portfolio with our largest single name investment at 2.7% of fair value and the top 15 investments accounting for 34.5% of fair value. With that, I’ll now turn it over to our CFO, Shiraz Kajee, to discuss the financial statements and key financial metrics.

Shiraz Kajee, CFO

Thank you, John. For more details on our financial results and today’s commentary, please refer to the Form 10-Q that was filed last evening with the SEC. Now I would like to turn your attention to Slide 26. The portfolio had over $2.8 billion in investments at fair value at June 30, 2020 and total assets of $2.9 billion. We have total liabilities at $1.8 billion, of which total statutory debt outstanding was $1.4 billion excluding $300 million of drawn SBA guaranteed debentures. Net asset value of $1.1 billion or $11.63 per share was up $0.49 from the prior quarter. As of June 30, our statutory debt-to-equity ratio was 1.29:1, and as Rob mentioned, net of $56 million in cash on the balance sheet, the pro forma leverage ratio would have been 1.24:1. On Slide 27, we share our historical leverage ratios and our historical NAV adjusted for the cumulative impact of special dividends. On Slide 28, we share our quarterly income statement results. We believe that our net investment income is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line. Focusing on the quarter ended June 30, 2020, we earned total investment income of $67.7 million, a $9.5 million decrease from the prior quarter. $7 million of this decrease was due to asset sales, lower base rates, and less fee income and only $2 million of the decrease was a result of non-accruals. Total net expenses were approximately $38.8 million, a $4.6 million decrease due primarily to lower debt service costs from lower base rates and less debt outstanding. As in prior quarters, the investment advisor continues to waive certain management fees. The effective annualized management fee this quarter was 1.31%. It is important to note that the investment advisor cannot recoup fees previously waived. This results in second quarter adjusted net investment income of $28.9 million or $0.30 per weighted share, which is at the high end of our guidance and covered our Q2 regular dividend of $0.30 per share. As Rob touched on earlier, due to the continued negative COVID impact to energy services company Permian, we took an additional $2 million PIK interest write-off for income accrued in prior years. This was offset by a $0.4 million incentive fee rebate bringing our GAAP NII for the weighted share for the quarter to $0.28 per share. As a result of the net unrealized appreciation in the quarter for the quarter ended June 30, 2020, we had an increase in net assets resulting from operations of $78 million. Slide 29 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see 97% of total investment income is recurring and cash income comes in at 82% of this quarter. We believe this consistency shows the stability and predictability of our investment income. Turning to Slide 30, as discussed earlier, our net investment income for the second quarter covered our Q2 dividend. Based on preliminary estimates, we expect our Q3 2020 NII will be approximately $0.30 per share. Given that our Board of Directors has declared a Q3 2020 dividend of $0.30 per share which will be paid on September 30, 2020, to holders of record on September 16, 2020. On Slide 31, we highlight our various financing sources. Taking into account SBA guaranteed debentures, we have almost $2.3 billion of total borrowing capacity at quarter end. As a reminder, both our Wells Fargo and Deutsche Bank credit facilities covenants are generally tied to the operating performance of the underlying businesses that we lent to, rather than the indiscernible for investments at any given time. Finally, on Slide 32, we show a leverage maturity schedule. As we’ve diversified our debt issuance, we’ve been successful at laddering our maturities to better manage liquidity. We have one near-term maturity in May 2021 and are evaluating multiple avenues to address that maturity in the most efficient manner.

Rob Hamwee, CEO

Thanks, Shiraz. In closing, we remain cautiously optimistic about the prospects for NMFC in the months and years ahead. Our longstanding focus on lending to defensive growth businesses supported by strong sponsors should serve us well in the uncertain environment likely to characterize upcoming quarters. While risks are more elevated than in the past and we cannot unequivocally discount more challenging scenarios, we believe our model is well-suited to the current environment. We once again thank you for your continued support and interest in these difficult times. Wish you all good health and look forward to maintaining an open and transparent dialog with all of our stakeholders in the days ahead. I will now turn things back to the operator to begin Q&A.

Operator, Operator

The first question comes from Bryce Rowe with National Securities. Please go ahead.

Bryce Rowe, Analyst

I wanted to ask about some of the comments you made about the deleveraging plan having been executed and possibly being kind of finished here. So just kind of curious if you plan to operate the BDC at this level of net leverage here going forward. And then maybe speak to any thoughts on the debt capital structure and if you’re considering any changes in terms of secured versus unsecured. Just to give you more flexibility as we move forward here. Thanks.

Rob Hamwee, CEO

Yes, we feel comfortable with our current leverage in the low 120's, although we're keeping an eye on the situation. It depends on how the environment evolves. As we receive natural repayments, we can adjust that if necessary. We have the flexibility to make changes. It's a dynamic situation, and we are also paying attention to the asset values, which are key to our leverage calculations. For now, we tend to lean towards being slightly conservative to ensure maximum safety until conditions stabilize. Overall, we are pleased with our current positioning and our ability to respond to changes as they arise. Regarding the leverage mix, we are assessing the trade-offs between the costs of various capital types and the flexibility they offer. As the situation develops, we will make appropriate decisions. We value the flexibility that comes with unsecured capital versus secured. Throughout this crisis, we've had a good experience with our secured lenders, and we aim to find the right balance. Does that help you, Bryce?

Bryce Rowe, Analyst

It is. I have one more unrelated question. Just looking at the balance sheet. In the liability side, it appears the management fee and the incentive fee payable continue to go up. So just curious how you’re thinking about maybe liquidity relative to that. At what point do those fees get paid in cash to the advisor?

Rob Hamwee, CEO

Yes, so I mean first quarter we did pay some of those fees based on our liquidity and the comfort we have - we talked about over $200 million of liquidity and you know a visibility. So we paid some of those post quarter which you’ll see in the next quarters’ results. But we continue to use that as a liquidity buffer, and it’s just another way that the manager can support the BDC just to make sure it’s a comfortable liquidity position as possible.

Operator, Operator

The next question comes from Finian O’Shea with Wells Fargo. Please go ahead.

Finian O’Shea, Analyst

The leverage migration slide you provide us always very helpful. I would have expected it all to still be negative given you’re working on up through April, May financials now assuming across the portfolio. So how did leverage improve for about half the names? Does that reflect the sponsors putting money in or something else?

Rob Hamwee, CEO

The leverage migration is from beginning of loan to present. So when you see improvement, it’s not just last quarter to this quarter. So it’s improvement from when the loan was extended and so that’s part of what’s going on. And then the other part is, many of these businesses have actually continued to increase their earnings and generate cash to decrease debt throughout the crisis just because they’re either positively positioned or un-impacted and that’s a lot of the enterprise software, some of the business services and healthcare names. So it’s a combination of those two things.

Finian O’Shea, Analyst

Thank you. I knew it was a dumb question.

Rob Hamwee, CEO

It was not.

Finian O’Shea, Analyst

You mentioned $200 million liquidity I think that’s as of July 31 according to the slide. Does that reflect an additional portfolio sales or does that reflect your cash plus borrowing base?

Rob Hamwee, CEO

Yes, that reflects the cash plus immediately available on the revolver. So that’s immediately available liquidity. It’s obviously not inclusive of excess borrowings per the credit facility, their maximum sizes. So it really does not reflect a lot of incremental post-quarter disposals.

Finian O’Shea, Analyst

Do you mean the revolver by the advisor revolver or all of the revolving facilities? Sorry if I missed that.

Rob Hamwee, CEO

All of the available revolver, including the advisor revolver availability but all of the again immediately available revolver facilities.

Finian O’Shea, Analyst

Okay. That’s helpful. And yes, the next logical question is that’s far shy of your available commitments. The way it looks like from the banks, so is this a reflection of the banks valuing the assets in a much stricter framework or are they hair cutting the borrowing base meaningfully for your availability?

Rob Hamwee, CEO

It’s not really that. It’s just we don’t have - we’ve always run with more commitment than asset to sort of fill the bucket right because we’ve historically been growing. So it really reflects that, tomorrow we could just call all that cash without any change to the borrowing base. But on top of that, if we bought some incremental asset, we would generate incremental borrowing base that we have availability for the commitments, if that makes sense.

Finian O’Shea, Analyst

Yes, it does and final question on the debt profile breakout you do. Does the maturity, you provide, does that reflect the revolving period or the final maturity of the facility?

Rob Hamwee, CEO

It reflects the final maturity of the facilities.

Finian O’Shea, Analyst

So is it then safe to say that your revolving period? I mean, they’re all about two, 2.5 years out. Does that mean your revolving periods are pretty short?

Rob Hamwee, CEO

Yes, in the major facility right, which is the big Wells facility. The revolver period is coming up before the end of this year, and not surprisingly, we’re pretty far along in expansion conversion around that facility.

Finian O’Shea, Analyst

Okay, great. That’s all from me. Thank you for all of the color again you’ve been providing throughout the COVID environment. We’re going to appreciate it. But we’ll speak to you soon.

Operator, Operator

The next question is from Ryan Lynch with KBW. Please go ahead.

Ryan Lynch, Analyst

I think I said last call, but I just want to reiterate it again. I think the slide deck that you guys provide is the best one out there regarding kind of the COVID detail and movements in your portfolio, so very much appreciate that detail you guys provide there.

Rob Hamwee, CEO

Great, happy to hear. Thanks.

Ryan Lynch, Analyst

And then I did have a question though and maybe I missed this. I didn’t see the quarter-to-date activity for the third quarter. I think you guys usually provide that. I don’t know if I missed that or not. But could you provide an update on kind of the originations and sales repayments for the quarter-to-date, third quarter?

Rob Hamwee, CEO

We don’t have it in the deck because it was de minimis. We can get you those numbers, but if we had a page and we look it is like, there was nothing on it. So we just took it out. But activity has been de minimis through the beginning of the third quarter.

John Kline, President and COO

This is John; it’s actually on Page 23 because of the unique nature of the quarter. We detailed the sales on repayments and then at the bottom we showed the originations. But as Rob said, we didn’t break it out because there was a bunch of as I mentioned generally delayed draws that we didn’t support our sponsor clients.

Rob Hamwee, CEO

In Q2, right. But I think the question was around Q3-to-date. We looked at that and it was single-digit millions of activity, so we just took it out.

Ryan Lynch, Analyst

Okay, that’s helpful. It’s all I needed to. And then can you walk me through exactly the adjustment that you made the $1.6 million of non-recurring interest and incentive fee adjustment related to Permian? Can you walk me through exactly the nature of that adjustment and do you expect those adjustments to occur again in the third quarter?

Rob Hamwee, CEO

Yes, I can take a first crack at it, and Shiraz can jump in if I’m missing anything. But effectively, in prior periods right so not in - I think this year but if you go back for the last couple of years. We were accruing some income in Permian post the original restructuring of Permian, which goes back some years. And then we got to the point, with the energy markets obviously all screwed up, where we deemed that accrual to be uncollectible. So we’ve written it off, it was $2 million of historically accrued income in prior periods. It’s not in this quarter. We wrote it off in this quarter because we collected incentive fees on that $2 million at the 20% rate, so $400,000 of incentive fees. We refunded those incentive fees in this quarter, right because we didn’t earn them in the end. And that’s how you get to the $1.6 million net because we always track our cumulative actual NII. We then reflect those prior periods adjustments in the chart on Page 19. So that cumulative adjusted NII reflects the period where the income is stripped out retrospectively. Does that make sense, Ryan?

Ryan Lynch, Analyst

Yes, I think so. So if that is expected to continue those reversals. When you guys provide the $0.30 of operating earnings guidance in there, is that reflective - is that $0.30 guidance what you guys expect to earn from an adjusted operating earnings?

Rob Hamwee, CEO

So yes, it is, although right now we don’t expect incremental historical reversals. But if we did, we would have put into this quarter like things can change in the next two or three months. But sitting here today I would say that we do not expect any prior period write downs. But you know obviously things can change in the next two, three months between now and next quarters earnings announcement.

Ryan Lynch, Analyst

Okay, got it. And then you mentioned the one non-accrual Benevis. Although it seems like things are actually improving a little bit there to this quarter. Can you just talk through how many loan modifications or amendments were made this quarter? What is your guys' philosophy in providing those, what you guys hope to get as far as fees or structures in order to provide those modifications and for the modifications that occurred this quarter? Were any of them or what level was the sponsor willing to provide additional capital in order to make those modifications?

Rob Hamwee, CEO

Yes, we had a few modifications, as reflected on the heat map on Page 11. The majority of accounts do not require modifications since they are compliant with their covenants. Benevis underwent a complete restructuring, which I wouldn't categorize as a modification. Looking at the heat map, the retail healthcare entity still listed required a modification that included extra interest and fees, which we are currently negotiating. The Permian also had a full restructuring. In the education sector, there was a modification where the sponsor invested additional capital, and in return, the lending group provided covenant relief and received fees. We are still finalizing the modification for hospitality management, which should be completed this quarter and will lead to some covenant relief along with a few quarters of interest adjustments. Moving to the orange section, we are working on modifications for Benevis and UniTek, which should be effective this quarter. The marketing services business has also received modification relief this quarter due to new capital from the sponsor, and another retail healthcare entity has also seen a modification with fresh funding from its sponsor. That's about it, and I hope this clarifies the situation.

Ryan Lynch, Analyst

Yes, thanks. That is extremely helpful color. And again I appreciate all the color you provided on the call as well as the significant detail you guys provide in your slide deck. So I appreciate the content.

Operator, Operator

The next question comes from George Bahamondes with Deutsche Bank. Please go ahead.

George Bahamondes, Analyst

Wondering if you could help provide some clarity around upcoming maturity. So I know you have roughly $130 million of unfunded commitments. You referenced roughly $200 million of liquidity, so it seems like that’s covered with what you have. Just curious to get a better sense of maybe what you expect to kind of come due and mature over the next 12 months on the portfolio.

Rob Hamwee, CEO

Yes, so we have a number of things that are coming due, but for the most part, our repayments come from early activity whether the company gets sold or the sponsor does the refinancing transaction. So we’ve actually got some visibility to a couple of those that we expect to close in either this quarter or the following quarter. And then obviously 2021, there are a number of maturities that occur. I don’t actually have that exact number at my fingertips. And then obviously on the liability side, Shiraz mentioned we have the one $90 million note that matures in 2021 and we’re pretty far down the path on figuring out the most efficient refi path option for that.

George Bahamondes, Analyst

We received a question about amendments. Looking at the credit performance on Slide 18, it appears that some of these have changed significantly. Can you provide insight into the covenants associated with these changes and what triggers a breakthrough at that level? Some of these values are considerably higher than when they were acquired. What benefits arise from this situation? I assume there are some fees involved. How do you approach leverage while considering the covenants in place during the underwriting process?

Rob Hamwee, CEO

It’s a good question. The companies that are showing the most significant changes can be seen on the bottom right of Page 18, and we can identify most of them by name because they’ve already undergone restructuring. These include Edmentum, Benevis, UniTek, and Permian, all of which have been restructured. We discussed Company CE, and John pointed out the marketing services company in the orange section that I mentioned, where the sponsor provided funding, we offered some covenant relief, and received a fee for that this quarter. If we move on to Companies CD, CC, CB, and so on, the changes become much more modest, generally falling between one to two turns of drift, which typically does not trigger a covenant. Usually, it takes two to three turns to trigger a covenant. I believe one of these instances did trigger a covenant, and we have negotiated the necessary amendments. As we move through the next one to two quarters, we will observe several outcomes as some weaker quarters pass. However, each case will have its own unique circumstances, making it challenging to generalize about when specific covenants will be triggered and what the consequences of those triggers will be.

George Bahamondes, Analyst

Got it, it's helpful to hear a bit more on how it probably seems. That's it from me this morning. I appreciate you taking the time.

Operator, Operator

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

Chris Kotowski, Analyst

Last quarter, looking at your chart on Page 11, which I really liked as well. You said that in particular for some of the moderately impacted A companies that you took comfort in the tremendous liquidity that they had on their balance sheet. I’m just wondering, if we stay in this kind of half open, half closed, semi-lockdown whatever we’re in state for another into the middle of next year. I mean, do these companies generally have enough liquidity to get through this? And I guess just as a general, do you think most of the portfolio companies can continue to operate, if this - in this kind of environment and it goes on lot longer than we all think.

Rob Hamwee, CEO

Yes, that's a very good question, and we share the same concern. The answer is broadly yes. We’ve been pleasantly surprised by how companies have maintained and even improved their liquidity, showing cash runways generally measured in years rather than months or quarters. Part of this is due to a reduced burn rate, as many businesses, especially in retail healthcare, have reopened more quickly and to a greater extent than we initially anticipated. They have reached cash flow breakeven and beyond much sooner than our original models suggested. Additionally, they entered this crisis well-capitalized, with accessible revolver balances and cash reserves. We feel more optimistic than ever about their runway. Of course, this situation needs to be fully resolved eventually, but we expect that resolution could be one or two years away, rather than facing an immediate cash crisis in just a few months.

Chris Kotowski, Analyst

Okay and then secondly just when you’re discussing the income statement highlights on Page 28, did I hear you said that if you look at the like roughly $8 million linked quarter decline in interest income, did I hear you say that only $2 million of that was the non-accruals and the rest was just the movement in rates?

Rob Hamwee, CEO

Yes, so it was - that’s generally right. I want to maybe reference to you to Page 14, it’s probably the best way to look at it. Well you can see that $2 million was the non-accruals and then it was a combination of lower rates, the deleveraging from the asset sales right, so we just have less asset earning little bit of lower fee income and then that’s the bridge.

Chris Kotowski, Analyst

Right, okay and I guess that’s it from me. That’ll be it. Thank you.

Operator, Operator

At this time there are no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Rob Hamwee for any closing remarks.

Rob Hamwee, CEO

Thank you, operator, and thank you everybody as always appreciate the time, the interest, the good questions. As always, we’re available for any follow-ups. But again, it’s obviously kind of a funky time but we do feel pretty good about where we are at and we just want to keep being as transparent with people as we can be and look forward to staying in touch and talking to everyone in the weeks and months ahead. So thank you and have a great rest of the day.

Operator, Operator

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