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New Mountain Finance (NYSE:NMFC)
Q2 2020 Earnings Call
Aug 06, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the New Mountain Finance Corporation second-quarter 2020 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rob Hamwee, CEO. Please go ahead.

Rob Hamwee -- Chief Executive Officer

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 in 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 -- Chief Financial Officer

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 that 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 -- Managing director

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 a 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 part of our founding mission. Happily, we have never had a PE portfolio company bankruptcy or missed an interest payment in the history of our private equity effort. Similarly, as of today, we have had only $74 million of realized default losses for just a 0.4% loss rate on the nearly $8 billion of total debt we have thought 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 nonaccrual. Every other borrower paid their interest for Q2 2020.

We currently do not anticipate any additional portfolio companies going on nonaccrual 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 was to become 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 shareholder 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 -- Chief Executive Officer

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 have 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 submetrics: 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 Edmentum which is a leading provider of distance learning and credit recovery, software and services has been 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 red assets have decreased from 6% to 4%. The 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 toward defensive 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 the 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 profit.

In Q2, we recovered $0.49 of the dramatic decline we witnessed in Q1. $52 million remain 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 paid 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, of the remaining of roughly $77 million value change in restructured securities, the bulk of the value change is in Edmentum, UniTek and Benevis.

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 toward value recovery. Page 13 shows the significant success we have had, bringing down our statutory leverage ratio from 1.56 to 1.29. The primary driver of this move was a debt paydown 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 vast 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 delayed draw activity was a modest use of cash as a number of our well-positioned portfolio companies restarted acquisition activity. Finally, beyond the debt repayments 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 of the $7 million decrease in gross NII prior to the offsetting impact of lower SG&A and fees, only $2 million is a function of nonaccruals from last quarter and this quarter, primarily Benevis, UniTek and Permian, while the rest is from deleveraging rate changes and generally lower activities.

While we expect the full-quarter impact of deleveraging and lower base rates to remain headwinds into Q3, we are confident absent a dramatic change in market conditions in our ability to generate approximately $0.30 of NII per quarter going forward to support the dividend. With that, I will turn it over to John Kline to discuss market conditions and other elements of the business. John?

John Kline -- President and Chief Operating Officer

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 benefiting 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 that 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 activity. 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-month LIBOR was 54 basis points. Since then, it has declined to 30 basis points as of June 30 and approximately 25 basis points today.

While this decline has been an earnings headwind for our business in 2020, NMFC has benefited 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 nonaccrual. This quarter, as mentioned earlier, a portion of our Benevis term loan was added to nonaccrual, representing $33.9 million of fair value. While 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 nonaccrual. Of the nonaccruals, only $74 million have become realized losses.

The nonaccruals 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 will 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 benefited 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 have 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 have 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 net unrealized loss is reflective of temporary market 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 stock price has had soft performance versus certain benchmarks. Still, our overall track record remains strong relative to the high-yield index and the index of BDCs that we have 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 where on 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 have 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 were 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 fundings 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 pie chart shows overall industry exposure, while the charts on the right and left give more insight into 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 U.S. 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 will now turn it over to our CFO Shiraz Kajee to discuss the financial statements and key financial metrics. Shiraz?

Shiraz Kajee -- Chief Financial Officer

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'd 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 with total liabilities of $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 the $56 million in cash on the balance sheet, the pro forma leverage ratio would have been 1.24:1. On Slide 27, we show our historical leverage ratios and our historical NAV adjusted for the cumulative impact of special dividends.

On Slide 28, we show our quarterly income statement results. We believe that our 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. Focusing on the quarter ended June 30, 2020, we earned total investment income of $67.7 million, a $9.5 million decrease in 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 nonaccruals. Total net expenses were approximately $38.8 million, a $4.6 million decrease due primarily to lower debt service costs from a 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 NII of $28.9 million or $0.30 per weighted average share, which is at the higher 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 per weighted average 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. The 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% this quarter. We believe this consistency shows the stability and predictability of our investment income.

Turning to Slide 30. As discussed earlier, our NII 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 had 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 lend to rather than the marks of our investments at any given time. Finally, on Slide 32, we show a leverage maturity schedule.

As we've diversified our debt issuance, we have been successful at laddering our maturities to better manage liquidity. We have one near-term maturity in May 2021 and evaluating multiple avenues to address that maturity in the most efficient manner. With that, I would like to turn the call back over to Rob.

Rob Hamwee -- Chief Executive Officer

Thanks, Shiraz. In closing, we remain cautiously optimistic about the prospects for NMFC in the months and years ahead. Our long-standing 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 for 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 dialogue with all of our stakeholders in the days ahead. I will now turn things back to the operator to begin Q&A. Operator?

Questions & Answers:


Operator

We will now begin the question and answer session. [Operator instructions] The first question comes from Bryce Rowe with National Securities. Please go ahead.

Rob Hamwee -- Chief Executive Officer

Yo, Bryce.

Bryce Rowe -- National Securities

Hey, Rob. How are you?

Rob Hamwee -- Chief Executive Officer

Good. Thanks.

Bryce Rowe -- National Securities

Thanks for having me today. First, I wanted to ask about some of the comments you made about kind of 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 -- Chief Executive Officer

Yeah, yeah, for sure. So we're generally comfortable at this point in time in the sort of low 120s net, although we're still monitoring things, right? It's a function of how the environment continues to develop. And as we see natural repayments continue to come in, we can modulate that if it makes sense to be lower than that. We certainly have that path available to us.

So it's really sort of a dynamic equation. And obviously, we're also tracking values that drive that the other part of the leverage equation, what the asset values are. So I think we're going to continue to probably err on the side of being a little bit lower and just make sure we have maximum safety until the world returned to a more normalized environment. But right now we are feeling pretty good about where we at -- where we're at and the levers we have to continue to react as events warrant.

And then, in terms of the leverage mix, yes, I mean, we're definitely evaluating the trade-offs between cost of different forms of capital and flexibility of different forms of capital. And again, we'll continue to monitor that. And similarly, as the environment evolves, we'll make some of those decisions. But we certainly appreciate the flexibility that comes with incremental unsecured versus secured, although, again, through the crisis, we've had a pretty good experience working with our secured lenders.

So we're going to try to get to the right balance. Is that helpful, Bryce?

Bryce Rowe -- National Securities

It is. That is. I had 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? And at what point do those fees get paid in cash to the advisor?

Rob Hamwee -- Chief Executive Officer

Yeah. So I mean, post 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 visibility. So we've paid some of those post quarter, which you'll see in the next quarter's 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 we're in a comfortable liquidity position as possible.

Bryce Rowe -- National Securities

Great. That's helpful. And I'm sure the market participants appreciate that. So I appreciate the comments, Rob.

Rob Hamwee -- Chief Executive Officer

Absolutely. Thank you.

Operator

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

Finian O'Shea -- Wells Fargo Securities -- Analyst

The leverage migration slide you provide is always very helpful. I would have expected it all to still be in the 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 -- Chief Executive Officer

Well, remember, the leverage migration slide 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 are either positively positioned or unimpacted. 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 -- Wells Fargo Securities -- Analyst

Thank you. I knew it was a dumb question. You mentioned the $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 -- Chief Executive Officer

Yeah, 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 facilities at their maximum sizes. And it really does not reflect a lot of incremental post-quarter disposals.

Finian O'Shea -- Wells Fargo Securities -- Analyst

And do you mean the revolver by the advisor revolver or all of the revolving facilities? Sorry, I missed that.

Rob Hamwee -- Chief Executive Officer

Yeah, all of the available revolver, including the advisory revolver availability, but all of the, again, immediately available revolver facility.

Finian O'Shea -- Wells Fargo Securities -- Analyst

OK, that's helpful. And yes, the next logical question is that's far shy of your available commitments, what it looks like from the bank. So is this a reflection of the bank's valuing the assets in a much stricter framework? Or are they haircutting the borrowing base meaningfully for your availability?

Rob Hamwee -- Chief Executive Officer

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

Finian O'Shea -- Wells Fargo Securities -- 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 -- Chief Executive Officer

It reflects the final maturity of the facilities.

Finian O'Shea -- Wells Fargo Securities -- Analyst

So is that safe to say that your revolving period, I mean, they're all about two, two and a half years out. Does that mean your revolving periods are pretty short?

Rob Hamwee -- Chief Executive Officer

Yeah, I mean, 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 extension conversations around that facility.

Finian O'Shea -- Wells Fargo Securities -- Analyst

OK, great. That's all for me. Thank you for all of the color. Again, you've been providing throughout the COVID environment wherein appreciated.

And we'll speak to you soon.

Rob Hamwee -- Chief Executive Officer

Great. Yeah, thank you.

Operator

[Operator instructions] The next question is from Ryan Lynch with KBW. Please go ahead.

Rob Hamwee -- Chief Executive Officer

Hi, Ryan.

Ryan Lynch -- KBW -- Analyst

Hey, Rob. Good morning, and thanks for taking my questions. And I think I said this 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 that you guys provide there. Yeah, and then, I did have a question though. And maybe I missed it, 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 -- Chief Executive Officer

Yeah, no, we don't have it in the deck because it was de minimis. We can get you those numbers, but it was -- we had a page and we look at it, it's 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 Chief Operating Officer

Yeah, this is John. Essentially on Page 23, because of the unique nature of the quarter, we detailed the sales and 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 did in support of our sponsor clients.

Rob Hamwee -- Chief Executive Officer

In Q2, right? I think the question was around Q3 to date. And we had that in -- we looked at that, and it was single-digit millions of activity. So we just look at that.

Ryan Lynch -- KBW -- Analyst

OK, that's helpful. That's all I needed just. And then, can you walk me through exactly the adjustment that you made, the $1.6 million of nonrecurring 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 -- Chief Executive Officer

Yeah. 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 Q2, but not even -- I don't think this year, but if you go back over 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've got to the point with the energy market, 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, 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. And we then -- because we always track our cumulative actual NII, we then reflect those prior-period 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 -- KBW -- Analyst

Yeah, 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 -- Chief Executive Officer

So yes, it is. Although right now, we don't expect incremental historical reversals, because if we did, we would have put it 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-off, writedowns. But obviously, things can change in the next two, three months between now and next quarter's earnings announcement.

Ryan Lynch -- KBW -- Analyst

OK, got it. And then, you mentioned the one non-accrual benefit. So those seems like things are actually improving a little bit there for 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 do you guys hope to get as far as huge or structures in order to provide those modifications and for the modifications that occurred this quarter, were any of them or what level then would the sponsor willing to provide additional capital in order to make those modifications?

Rob Hamwee -- Chief Executive Officer

Yeah, sure. So we really only had a handful of modifications, and you can kind of see it sort of maps to the heat map on Page 11. And the significant -- obviously, majority are -- do not need modifications because they're paying, they're in compliance with their covenants, etc. Obviously, benefits with a full restructuring so I wouldn't necessarily call that a modification.

If you're looking at the heat map on Page 11, just starting in the upper right-hand corner, that the retail healthcare name, that's still up there. We did a modification there where we are getting some extra interest and some fees. And that's a continued negotiation. The Permian, obviously, with a full restructuring.

The education products, there was a modification there and the sponsor put incremental capital in. And we gave -- lending group gave covenant relief in exchange for that and earned some fees. Hospitality management, we're still working through the modification there, but that will be completed this quarter. And that will result in some covenant relief and a few quarters of interest picking.

Moving to the orange, talked about Benevis. UniTek, we're working through some modification work there that will probably come into effect this quarter. The marketing services business highlighted there, there was a relief modification release provided this quarter where the sponsor did put some fresh capital in. And the other retail healthcare name there, there was also a modification where the sponsor put some fresh money in.

That's pretty much it. And so that gives hopefully a sense of what that looks like.

Ryan Lynch -- KBW -- Analyst

Yeah, 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.

Rob Hamwee -- Chief Executive Officer

Great. Happy to do it. Thank you.

Operator

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

George Bahamondes -- Deutsche Bank -- Analyst

Hi, good morning. I was wondering if you can help provide some clarity around upcoming maturities. 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 of the portfolio?

Rob Hamwee -- Chief Executive Officer

On the asset side?

George Bahamondes -- Deutsche Bank -- Analyst

Correct.

Rob Hamwee -- Chief Executive Officer

Yeah. So we have a number of things that are coming due. But for the most part, our repayments come from early activity, whether it's the company gets sold or the sponsors does a refinancing transaction. So we've actually got some visibility to a couple of those that we expect to close in either this quarter or in 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 -- Deutsche Bank -- Analyst

Great. And the other question I had was on amendment just asked. I guess, you had the next one, I'm looking at the credit performance slide, Slide 18. You see a few of these have maybe dripped it up significantly.

Just wondering if you can kind of give me a sense of what the covenants are around some of these? And when they kind of break through that level, you see some of these that are fairly elevated from when they were purchased. What sort of benefits you get from doing that? I'd imagine there's some sort of maybe fees that you're getting? Or kind of how do you kind of think about leverage and kind of folks staying within whatever covenants are in the docs when this is underwritten?

Rob Hamwee -- Chief Executive Officer

Yeah, it's a good question. So clearly, the ones that are most elevated, and you can see them kind of in the bottom right on Page 18, and we can call most of those out by name because they've already been restructured, right, Edmentum, Benevis, UniTek Permian, right? So those are all -- have been restructured. Company CE, we talked a little bit about, John mentioned that. That's the marketing services company in the orange that I mentioned, the other comments is sponsor put some money in.

We gave some covenant relief, got a fee, etc., and that was this quarter. And then, beyond that, if you go up to Company CD, CC, CB, etc., the drift becomes much more modest between kind of one to two turns of drift, which will typically not yet trigger a covenant. There's typically two to three turns before the covenant gets triggered. I believe one of these, there was covenant that was triggered, and we negotiated an appropriate amendment.

I think we'll see a couple of things of some weaker quarters roll through in the next one to two quarters. But that the -- each situation is going to have its own pretty unique dynamic. It's hard to generalize about what -- where the specific covenant will be triggered, and what the result of that trigger would be.

George Bahamondes -- Deutsche Bank -- Analyst

Got it. It's helpful to kind of hear a bit more on how this works behind the scenes. That's it for me this morning. I appreciate you taking the time.

Rob Hamwee -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] The next question comes from Chris Kotowski with Oppenheimer. Please go ahead.

Rob Hamwee -- Chief Executive Officer

Hi, Chris, good morning.

Chris Kotowski -- Oppenheimer and Company -- Analyst

Hey, good morning, and thank you. Last quarter, looking at your chart on Page 11, which I really like 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 sheets. And I'm just wondering, I mean, if we stay in this kind of half-open, half-close, 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 rule, do you think most of the portfolio companies can continue to operate if this -- in this kind of environment if it goes on a lot longer than we all think?

Rob Hamwee -- Chief Executive Officer

Yeah, it's a very good question, and it's the same exact question we have. And the answer is broadly yes, that we've actually been pleasantly surprised the degree to which companies have maintained and even enhanced liquidity and show -- cash runway is measured generally in years, not months or quarters at this point. And part of that is the burn has just been less because these things have -- even in this kind of, like you say, half-open, half-close environment. Things -- and again, for us, it's primarily the retail healthcare.

They just opened more quickly and to a greater degree and therefore, gotten to cash flow breakeven and beyond much more rapidly than we originally modeled. And two, they just entered the price that's most been very well capitalized with available both revolver balances that they drew upon and just cash on the balance sheet. So we feel generally better than ever about the runway. Obviously, it has to get fully resolved at some point, but that point could be one or two years from now as opposed to, oh, in three months, we are going to hit some cash flow across these companies.

Chris Kotowski -- Oppenheimer and Company -- Analyst

OK. And then, secondly, just when you're discussing the income statement highlights on Page 28, did I hear -- you said that the -- 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 nonaccruals? And that the rest was just the movement in rates?

Rob Hamwee -- Chief Executive Officer

Yeah. So it was -- that's generally right. I want to maybe reference you to -- Page 14 is probably the best way to look at it where you can see that that $2 million was the non-accrual and then it was a combination of lower rates, the deleveraging from the asset sales, right? So we just have less assets earning interest, a little bit of lower fee income, and then that's the bridge.

Chris Kotowski -- Oppenheimer and Company -- Analyst

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

Operator

[Operator instructions] 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 -- Chief Executive Officer

Thank you, operator. And thank you, everybody. As always, appreciate the time, the interest, the good questions. As always, we're available, any follow-ups.

But again, it's, obviously, kind of a funky time, but we do feel pretty good about where we're at and 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 signoff]

Duration: 59 minutes

Call participants:

Rob Hamwee -- Chief Executive Officer

Shiraz Kajee -- Chief Financial Officer

Adam Weinstein -- Managing director

John Kline -- President and Chief Operating Officer

Bryce Rowe -- National Securities

Finian O'Shea -- Wells Fargo Securities -- Analyst

Ryan Lynch -- KBW -- Analyst

George Bahamondes -- Deutsche Bank -- Analyst

Chris Kotowski -- Oppenheimer and Company -- Analyst

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