New Mountain Finance (NMFC) Earnings Transcript

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Date

• Tuesday, Aug. 5, 2025, at 2 p.m. ET

Call participants

• President and Chief Executive Officer — John Kline
• Chairman — Steve Klinsky
• Chief Operating Officer — Laura Holson
• Chief Financial Officer and Treasurer — Kris Corbett

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Risks

• Net Asset Value Decline: Net asset value per share declined by $0.24 to $12.21 in Q2 2025 as a result of portfolio markdowns in several positions, including challenges in dental healthcare and consumer products.
• Portfolio Downgrade: Internal risk ratings declined slightly, with select investments totaling $79 million were downgraded, including a consumer products business now categorized as red due to significant tariff exposure and the need for liquidity support before year-end.
• Reduced Origination and Yields: Origination volume was lighter, with $122 million in new investments versus $155 million in repayments and sales, while the average portfolio yield fell to 10.6%, caused partly by a downward shift in the forward SOFR curve and lower yields on new originations.

Takeaways

• Adjusted Net Investment Income: $0.32 per share, fully covering the quarterly cash dividend, due to stable recurring loan income and no new non-accruals.
• Net Asset Value: $12.21 per share, reflecting a $0.24 per share decrease compared to Q1 2025, attributed to declines in a dental healthcare investment, a consumer products business, and position markdowns.
• Dividend Protection Program: Management confirmed full utilization of the dividend protection program, maintaining a $0.32 quarterly dividend supported by recurring portfolio income and incremental fee waivers, with the program remaining in place through 2026.
• Credit Quality and Losses: Non-accruals represent $38 million or 1.2% of the portfolio, while 95% of investments are rated green, and cumulative net realized losses since IPO total $16 million on $10.2 billion of investments.
• Stock Repurchases: $16 million of shares repurchased year-to-date 2025, with $31 million in remaining board authorization, underlining management’s capital return priority.
• Debt Refinancing Plans: Management is preparing to refinance 7.5% convertible notes and 8.25% unsecured notes maturing or callable in Q4 2025, planning to access the unsecured debt market and implement interest rate hedges.
• Income Mix: 95% of total investment income was recurring, with 86% of the loan portfolio floating rate; 14% of investment income came from PIK assets, most of which are green-rated.
• Leverage and Liquidity: Statutory debt-to-equity ratio was 1.17 to one (or 1.13 to one net of cash), within management’s target range, with $2.9 billion total borrowing capacity as of June 30, 2025, and nearly $1.1 billion available on revolving lines, covering $262 million in unfunded commitments.
• Portfolio Diversification: The portfolio included 124 companies as of June 30, 2025, with the top 10 single-name issuers accounting for 25% of total fair value, and average portfolio company EBITDA increased to $176 million.
• Shareholder Alignment: NMC employees and senior advisors own 14% of outstanding shares, and management cites this as aligning interests with shareholders.

Summary

New Mountain Finance (NMFC -1.79%) reported adjusted net investment income per share of $0.32 for Q2 2025, fully covering its cash dividend and highlighting ongoing support from stable, recurring portfolio income. Tactical use of the dividend protection program and incremental fee waivers ensured dividend stability during a period of lighter origination activity and compressed yields. Management addressed slight portfolio risk rating deterioration, noting a consumer products business downgrade to red with significant tariff-related pressures and expected liquidity needs by year-end. The loan portfolio is increasingly allocated to senior secured assets, with floating rate exposure aligned to expected refinancing activities intended to preserve net interest margins as funding costs change. Debt repayment and refinancing initiatives signal a focus on optimizing the liability structure to maintain liquidity and cost discipline. Portfolio returns and realized loss rates remain favorable on a cumulative basis since IPO, with low non-accruals and cumulative net realized losses since IPO of only $16 million. Ongoing stock repurchases, high management ownership, and continued equity monetization efforts reinforce shareholder return priorities as management anticipates improving credit performance and asset rotation in the coming quarters.

• John Kline said, "The dividend protection program is meant to be a form of shareholder support where we can give our shareholders really good visibility on what the dividend is going to be."
• Refinancing of the company’s outstanding notes is expected to meaningfully increase the alignment between floating-rate assets and liabilities, resulting in an 81%/19% floating/fixed mix pro forma for the expected refinancing activity over the next six months.
• Selective downgrades, notably the consumer products business, were described as isolated with minimal anticipated tariff exposure in the broader portfolio, according to Laura Holson.
• Management reiterated a disciplined approach to new originations. The pass rate on deals has increased and emphasizing focus on "core defensive growth power alleys" of business services, healthcare, IT, and infrastructure sectors.

Industry glossary

• PIK income (Payment-in-Kind income): Non-cash interest earnings accrued by accepting additional securities in lieu of cash interest, recognized in investment income but affecting cash flow timing and risk.
• SLP (Senior Loan Program): Joint venture or fund structure dedicated to direct origination or acquisition of first lien senior loans, often referenced as a portfolio segment within BDCs.

Full Conference Call Transcript

Operator: Good day, and welcome to the New Mountain Finance Corporation Second Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO. Please go ahead.

John Kline: Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's second quarter 2025 earnings call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital, Laura Holson, COO of NMFC, and Kris Corbett, CFO and Treasurer of NMFC. Steve is going to make some introductory remarks, but before he does, I would like to ask Kris to make some important statements. Thanks, John. Before we get into the presentation,

Kris Corbett: 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. I would like to call your attention to the customary Safe Harbor disclosures in our press release and on Pages two and three of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections. 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 would like to turn the call over to Steve Klinsky, NMFC's Chairman, who will give some highlights beginning on Page five of the slide presentation. Steve?

Steve Klinsky: Thanks, Kris. Great to be able to address you all today both as NMFC's Chairman and as a major fellow shareholder. Adjusted net investment income for the quarter was $0.32 per share, covering our $0.32 per share dividend that was paid in cash on June 30. NII was supported by consistent recurring income from our loan portfolio, no new non-accruals, full utilization of the dividend protection program, and a modest incremental fee waiver. Our net asset value per share of $12.21 declined $0.24 compared to Q1.

Laura Holson: NMFC did experience modest declines across three positions, which John will address later in the call. 95% of our investments are green on our heat map, and our portfolio has nearly 80% exposure to senior-oriented assets. NMFC lends chiefly in sectors such as healthcare, information technology, software, insurance services, and infrastructure services, which we believe are well-positioned in today's economic environment. NMFC's portfolio loan-to-value stands at just 45%. Our lending lines are being refinanced at lower rates, and our percentage of first lien assets is growing while our PIK income is falling. Looking forward to Q3, we would like to announce a $0.32 dividend payable on September 30 to shareholders of record on September 16.

NMFC's dividend is supported by our strong recurring earnings from our well-performing credit portfolio, increased portfolio activity compared to Q2, and the dividend protection program, which we have in place through 2026. The dividend protection program represents a shareholder-friendly way to stabilize the dividend in a period of time that is characterized by tighter new issue spreads and lower fees that have been the result of below-normal private equity deal activity. Our view at New Mountain is that these trends are likely to normalize as deal flow picks up.

Our current stock price implies a 15% discount to book value, and the dividend of $0.32 quarterly or $1.28 annually represents over a 12% yield, all with a fourteen-year track record of just a one basis point total net realized loss rate. NMFC entered into a stock repurchase program where the company has repurchased approximately $16 million of shares year-to-date, with an additional $31 million of Board authorization remaining. Additionally, I and my fellow managers at New Mountain are the largest shareholders of NMFC and have steadily increased our ownership level over time.

We believe that our current share price represents a compelling entry point for prospective investors as we seek to deliver stable, consistent yield and exhibit clear opportunity for equity upside in the months ahead through further advancing our strategic initiatives. As a reminder, New Mountain's flagship private equity funds have never had a bankruptcy or missed an interest payment, and the firm now manages over $55 billion of assets. We employ over 90,000 people at our PE portfolio companies at field, and our New Mountain team has now grown to over 280 employees and senior advisors and approximately 70 members of our executive advisory council, building skill and knowledge to benefit NMFC and our credit platform as a whole.

We thank you for your ownership and partnership, and we are working diligently. With that,

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

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

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

We expect to access the unsecured debt market and lock in interest rate hedges on the notional amount of these transactions. Finally, we continue to sell equity positions and exit PIK assets. In Q2, we monetized MFC's $15 million position in OfficeAlly's common equity and received a full repayment on our position in ARCOS preferred shares, including all previously accrued PIK. We will seek to exit more PIK positions in the coming quarters. As shown on pages eleven and twelve, the internal risk ratings of our portfolio decreased slightly during the quarter. With approximately 95% of the portfolio rated green.

At the margin, we did see a few select names migrate down on our rating scale, representing $79 million or less than 3% of the portfolio. Perhaps the most notable movement was the migration from yellow to red of a consumer products company in the portfolio. While this company is still current on its interest, its performance has been significantly impacted by tariffs on its predominantly China-oriented supply chain and will need liquidity support before year-end. It's worth noting that NMFC's loan is at the top of the capital structure, and there is no material debt ahead of our position.

Despite the modest negative move in overall risk ratings, our most challenged names marked orange and red represent only 2.1% of NMFC's fair value, making them a small part of the portfolio. Turning to Page 13, we provide a graphical analysis of NAV changes during the quarter, resulting in a book value of $12.21, a $0.24 decline compared to last quarter. Overall, the quarter benefited from good core credit performance offset by declines in momentum, a dental healthcare business, and the aforementioned consumer products business. Admintem continues to deliver steady operating performance. However, there is debt and preferred equity that is accreting senior to our common equity position, which is pressuring our valuation.

Admentum continues to work on new growth levers, including a career learning offering and other operating initiatives to enhance top and bottom-line performance. We have started to see M&A activity pick up in the sector and believe Admentum remains an attractive and well-positioned platform. The dental business has faced challenging labor inflation against the backdrop of lower patient volumes combined with price pressure. The company's financial sponsors have given the business a meaningful liquidity runway to improve operations and have made management changes that we hope will catalyze better execution. Page 14 addresses MFC's non-accrual performance.

On the left side of the page, we show that non-accruals continue to be very low, with only $38 million or 1.2% of the portfolio on non-accrual. On the right side of the page, we show our cumulative credit performance since IPO. During that time, NMFC has made $10.2 billion of investments while realizing losses net of realized gains of just $16 million over the course of our history as a public company. On Page 15, we present NMFC's consistent returns over the last fourteen years.

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

Laura Holson: Thanks, John. While deal activity remained constrained in Q2, given tariffs and regulatory uncertainty, we have seen an increase in deal volume over the past several weeks. A combination of IPOs, take privates, as well as general LBO activity indicates an unfreezing of the post-Liberation Day markets. The pipeline of potential PE exits remained exceptionally full given the extended hold times for many PE-owned assets. The pressure to both deploy dry powder and return capital to LPs are key drivers of sponsor activity. As some of the headline noise stabilizes, we think the remainder of the year could be a productive period for LDO activity.

We believe direct lending remains an attractive asset class in today's market and continues to provide good risk-adjusted returns relative to other asset classes, including the syndicated loan market, which has continued to experience meaningful repricing waves. Direct lending spreads, while tighter than twelve months ago, have largely stabilized. We have particularly noted the lack of dispersion in pricing based on both asset quality and asset size. Most unitranche loans are pricing at the SOFR plus even for slightly lower quality or smaller companies.

While we continue to find opportunities in our defensive growth verticals, where we can make loans that attach a $1 in the capital structure at 9% to 10% unlevered returns, our underwriting bar remains higher than ever, and our pass rate on deals has increased. Deal structures generally remain compelling, with significant sponsor equity contribution representing the vast majority of the capital structures. Page 17 presents an interest rate analysis that provides insight into the effect of base rates on NMFC's earnings. The NMFC loan portfolio is 86% floating rate and 14% fixed rate, while our liabilities are 49% floating rate and 51% fixed rate.

Pro forma for the expected upcoming refinancing activity over the next six months, we expect our mix will shift meaningfully to 81% floating and 19% fixed. This will nearly align us with our target of matching our percentage of liabilities that float with the percentage of our assets that float. As shown in the bottom table, while we would expect to see earnings pressure in the scenarios where base rates decrease, we are evolving our capital structure to help offset some of that pressure. Moving on to Page 18, Q2 was a lighter quarter in origination activity given what I mentioned on deal flow and quality.

In Q2, we originated $122 million of assets offset by $155 million of repayments and sales. Our originations consisted of investments in our core defensive growth power alleys, including niches of business services, like insurance and utility services. Notable repayments in the quarter included our first lien and equity positions in OfficeAlly, which as mentioned previously provided us the opportunity to rotate into senior cash-yielding loans. As John noted, we also received a repayment in our preferred equity investment in ARCOS, collecting our previously accrued PIK in full. Turning to page 19, approximately 78% of our investments, inclusive of first lien SLPs and net lease, are senior in nature, up from 75% in the prior year.

Second lien positions represent just 6% of our portfolio. Approximately 7% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. We continue to dedicate meaningful time and resources to business building at these companies. Page 20 shows that the average yield of NMFC's portfolio decreased slightly to 10.6% for Q2, partially due to a small downward shift in the forward SOFR curve. Despite lower yields on our originations compared to on our repayments, we believe total yields remain attractive for the risk. Page 21 highlights the scale and positive credit trends of our underlying borrowers.

The weighted average EBITDA of our portfolio companies increased slightly in the second quarter to $176 million, primarily due to growth at the individual companies we lend to. We also show the relevant leverage and interest coverage stats across the portfolio. These metrics have remained relatively consistent over the last several quarters. Loan-to-values continue to be quite compelling, and the current portfolio has an average loan-to-value of 45%. Finally, as illustrated on page 22, we have a diversified portfolio across 124 portfolio companies. Excluding our investments in the SLPs and net lease funds, the top 10 single-name issuers account for 25% of total fair value.

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

Kris Corbett: Thank you, Laura. For more details, please refer to our quarterly report on Form 10-Q that was filed yesterday with the SEC. As shown on Slide 23, the portfolio had $3 billion in investments at fair value on June 30, and total assets of $3.2 billion. Total liabilities were $1.9 billion, of which statutory debt outstanding was $1.5 billion. Net asset value of $1.3 billion or $12.21 per share was down slightly compared to the prior quarter. At quarter-end, the statutory debt-to-equity ratio was 1.17 to one and 1.13 to one net available cash on the balance sheet, which is in the middle of our target range of one to 1.25 times.

On Slide 24, we show our quarterly income statement results. For the current quarter, we earned total investment income of $83 million, a 12% decrease over the prior year. Total net expenses of $49 million decreased 13% versus the prior year, inclusive of the fee waiver previously mentioned. Our effective incentive fee rate for the quarter was 13.5%. Our adjusted net investment income for the quarter was $0.32 per weighted average share, which covered our Q2 dividend. Slide 25 highlights that 95% of our total investment income is recurring in the second quarter.

On the following page, you can see that over 80% of our investment income was paid in cash, and 14% was PIK income for positions that included PIK from inception to best enable these borrowers to execute on their strategic growth plans. Only 3% of investment income is driven by modified PIK of an amendment or restructure. Importantly, investments generating non-cash income during the second quarter are marked at a weighted average fair market value of 96% of par, and 92% of this income is generated from our green-rated names. In the second quarter, we collected $8 million of PIK income, primarily associated with the aforementioned Arcos preferred share repayments.

We continue to make progress in monetizing PIK income and see continued opportunities to do so in the coming quarters. Turning to Slide 27, the red line shows the coverage of our dividend. For Q3 2025, our Board of Directors has again declared a dividend of $0.32 per share. On Slide 29, we highlight our various financing sources and diversified leverage profile. Taking into account SBA-guaranteed debentures, we have $2.9 billion of total borrowing capacity, with nearly $1.1 billion available on our revolving lines, subject to borrowing base limitations. This more than covers our unfunded commitments of $262 million, as well as all of our near-term bond maturities.

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

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

Operator: Thank you. The first question comes from Finian O'Shea with Wells Fargo. Please go ahead.

Finian O'Shea: Hey, everyone. Good morning. A question on healthcare names. I know you highlighted the dental downgrade. It sounds idiosyncratic, but seeing if there's any industry headwinds there when noticing there are a couple more healthcare names on your slide 33 that are downgraded on a business characteristics perspective. And then sort of another add-on there, Alliance Animal Health, one of your larger names, seeing if these sort of headwinds relate to that as well?

Kris Corbett: Hello?

Operator: Sorry. We're just kind of reconnecting the speaker line. Just a second.

Laura Holson: Are you able to hear us? Yes.

Finian O'Shea: Great. Sorry about that, sorry. Technical difficulties over here. No.

Operator: Just starting on the

Laura Holson: I did. Yes. Thank you. Okay. Just starting on the dental side and physician, you know, business practice businesses generally speaking, you know, that is a sector that we've studied a lot at the firm level. It does have some good secular tailwinds when you think about, you know, just some of the demographics and the of a lot of those underlying niches. But I think, you know, as we've owned businesses in the space, as we've invested in many over the years as well, I think you know, some of the learnings around that sector in particular is, number one, just that the you know, the top line.

It's a business that you don't have a lot of pricing levers to pull, right, when you think about just And, you know, that's not a lever that really is available. Despite the fact that there are some good volume trends. In many of these underlying sectors. And then I think more importantly on the expense side, it's a it's a business that's very operationally intensive and does, you know, really require excellent execution when you think about just managing the expense base and it does have a decent amount of operating leverage. In these businesses. So as we've kinda lived with the this sector and gotten deeper on it, it is one that's very management sensitive also.

And so it's an area that we've spent less time on as of late. You know, when talking about the specific one that we downgraded, it is a bit more idiosyncratic. We don't think, you know, in general, we're seeing, you know, headwinds across the space for large. But, certainly, as I said, because of how operationally intensive it is, it does require very specific execution. And, therefore, just as a lender, it's not a space that we prioritizing on a go forward basis.

But that really is the one that just some underperformance you know, we did downgrade again for some idiosyncratic reasons that John alluded to, specifically around on the volume side, but not necessarily a trend that we think is impacting over overall. But again, just on a go forward basis, less of a focus. For us as we originate new deals. And then switching gears to the veterinary side of things, again, space that has a lot of good secular tailwinds. You know, things that we like about it is just more people are getting pets. These pets are living longer. There's more types of procedures and things that you can do to help pets.

So, again, a lot of good things here. And then the additional benefit versus maybe the dental space is that, you know, you don't have that limitation from a top line perspective because it's typically cash pay, no reimbursement risk, etcetera. So, there's a lot of things here that we do like about this space. You mentioned the Lions Animal Health in particular is one of our larger positions. It is know, generally speaking, we feel like that space is performing quite well overall. We have seen some volume trends, not on that company in particular, but just in general in the industry. Come off a little bit from what the COVID peak was.

A lot of people got puppies and kittens. During COVID, and those pets go to the vet three to four times in their first year of life, and then it's more like once a year thereafter. But as those pets age, we will expect to see the other side of that from a volume perspective. But again, more levers here, a little less execution intensive, and it's a space that we like quite a bit.

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

Kris Corbett: Thanks.

John Kline: Sure. The dividend protection program is meant to be a form of shareholder support where we can give our shareholders really good visibility on what the dividend is going to be. We've had this in place for a while and we're committed to very shareholder friendly. And we are in an environment, as you know, where spreads have come off a little bit, OIDs have come off. Or are actually higher than they were. You know, deal flow is not quite what we've wanted it to be just given some volatility around, you know, the Trump tariffs. So, you that's why I think the dividend protection program is so important.

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

I know I know we showed that in our deck. And I think that's a real positive catalyst for NMFC. We have a new SBIC coming online, and then, of course, we have the buyback as well. So there are a bunch of things that we have at the top of our mind to offset you know, some of the pressures that we do see. And it feels great to have you know, the New Mountain firm support around the dividend protection program And as you mentioned in this quarter, we did go a little bit above and beyond because we do feel strongly about, you know, maintaining that consistency of dividend.

Finian O'Shea: Okay. So I mean, it sounds like the incremental fee, know, kind of forget the 15% number you'll waive incremental to make the 32 through 26 And then just and How do you how should we think about The policy in place is the core dividend protection and then of course, we have the option to do more if we see fit. I think what I was trying to describe is we do see some positive catalyst it relates to our core earnings capability. You know, that should, you know, help support know, the overall dividend. So we have the announced program, and that's what we're committing to.

Finian O'Shea: Okay. Thanks so much.

Operator: The next question comes from Robert Dodd with Raymond James. Please go ahead.

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

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

There's still you know, a fair amount of tariff volatility even though it doesn't feel quite as present in the headlines of the Wall Street Journal. There are still some headwinds. And, you know, this company is materially exposed to a Chinese, an Asian centric supply chain, and the business is working through that. But, really, it wasn't under underperformer, and I think that the tariffs hurt it, even more. And I think there's still a lot yet to be to be known about, you know, the end state of this company. In my own head, it's not a long term impairment. I still have a personal optimism that we can get our a full recovery on this name.

But it's important to be very transparent and honest about you know, the current state of the company, which is, in our view, a red. The business, as we said, in our comments, will need some more liquidity. And so the sponsor can put that liquidity in or the lenders may have to put it in. We're not sure which direction that's gonna go. But over the over a long period of time, we do or a longer period of time, we do feel like plenty of opportunity for this business to recover, you know, full par. But the fair value, it has been has been moved lower, and we do have it as red.

Laura Holson: And only the other thing to add, just to your question about, you know, is there a risk of you know, was this a surprise, and was there is there risk of any others kind of surprising news from a tariff perspective? As John said, this is one that we flagged last quarter, but we did not move the risk rating at that point just given the massive amount of uncertainty at that particular moment. Now that they're, even though it's not totally certain, they have a little bit more a view as to what the tariff impact is likely to be.

From the rest of the portfolio perspective, you know, we've continued to refresh perspective, perspectives on tariff exposure, and we continue to think that otherwise, you know, it's very minimal you know, across the rest of the portfolio.

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

Given that the timeframe that you've committed to on the dividend protection program, ended 2026, do you think you can complete all your activities in terms of optimizing the liability stack having maybe some spread widening make its way through the portfolio and maybe monetize some of the equities. Do you think all of that can be completed by the end of '26? Sufficient to the point that the dividend protection program may be hypothetically, might not be necessary at that point?

John Kline: I think we've been very clear about all the different things that we're doing to improve our company. And I think we've reported on the cadence of improvement over the last few quarters and I continue to feel very good about it. So when I think about the next six quarters, I think that we'll continue to show really good improvement on the asset quality and the character of the assets the liability mix. I think we'll continue to show improvement on our PIK income. We're incredibly focused on, monetizing some of the largest positions. So I do feel very, very optimistic and positive personally that we're we're gonna be able to make some real progress.

It's gonna be know, there's some hard work to be done, but we've done we've gotten off to a good start, and I see, you know, particularly in a deal environment, that we think will be good over the course of the next six to twelve months, I am optimistic about improvements on all fronts. Know, when you think about the overall yield characteristics of just the direct lending environment, that's that's obviously a little tougher to predict to predict overall. We're just gonna focus on the parts of our business that we can control again, I feel good about the trajectory there.

Robert Dodd: Got it. Thank you.

Operator: The next question comes from Sean Paul Adams with B. Riley. Please go ahead.

Sean Paul Adams: Hey, guys. Good morning. On Augmentum, just seems that there's been a continued trend of write downs on the name. Is this just more of a unwinding that you forecast you know, throughout the rest of the year? Or any secular trends in the education space? Yes. No, in terms of momentum, just as a reminder, the business is an ed tech business serving the K-twelve end market. I think the market is very much there, right?

Laura Holson: There's more learning loss than effort, right, on the yield of COVID, some of that learning loss. And as John mentioned, you know, we do have some other outside of the just the core business of Edmentum continuing to expand vectors of the business to attack the career market in addition to that. You know, we do think it's a scaled platform. It's well positioned in the space. The underlying performance has been has stabilized. Right? If you remember, this is a business that is performing fine pre-COVID then had a big spike during COVID given part of the business relates to virtual learning, which obviously, you know, experienced a tremendous uptick. During COVID.

And at this point now, that kind of uptick is gonna just renormalized, the business is stable and on a stable trajectory. But as John mentioned, we just have some securities ahead of us in the capital structure, you know, that are accreting ahead of us, which, you know, modestly impacts the equity where we sit in the capital stack. So right now, the company is in the midst of its know, key buying season just from a summer perspective. And, you think we'll we'll continue to know more as that evolves over the next, you know, coming months.

But again, I think big picture, we view it as well performing, and stable underlying performance just has some of this unique capital structure dynamics.

Sean Paul Adams: Perfect. Appreciate the color. Thank you.

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

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

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