Q2 2024 New Mountain Finance Corp Earnings Call
Operator: Well, going early didn't hurt. I lost your circuit. Day and welcome to the New Mountain Finance Corporation second quarter 2024 earnings call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO of New Mountain Finance Corporation. Please go ahead.
Speaker Change: Welcome to the New Mountain Finance Corporation's second quarter 2024 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star, then 1 on a touchtone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO of New Mountain Finance Corporation. Please go ahead.
John Kline: Thank you and good morning everyone. Welcome to New Mountain Finance Corporation's second quarter 2024 earnings call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital, Laura Holson, COO of NMFC, and Kris Corbett, CFO and treasurer of NMFC. Steve is going to make some introductory remarks, but before he does, I'd like to ask Kris to make some important statements regarding today's call.
John Kline: Thank you and good morning everyone. Welcome to New Mountain Finance Corporation's second quarter 2024 earnings call.
Speaker Change: 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.
Speaker Change: Steve is going to make some introductory remarks, but before he does, I'd like to ask Kris to make some important statements regarding today's call.
Kris Corbett: Thanks, John. Good morning, everyone.
Kris Corbett: 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 July 31st earnings press release. I would also like to call your attention to the customary Safe Harbor disclosures in our press release and on pages 2 and 3 of the slide presentation regarding forward-looking statements.
Kris: Thanks, John . Good morning, everyone.
Kris Corbett: Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded.
Kris: Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available on our July 31st earnings press release.
Kris: I would also like to call your attention to the customary Safe Harbor disclosures in our press release and on pages 2 and 3 of the slide presentation regarding forward-looking statements.
Kris Corbett: Today's conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we'll be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time, I'd like to turn the call over to Steve Klinsky, NMFC's Chairman, who will give some highlights beginning on page 5 of the slide presentation. Steve?
Kris Corbett: 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.
Kris Corbett: We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we'll be referencing throughout this call, please visit our website at www.newmountainfinance.com.
Steve Klinsky: At this time, I'd like to turn the call over to Steve Klinsky, NMFC's Chairman, who will give some highlights beginning on page 5 of the slide presentation. Steve? Thanks, Chris. It's great to be able to address you all today.
Steven Klinsky: Thanks, Kris. It's great to be able to address you all today, both as NMFC's chairman and as a major fellow shareholder. Adjusted net investment income for the quarter was $0.36 per share, in line with our implied guidance and more than covering our $0.32 per share regular dividend that was paid in cash on June 28. Our net asset value per share of $12.74 was roughly flat, with only a 3-cent decline, or 0.2%, demonstrating continued stable credit performance across our portfolio.
Kris Corbett: both as NMFC's chairman and as a major fellow shareholder.
Speaker Change: Adjusted net investment income for the quarter was 36 cents per share in line with our implied guidance and more than covering our 32 cent per share regular dividend that was paid in cash on June 28th.
Speaker Change: Our net asset value per share of $12.74 was roughly flat with only a 3 cent decline or 0.2%, demonstrating continued stable credit performance across our portfolio.
Steven Klinsky: The remainder of the excess earnings will remain on our balance sheet and may be paid out in the future. While there is uncertainty around these variables, we would like to announce some shareholder-friendly changes to our fee structure. First, we plan to permanently reduce our base management fee to 1.25% from 1.4%. Second, we are announcing the extension of our dividend protection program for calendar years 2025 and 2026. We commit to reduce our incentive fee to 15% if and as needed to help support the $0.32 per share quarterly regular dividend.
Kris Corbett: for Q3, in addition to our $0.32 regular dividend.
Speaker Change: We expect to generate a variable supplemental dividend of at least one cent per share payable in the fourth quarter of 2024.
Kris Corbett: While there is uncertainty around these variables, we would like to announce some shareholder-friendly changes to our fee structure.
Kris Corbett: First, we plan to permanently reduce our base management fee to 1.25% from 1.4%.
Kris Corbett: Second, we are announcing the extension of our dividend protection program.
Kris Corbett: While the current program will remain unchanged for the remainder of the year,
Speaker Change: And the firm has developed specialties in attractive, defensive growth, that is, acyclical growth, sectors such as life science supplies, healthcare information technology, software, infrastructure services, and digital engineering.
Steven Klinsky: When pursuing our credit investing efforts, we utilize our extensive group of industry experts to provide unique knowledge and expertise that allows us to make very informed, high-conviction underwriting decisions. Over the last year, we have continued to expand the quality of our overall team. New Mountain's private equity funds have never had a bankruptcy or missed an interest payment. Similarly, NMFC has experienced only 12 basis points of average annualized net realized losses in its 13 years as a public company while paying out over $18 per share in cumulative dividends.
Speaker Change: When pursuing our credit investing efforts, we utilize our extensive group of industry experts.
Kris Corbett: to provide unique knowledge and expertise that allows us to make very informed, high conviction, underwriting decisions. Over the last year we have continued to expand the quality of our overall team.
Kris Corbett: and the firm now manages over $55 billion of assets.
Kris Corbett: Similarly, NMFC has experienced only 12 basis points of average annualized net realized losses in its 13 years as a public company, while paying out over $18 per share of cumulative dividends.
Kris Corbett: We believe our loans today are well positioned overall in defensive growth industries that we think are right in all times and particularly attractive in less certain economic times.
Kris Corbett: As you can see from the industry pie chart on page 8, we have virtually no exposure to cyclical, volatile, and secularly challenged industries, which could be riskier areas to invest in given today's higher rate environment.
Steven Klinsky: Our strategy has been consistent over our 13 years as a public company, and it allows us to operate with confidence in any economic environment. Page 9 provides key performance statistics showing a long-term track record of delivering consistent, enhanced yield to our shareholders by minimizing credit losses and distributing virtually all of our excess income to shareholders. Since our IPO in 2011, NMFC has returned approximately $1.3 billion to shareholders through our dividend program, generating an annualized return of approximately 10%. We lend primarily to businesses owned by financial sponsors who are sophisticated and supportive owners with significant capital that is junior to the loans that we make.
Kris Corbett: Since our IPO in 2011, NMFC has returned approximately $1.3 billion to shareholders through our dividend program, generating an annualized return of approximately 10%.
Kris Corbett: This represents the highest level of green rated assets since we began using the heat map rating system in 2020.
Steven Klinsky: Our most challenged names within the orange and red categories represent only 1.2% of NMFC's fair value, making them a negligible part of our portfolio. Given NMFC's orientation towards defensive sectors like software, business services, and healthcare, we believe our assets are well-positioned to continue to perform no matter how the economic landscape develops. Similar to Q1, we did not have any negative risk rating migrations during the quarter. In fact, the majority of our investments continue to experience both top and bottom line growth consistent with our underwriting.
Speaker Change: Given NMFC's orientation towards defensive sectors like software, business services, and health care, we believe our assets are well positioned to continue to perform no matter how the economic landscape develops.
Kris Corbett: Similar to Q1, we did not have any negative risk rating migrations during the quarter. In fact, the majority of our investments continue to experience both top and bottom line growth consistent with our underwriting.
Speaker Change: Additionally, we remain optimistic about the prospects of many of our non-green names, many of which have the ability to migrate back to green over time, and one of which we expect to partially repay in Q3 at par.
Steven Klinsky: Turning to page 12, we provide a graphical analysis of NAV changes during the quarter resulting in a book value of $12.74, a $0.03 decline in book value compared to last quarter. While our general expectations for Northstar's recovery value have not changed, a delay in the expected timing of realization resulted in a write-down this quarter. Additionally, we again modestly reduced the carrying value of our equi-stake in inventors. As a reminder, Mentum is a leading provider of K-12 online learning programs that benefit from an accelerated shift to virtual learning during the pandemic.
Speaker Change: Turning to page 12, we provide a graphical analysis of NAV changes during the quarter resulting in a book value of $12.74, a 3 cent decline in book value compared to last quarter.
Speaker Change: Overall, the quarter benefited from very good core credit performance, a supportive market environment, which was offset by declines in the value of Northstar and Inventum.
Speaker Change: While our general expectations for Northstar's recovery value have not changed, a delay in the expected timing of realization resulted in a write-down this quarter.
Steven Klinsky: As we discussed last quarter, the market continues to normalize post-COVID, and therefore, we have reversed some of the unrealized gain that we previously recognized. Today, the current value of this equity largely offsets the original face value of the non-accruing preferred. We believe that showing these non-accruing Unitec positions with the offsetting equity appreciation, Moving to the right side of the page, we show our cumulative credit performance since IPO, where NMFC has made approximately $10 billion of investments while only realizing losses of $69 million.
Speaker Change: Of the names on Nonaccrual, most are from much older vintages, have been written down materially and have a good chance of exiting the portfolio in the medium term.
Kris Corbett: We believe that showing these non-accruing Unitec positions with the offsetting equity appreciation
Speaker Change: without the offsetting equity appreciation is misleading and that this new disclosure more accurately reflects our overall non-accrual performance.
Speaker Change: Moving to the right side of the page, we show our cumulative credit performance since IPO, where NMSC has made approximately $10 billion of investments while only realizing losses of $69 million.
Speaker Change: This represents an average annualized net realized loss rate of approximately 12 basis points since IPO.
Speaker Change: This loss rate increased compared to last quarter as we recorded realized losses as a result of the restructurings of Charismatic Brands and Transcendia.
Steven Klinsky: Charismatic is currently held at a negligible fair value relating to out-of-the-money warrants received in the restructuring. The position has almost no downside but meaningful upside if the company returns to past earnings levels. Transcendia was recapitalized by a new sponsor during Q2, which led to a restructuring of our second lien position but no meaningful change in fair value relative to Q1. We now own two tranches of preferred securities and common equity alongside the new owner of the business.
Speaker Change: Charismatic is currently held at a negligible fair value relating to out-of-the-money warrants received in the restructuring.
Speaker Change: The position has almost no downside, but meaningful upside if the company returns to past earnings levels.
Speaker Change: Transcendia was recapitalized by a new sponsor during Q2, which led to a restructuring of our second lien position, but no meaningful change in fair value relative to Q1. We now own two tranches of preferred securities and common equity alongside the new owner of the business.
Speaker Change: Cumulatively, NMFC has earned nearly $1.3 billion of net investment income while generating only $69 million of cumulative net realized losses and only $30 million of net unrealized depreciation, resulting in $1.2 billion of value created for shareholders.
Speaker Change: Thanks John . Sponsor-backed M&A continued to pick up in the second quarter but still remains below normal levels.
Speaker Change: The timing of that pickup in M&A remains a question, however general sentiment feels more likely 2025 rather than the second half of 2024.
Speaker Change: Syndicated markets are open and we continue to see modest spread compression related to the increased competition.
Steven Klinsky: However, we expect the supply-demand imbalance to normalize as soon as we see a more regular deal flow environment return. While the syndicated markets are open, the direct lending market generally remains the financing market of choice for sponsors, as the majority of sponsors still recognize the benefits of the direct lending solution, including more certain execution, more flexibility around creating a bespoke capital structure, and the ability to hand-select lenders. In addition to new activity, we've seen an increased volume of opportunistic refinancings and add-on opportunities within our large portfolio of over 120 unique borrowers.
Speaker Change: including more certain execution, more flexibility around creating a bespoke capital structure and the ability to hand-select lenders.
Speaker Change: As a reminder, during Q1, we fully swapped our investment-grade bond issuance from fixed to floating rates.
Speaker Change: As we access the investment-grade market in the future, we would expect to hedge interest rate risk in this manner.
Speaker Change: Specifically, our 7.5% converts mature in October 2025, and our 8.25% baby bonds are callable at par in November of 2025.
Speaker Change: Our originations consisted of investments in our core defensive growth power alleys, including niches of enterprise software and business services.
Steven Klinsky: I'd highlight that five of our repayments during the second quarter were second lien positions, two of which completed opportunistic refinancings where we participated in the new first lien. Page 20 highlights the scale and credit trends of our underlying borrowers. As you can see, the weighted average EBITDA of our borrowers has increased over the last several quarters to $180 million. We also show the relevant leverage and interest coverage stats across the portfolio. Portfolio company leverage has decreased slightly over the last several quarters.
Speaker Change: Second lean positions decreased from 18% in Q2 of last year and 14% last quarter to just 9% this quarter.
Speaker Change: We continue to dedicate meaningful time and resources to business building at these companies, all of which we believe are making positive progress in advance of potential medium-term exits.
Speaker Change: Page 19 shows that the average yield of MMFC's portfolio remained consistent at 11.1% for Q2.
Speaker Change: Generally speaking, even though spreads are tighter, as evidenced by lower yields on our originations compared to on our repayments, yields remain attractive and support our net investment income target.
Speaker Change: Page 20 highlights the scale and credit trends of our underlying borrowers.
Speaker Change: As you can see, the weighted average EBITDA of our borrowers has increased over the last several quarters to $180 million.
Speaker Change: The top 15 investments, inclusive of our SLP funds and net lease, account for approximately 41% of total fair value and represent our highest conviction names.
Speaker Change: 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.
Kris Corbett: As shown on slide 22, the portfolio had approximately $3.2 billion in investments at fair value on June 30th and total assets of $3.4 billion with total liabilities of $2 billion, of which total statutory debt outstanding was $1.7 billion.
Kris Corbett: On slide 23, we show our quarterly income statement results.
Speaker Change: For the current quarter, we earned total investment income of $94.3 million, a 1% decrease over prior year. Total net expenses of approximately $56.1 million, increased 1% versus prior year.
Speaker Change: As a reminder, the Investment Advisor is committed to a management fee of 1.25% for the 2024 calendar year, and as mentioned earlier, we expect to permanently reduce our fee to this level on a go-forward basis.
Steven Klinsky: The Investment Advisor has pledged to reduce its incentive fee to fully support the $0.32 per share regular dividend through the end of 2024. Additionally, over 98% of our quarterly non-cash income is generated from our green-rated names.
Speaker Change: In 2025 and 2026, it pledges to reduce its incentive fee to the higher of 15% or the percentage needed to achieve an adjusted NII of $0.32, if and as needed, to support the quarterly regular dividend.
Speaker Change: Our adjusted net investment income for the quarter was $0.36 per weighted average share, which meaningfully exceeded our Q2 regular dividend of $0.32 per share.
Speaker Change: You will see historically that over 90% of our quarterly income is recurring in nature and on average over 80% of our income is regularly paid in cash.
Speaker Change: We believe this consistency shows the stability and predictability of our investment income. Importantly, over 98% of our quarterly non-cash income is generated from our green rated names.
Speaker Change: Turning to slide 25, the red line shows the coverage of our regular dividend. This quarter, adjusted net investment income exceeded our Q2 regular dividend by $0.04 per share. For Q3 2024, our Board of Directors has again declared a regular dividend of $0.32 per share, as well as a supplemental dividend of $0.02 per share.
Speaker Change: On slide 26, we highlight our various financing sources and diversified leverage profiles.
Speaker Change: Taking into account SBA-guaranteed debentures, we have $2.6 billion of total borrowing capacity with $587 million available on our revolving lines, subject to borrowing-based limitations.
Speaker Change: Our significant borrowing capacity continues to highlight our strong liquidity position.
Speaker Change: Subsequent to quarter end, we successfully negotiated a repricing on our Wells Fargo credit facility which reduced our spread from SOFR plus 250 to SOFR plus 215.
Speaker Change: As a reminder, covenants under both our Wells Fargo and Deutsche Bank credit facilities are generally tied to the operating performance of the underlying business that we lend to, rather than the marks of our investments at any given time, which we think is particularly important during volatile market conditions.
Speaker Change: Finally, on slide 27, we show our leveraged maturity schedule.
Speaker Change: As we've diversified our debt issuance, including through our inaugural investment-grade bond issuance earlier this year, we successfully
Speaker Change: We've been successful at laddering our maturities to manage liquidity. Notably, nearly 70% of our debt matures in or after 2027, with near-term maturities representing an opportunity to continue to access the investment-grade bond market.
Speaker Change: With that, I would like to turn the call back over to John .
John Kline: We once again would like to thank all of our stakeholders for the ongoing partnership and support and look forward to speaking to you again on our next quarterly call in October . I will now turn things back to the operator to begin Q&A. Operator?
Operator: Thank you. We will now begin the question and answer session. To ask a question, press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered, and you would like to withdraw your question, press star then 2.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2.
Frank: Frank, how are you? First question on capital raising: it looks like you may have only hit book value intraday by a little bit. So, first, was there any ATM capital raised below NAV?
Speaker Change: First question on capital raising, it looks like you may have only hit book value intraday a little bit.
Speaker Change: One, was there any ATM capital raised below NAV? And two, what sort of posture should we expect if and when the stock reaches NAV again?
Speaker Change: Sure. Yes, so when we issue shares in our ATM program, we always make sure that the company nets NAV. So there were small subsidies that we paid to make sure the company netted NAV.
Speaker Change: on any new ATM shares.
Speaker Change: And then the posture around growing through the ATM is one of, you know, I think of a focus. We do want to continue to grow NMFC. We think there's a huge opportunity.
Speaker Change: for us to grow our direct lending franchise in general. As you know, we're more of a mid-sized lender and we stay long ideas and always a little bit short capital. So when we issue ATM shares, we have no problem investing those proceeds.
Speaker Change: into our core direct lending loans that we make. So, to the extent the stock trades well, we'll continue to utilize the ATM program.
Speaker Change: Okay, it's helpful, thanks. And a second one on the the color ratings you provide which are very helpful. I think you said there are no changes this quarter.
Speaker Change: and in the queue it says Transcendia is on on green so assuming it was on green last quarter with the comments like
Speaker Change: So are the color ratings market value adjusted or something like that? Or if this was the case, why was Transcendia on green last quarter?
Speaker Change: Yes, so when we
Speaker Change: Any time when one of the portfolio companies restructures, we kind of reset kind of the color mapping from a heat map perspective.
Speaker Change: So, Transcendia was technically not on green last quarter. I believe it might have been an orange last quarter. But because it was kind of a new transaction, effectively post-restructuring.
Speaker Change: We kind of reset the expectations, we're resetting our underwriting cases, all of that, and therefore it's now on green, kind of post-restructuring. Does that help clarify?
John Kline: Absolutely.
Speaker Change: Absolutely. Thanks so much.
Speaker Change: Next question comes from Bryce Rowe with B. Reilly. Please go ahead.
Bryce Rowe: Thanks a bunch, good morning.
John Kline: I'm good, John.
Speaker Change: Good morning. How are you, Bryce?
Bryce Rowe: I'm good John
Speaker Change: So maybe I'll start with a kind of an income statement question and Chris you called out the one-time the one-time dividend
Bryce Rowe: was hoping maybe you could help size that one up for us. And then also it looked like the other income line might have been a little elevated in the quarter, just trying to get a feel for what's recurring and what isn't.
Chris: Yes, so that, yes, the dividend that we received during the quarter was approximately two million dollars.
Speaker Change: for that line, and then as far as the uptick in other income, again, that was due to the increased velocity with the increase in originations during the quarter. I think that was the bulk of that increase in the other income line item.
Speaker Change: Got it. Okay. Yeah, as you know for for quite a long period of time We just didn't have a lot of portfolio velocity and we're really you know in Q2 We just saw that change and that does change the nature of our income a little bit. Yeah. Yeah, okay
Speaker Change: That makes sense.
Speaker Change: and then...
Speaker Change: You guys made a comment about, you know, and we've seen some other BDCs do this in swapping the.
Speaker Change: the fixed rate on some of the unsecured into floating.
Speaker Change: Did I get the read that maybe that will be kind of an ongoing strategy, even in maybe a different interest rate environment, do you expect to try to match?
Speaker Change: the assets and liabilities from a from a I guess an ALM perspective, asset liability management perspective.
Speaker Change: Yeah, I think that's right. I mean, as we said, we did fully swap the investment-grade bond issuance that we did earlier this year.
Speaker Change: And we think that was appropriate to do based on the interest rate environment that we're in. And I think going forward, we would probably expect to operate in that same manner, but we'll continue to evaluate on a case-by-case basis.
John Kline: Okay, that's helpful. Last one for me, just kind of thinking about activity in the back half of the year and certainly heard your comments about, you know, M&A activity or percolating M&A activity might be more of a 25 event than 24, but curious how you're kind of handling it.
Speaker Change: Okay, that's helpful.
Speaker Change: Last one for me, just kind of thinking about activity in the back half of the year.
Speaker Change: certainly heard your comments about M&A activity or percolating M&A activity might be more of a 25 event than 24. But curious how you're kind of...
Speaker Change: Seeing the back half of the year from a you know, maybe a net perspective. What's the pipeline look like? Origination wise, you know, what's the visibility into repayments?
Speaker Change: And then, you know, maybe a follow-up to that is around the second lien activity that you've noted here. Has that kind of continued into the third quarter? I guess we're a month into it now.
Speaker Change: Sure. Yeah, so as we think about kind of just overall activity, I think, you know, what we've demonstrated in Q2 is that even in a somewhat depressed M&A environment,
Speaker Change: granted it was a little bit better than Q1. We've still been very active from an origination and just velocity perspective.
Speaker Change: And I attribute that to, you know, the incumbency position that we have in a lot of the portfolio and just a lot of portfolio activity when we think about incrementals.
Speaker Change: opportunistic refis, kind of all of that type of thing. So the pipeline remains decent for the back half of the year, you know, despite what I said about M&A activity, you know, seemingly not totally unlocking maybe until 2025, you know, we still we're still seeing a handful of new deals.
Speaker Change: taking place, and then a lot of continued portfolio activity. So, velocity-wise, we're not seeing maybe quite the pace of repayments that we saw in Q2, at least quarter to date, but we're still seeing some velocity there.
Operator: The next question comes from Robert Dodd with Raymond James. Please go ahead.
Speaker Change: A third of your second lien is basically repaid in the quarter, I mean the market has shifted. What do you think could change that to go back? You have generated pretty attractive returns historically in the second liens and the fact that they keep repaying means the credit risk is pretty decent.
Robert Dodd: What do you need to see in balance? What do you think the market needs to see for the second lean to get more appealing market-wide and more appealing to you to maybe increase that niche? Maybe not back up to the highs, but back out of the single digits. So it's just that something that's just not on the cards.
Speaker Change: what what do you need to see
Speaker Change: imbalance, what do you think the market needs to see for the second lean to get more appealing market-wide and more appealing to you to maybe increase that mix?
Speaker Change: Maybe not back up to the highs, but back out of the single digits. So it's just that something that's just not on the cards for you anymore.
Speaker Change: Well, I would say, well, first of all, hi, Robert. Welcome to the call.
Speaker Change: I would first of all say that second lien is just a little bit of an out-of-favor classification of debt.
Speaker Change: I think that one reason is because Unitron is widely accepted and I think really widely liked by sponsors and folks that are financing their companies.
Speaker Change: Second liens typically are cash-oriented, yielding.
Speaker Change: securities, and there's not a lot of extra cash after first lien cash obligation. So typically second liens are being pushed out in favor of preferred tranches, or non-cash pay debt-like instruments.
Speaker Change: And so I just think that when we look at the market, it's a unitronch market, and if folks want to stretch beyond that, it's a unitronch and pref market.
Speaker Change: In some cases, we do see first-lane, second-lane structures.
Speaker Change: more on the you know larger companies where you have a syndicated first and and perhaps a second lien and right now just given the competitive environment in that larger more syndicated market
Speaker Change: The second liens that do exist are being priced at extremely tight levels.
Speaker Change: in many cases in the low to mid 500s on a spread basis, which
Speaker Change: I think when you compare that relative value to, you know, even the first lean in Unitronch market, I think that relative value is pretty poor.
Speaker Change: So, those are really the reasons, and I don't know what the impetus for the second-line market sort of improving will be. It could be lower base rates, and things always change in our market, so you never know.
Speaker Change: when we look at
Speaker Change: whether it's first lien, second lien, PREF positions, you know, we evaluate credit risk in the same way and to the extent that market comes back, we could be open to investing if we think there's great value in that second lien market.
Speaker Change: Got it, got it. Thank you. Sean, what if I can... Lloyd, comment on kind of the...
Lloyd: Maybe it's more 2025 than the second half of this year. I mean, how...
Speaker Change: How soon will you know? I guess the question obviously, I mean, rates might move in September, the market might line up, but it might not. There's an election, I mean...
Speaker Change: given that the time it takes to underwrite I mean are you basically hitting the cutoff now for closing deals this year or what's the time frame you think you'll have?
Laura Holson: No, I mean, I think, you know, Laura expressed her view that
Speaker Change: No, I mean I think you know Laura expressed her view that and I think it's a it's a it's a good view that that 25 be really busy but the back half of 24 I think could be pretty busy. Deals can pop up very quickly and
John Kline: You know, so we're not giving up on the back half of 24. If we were to look at our private equity deal pipeline, there are plenty of deals that our private equity team is looking at, and that would be, I think, an interesting data point when we think about other sponsors in the market. So, you know, 24 is looking just fine, but I think we do have the view that the pent-up demand will really hit in 25. That said, it just is hard to know with great precision.
Speaker Change: So we're not giving up on the back half of 24. If we were to look at our private equity deal pipeline, there are plenty of deals that our private equity team is looking at, and that would be, I think, an interesting data point when we think about other sponsors in the market. So 24 is looking just fine, but I think we do have the view that the pent-up demand will really hit in 25. That said, it just is hard to know with great precision.
John Kline: and John Kline.
John Kline: Got it. Thank you.
John Kline: Thank you.
Speaker Change: Again, if you have a question, please press star then 1.
Speaker Change: The next question comes from Finian O'Shea of Wells Fargo with a follow-up. Please go ahead.
Finian O'shea: Hey everyone, thanks for the follow-up.
Finian O'shea: I'm just curious on, for like platform design and work out, when you have a name where you've taken the keys and invented a Unitech, so forth,
Speaker Change: Is that then fully run by the private equity side?
Speaker Change: Or do you still have your
John Kline: say, Origination Point person or a group in the credit business that primarily runs it, just any color you could provide on the backdrop of,
Speaker Change: support for these names. Thanks.
Speaker Change: Sure, I mean it's exactly as I think you said which is
Speaker Change: we would have a credit deal shepherd involved in the deal, but the restructured equity position would really be run and driven by the private equity team.
Speaker Change: and that is what we think is a really big competitive advantage.
Speaker Change: for getting great outcomes on positions that turn from debt to equity.
Speaker Change: So that is the way we do it. Credit is still involved, but the decision making, the effectuation of, you know, the effecting positive, you know, operating change in the business is really driven by our private equity team and our operating partners.
John Kline: Great. Thanks, John.
Operator: The next question comes from Paul Johnston with KBW. Please go ahead.
Kris Corbett: The next question comes from Paul Johnston with KBW. Please go ahead.
Paul Johnston: Yeah, good morning. Thanks for taking my question. On the high level of origination activity this quarter, how much, if any, of those originations is just due to pick accruing?
Speaker Change: So, I think in today's environment, we're seeing a decent amount of New Deal
Speaker Change: activity have some form of
Speaker Change: take flexibility, but it tends to be still.
Speaker Change: you know, pretty small percentage of the overall yield.
Paul Johnston: So, in a typical deal, what we might see is a SOFR, you know, 500 or 525 type pricing in terms of the overall spread and the ability for the borrower to pick.
Speaker Change: 100 or 200 basis points of the spread for a 25 or 50 basis point premium.
Speaker Change: So, I would say, you know, that's kind of the typical new market deal for, you know, for Unitrons right now. So, of our new originations, I would say certainly probably a good handful of them have that kind of peak flexibility, but it's still pretty small in the context of the overall yield.
Speaker Change: And importantly, I think it is one of the reasons why, you know,
Operator: Again, back to my comments about why direct lending kind of still remains the market of choice. In today's base rate environment, I think sponsors like to have a little bit of that flexibility and one of the reasons why sponsors still choose the direct lending solution over the syndicated market.
Speaker Change: The other thing I would note is just because the deal is structured with a little bit of that PIC flexibility doesn't mean that all borrowers are using that flexibility. It's kind of a nice to have and then they make a kind of quarter by quarter decision whether to use that.
Paul Johnston: That's good color. But within the 437 million of originations this quarter, I mean, it is.
Paul Johnston: Was there any pick accrual included in that number at all?
Speaker Change: No, there's not. That's just pure New Deal activity and DDTL draws.
Paul Johnston: Gotcha. Thanks. Thanks. And just, you know, generally on pick utilization rates in the quarter. I mean, how, how did that trend this quarter, higher, lower, you know, kind of what did you see there?
Paul Johnston: Gotcha. Thanks. Thanks. And just, you know, generally on, you know, pick utilization rates in the quarter. I mean, how did that trend this quarter, you know, higher, lower, you know, kind of what did you see there?
John Kline: Yeah, I would say no material change. The borrowers that have been utilizing a little bit of their PIC flexibility probably will continue to do so, but we haven't seen any material uptick in that. And if anything, you know, maybe slightly going the other way, that is, people kind of grow into their capital structures; they're swapping to kind of all cash.
John Kline: Yeah I would say no material change. The borrowers that have been utilizing a little bit of their PIC flexibility probably continue to do so but we haven't seen any material uptick in that and if anything you know maybe slightly going the other way that is people kind of grow into their capital structures they're they're swapping to kind of all cash.
John Kline: Gotcha, that makes sense. And then, I mean, not to belabor the point, but, you know, going forward, you know, on new origination activity, how do you factor in, I guess, the higher utilization rate in the portfolio today to just manage PIC income going forward? I mean, it probably isn't reasonable to expect that a new issue loan is going to be paying PIC income so soon after, you know, origination, but how do you kind of factor that into the new deals that you fund today?
John Kline: gotcha that makes sense and then I mean
John Kline: Not to belabor the point, but, you know, going forward, you know, on new origination activity, I mean, how do you factor in, I guess, the higher utilization rate in the portfolio today to just managing?
John Kline: going forward. I mean, it probably isn't reasonable to expect that a new issue loan is going to
John Kline: be paying PICC income so soon after, you know, origination, but how do you kind of factor that into the new deals that you fund today?
Speaker Change: Sure, so you know our strategy is really to try to invest in the best direct lending credit within our core industries as we as we can find.
Speaker Change: The fact of the matter is this PIC flexibility is a term that is a it's a market standard term And if we want access to the best deals that we see in direct lending market within our core industries We have to accept that
Speaker Change: So, when we think about managing our overall PICC portfolio, I think we're going to accept this partial PICC feature on great loans with really credit-worthy borrowers.
Speaker Change: And the way that we plan to reduce the overall pick in the portfolio is
Speaker Change: is some of the older names that we think are coming up for refinancing in the very near future.
Speaker Change: that we think, you know, that may have a 100% pick, they may be, you know, preferred investments.
Speaker Change: and we can think of a couple of catalysts over the next four quarters where we really think we can exit some of those larger 100% pick positions.
Speaker Change: And so the goal would be to actually be able to reduce the PIC over the next year. Although, you know, as you're noting and as you're alluding to, I think the headwind is just the PIC component that is just in existence on these unit tranche loans.
John Kline: about it, thanks. It's very helpful. And then last one, for me, sounded like a lot of the activity this quarter was driven kind of by add-on opportunities within the portfolio. Are those types of add-on deals mainly M&A driven, or are there other things that they're using the capital for?
John Kline: It makes sense.
John Kline: got it. Thanks. It's very helpful.
John Kline: And then last one for me.
John Kline: sounded like a lot of the activity this quarter was driven kind of by add-on opportunities within the portfolio. Is that those type type of add-on deals are those mainly M&A driven or are there other things that they're they're using the capital for?
Speaker Change: Yeah, I think it's largely M&A driven, certainly kind of the buy and build strategies we've talked about in the past is, I think, key to a lot of sponsors thesis for, you know, post acquisition of an additional or an initial portfolio company.
Speaker Change: So I think most of it's M&A related. There's a handful of cases where it could have been for specific investments that the sponsor has identified.
Speaker Change: And then the other category would be kind of the refi activity that I mentioned, where
Speaker Change: Maybe there was a first lane, second lane capital structure that the sponsor refinanced into an all first lane or a first lane PREF, as John talked about. So those would be kind of the nature of the originations in the quarter that related to existing portfolio companies.
Speaker Change: We like making loans to companies that we know well and have performed well for us so when we see this sort of activity that Laura is talking about we think that's just a healthy sign and indicates that we're we're picking good credit and we're sticking with that those companies.
John Kline: That makes sense. Thanks for taking my questions and congrats on a good quarter and as well as the protection of the dividend extension.
Speaker Change: Thank you.
John Kline: This concludes our question and answer session. I would like to turn the conference back over to John Kline for any closing remarks.
John Kline: Great. Well, thank you for your interest in New Mountain Finance Corporation. Thank you for the great questions on the call today. And we look forward to speaking with you again very soon. Have a great day.
John Kline: Great. Well, thank you for your interest in New Mountain Finance Corporation. Thank you for the great questions on the call today, and we look forward to speaking with you again very soon. Have a great day.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.