New Mountain Finance Corp

NASDAQ:NMFC

Earnings Call Analysis

Steady Performance with Strategic Dividend Adjustments

New Mountain Finance Corporation reported a stable adjusted net investment income of $0.36 per share for Q2 2024, exceeding the $0.32 regular dividend. The net asset value per share was almost unchanged at $12.74, indicating consistent portfolio performance. A $0.02 variable supplemental dividend was declared, totaling a $0.34 dividend for Q3, yielding an 11% annualized rate. The company reduced its base management fee to 1.25% and extended its dividend protection program for 2025-2026. The loan portfolio remains robust, with 86% floating rates and improving leverage and interest coverage ratios, supported by proactive sponsor investments.

Strong Q2 Performance and Consistent Dividends

In the second quarter of 2024, New Mountain Finance Corporation (NMFC) reported adjusted net investment income of $0.36 per share, surpassing the regular dividend of $0.32 per share. This consistency supports the $0.34 annualized distribution yield, indicating a strong performance. The company announced a variable supplemental dividend of $0.02 per share, payable on September 30, 2024. Expecting to maintain a similar trend, NMFC anticipates a supplemental dividend of at least $0.01 per share in Q4 2024.

Stable Asset Valuation Amid Market Conditions

The net asset value (NAV) per share stood at $12.74, reflecting a slight decrease of $0.03 or 0.2% from the previous quarter. This stability suggests that NMFC's credit performance has remained resilient in the face of fluctuating market conditions, underpinned by the diversity and quality of the underlying assets.

Strategic Fee Reductions and Economic Outlook

Management announced a permanent reduction in the base management fee from 1.4% to 1.25%, alongside a commitment to reduce the incentive fee to a minimum of 15% through 2026, should necessary adjusted net investment income fall below $0.32 per share. This strategic maneuver showcases NMFC's commitment to safeguarding shareholder returns, particularly as it navigates a complex economic landscape where M&A activity is anticipated to pick up significantly in 2025.

Record of Low Credit Losses and Portfolio Management

Since its IPO, NMFC has benefitted from a robust credit strategy, experiencing a negligible average annualized net realized loss rate of approximately 12 basis points. This is indicative of effective portfolio management, with 93% of investment income categorized as recurring. Amid portfolio dynamics, the company successfully originated $437 million in assets while experiencing nearly $300 million in repayments, illustrating strong portfolio velocity.

Maintaining High Growth Sectors Amid Challenges

NMFC's investments are strategically concentrated in defensive, non-cyclical sectors such as software, healthcare, and business services. With approximately 75% of investments now senior in nature, the firm looks to optimize its asset mix. They expect strong performance from most portfolio companies, with 97% rated green under the firm’s internal risk framework, marking an increase from 96.5% last quarter. This solid standing aligns with NMFC's history of minimal exposure to economic downturns.

Future Prospects and Strategic Initiatives

Looking ahead, NMFC exhibits confidence in its portfolio’s strong performance for the remainder of 2024. The firm remains focused on optimizing its lending strategy by capitalizing on rising interest rates and refinancing opportunities. Their proactive asset-liability management aims to enhance liquidity and maintain robust returns for shareholders despite broader economic uncertainties.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the New Mountain Finance Corporation Second Quarter 2024 Earnings Call. [Operator Instructions] 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, executive]

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.

[Kris Corbett, executive]

Thanks, John. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available on our July 31 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. 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?

[Steven Klinsky, executive]

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 $0.03 decline or 0.2%, demonstrating continued stable credit performance across our portfolio.

Given our earnings of $0.36 per share this quarter, we will make our sixth consecutive variable supplemental dividend payment. The variable supplemental dividend for this quarter will be $0.02 per share, which is equal to half of the amount of our Q2 quarterly earnings in excess of our regular dividend of $0.32. NMFC will pay these distributions on September 30 to holders of record as of September 16. The remainder of the excess earnings will remain on our balance sheet and may be paid out in the future.

Our dividend at $0.34 represents an annualized current distribution yield of 11%. For Q3, in addition to our $0.32 regular dividend, we expect to generate a variable supplemental dividend of at least $0.01 per share payable in the fourth quarter of 2024. As we look ahead, the continuation of variable supplemental dividend payments will be dependent on the direction of base rates, financing spreads and other factors.

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. While the current program will remain unchanged for the remainder of the year, 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. Specifically, during 2025 and 2026, if we earn quarterly NII below $0.32 per share, we would reduce our incentive fee to the higher of 15% or the percentage needed to achieve NII of $0.32 per share. We believe these changes reflect our commitment to delivering stable yield and a well-protected dividend. We believe the strength of New Mountain and of NMFC is driven by the consistency of our strategy and the quality of our team.

New Mountain overall now numbers over 250 members, and the firm has developed specialties in attractive defensive growth that is a cyclical growth sectors such as life science supplies, health care information technology, software, infrastructure services and digital engineering. 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 and the firm now manages over $55 billion of assets. 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. 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.

Finally, we as management continue as major shareholders of NMFC. I and NMC's other senior management employees currently own around 12% of NMFC's total shares personally.

With that, let me turn the call to John.

[John Kline, executive]

Thank you, Steve. I would like to begin by offering a broader review of our direct lending investment strategy and long-term track record. Starting on Page 8, we highlight our exposure to a diversified list of defensive noncyclical sectors. These sectors map to the industries where New Mountain has made successful private equity investments and where our firm's knowledge is the strongest. We seek to make investments in companies with durable growth drivers, predictable revenue streams, margin stability and great free cash flow conversion.

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. 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%. Our current portfolio invests in companies within high-quality industries that are performing well and where our last dollar of risk is approximately 40% of the purchase price paid for the business. We lend primarily to businesses owned by financial sponsors, who are sophisticated and supportive owners with significant capital that is junior to the loans that we make.

Turning to Page 10. The internal risk ratings of our portfolio improved quarter-over-quarter with 97% of the portfolio rated green compared to 96.5% last quarter. This represents the highest level of green-rated assets since we began using the heat map rating system in 2020. 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.

The updated heat map is shown in its entirety on Page 11. 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. 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. 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.

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. 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 Edmentum. 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 equity stake in Edmentum. As a reminder, Edmentum is a leading provider of K-12 online learning programs that benefited from an accelerated shift to virtual learning during the pandemic. As we discussed last quarter, the market continues to normalize post-COVID, and therefore, we have reversed some of the unrealized gains that we previously recognized. Consistent with last quarter, we believe the market is stabilizing, Edmentum remains well positioned and the value proposition of the company's products is strong.

Page 13 addresses NMFC's nonaccrual performance. On the left side of the page, we show the current state of the portfolio where we have approximately $3.2 billion of investments at fair value, with $44 million or 1.4% of the portfolio currently on nonaccrual. 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. We now show an adjusted nonaccrual box on the bottom left of the page, which excludes $54 million of certain older UniTek preferred classes that are on nonaccrual. These preferred positions suffered dilution in 2020 when New Mountain led an incremental capital around during the pandemic. The investment came with significant equity participation, which meaningfully diluted the preferred stock tranches.

Today, the current value of this equity largely offsets the original face value of the non-accruing preferreds. We believe that showing these non-accruing UniTek positions with the offsetting equity appreciation without the offsetting equity appreciation is misleading and that this new disclosure more accurately reflects our overall nonaccrual performance.

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. This represents an average annualized net realized loss rate of approximately 12 basis points since IPO. This loss rate increased compared to last quarter as we recorded realized losses as a result of the restructuring of charismatic brands and Transcendia. 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. We are optimistic about Transcendia's current trajectory and operational improvement plans and are hopeful the value of our new securities will increase over time.

On Page 14, we present NMFC's overall economic performance since IPO, showing that we have delivered consistent and compelling returns. 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.

I'll now turn the call over to our Chief Operating Officer, Laura Holson, to discuss the current market environment to provide more details on NMFC's quarterly performance.

[Laura Holson, executive]

Thanks, John. sponsor-backed M&A continued to pick up in the second quarter but still remains below normal levels. There are pockets of activity in our defensive growth verticals where we have the opportunity to make loans that attach $1.01 in the capital structure at attractive double-digit yields while staying very selective. Deal structures remain compelling, with leverage below peak levels and significant sponsor equity contributions representing the vast majority of the capital structures. We remain bullish on the medium- and long-term outlook for M&A activity given the magnitude of dry powder for private equity, the ongoing pressure to return capital to LPs as well as attractive financing markets for borrowers. 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.

Syndicated markets are open, and we continue to see modest spread compression related to the increased competition. However, we expect the supply/demand imbalance to normalize as soon as we see a more regular deal flow environment returns. 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. This provides an ongoing opportunity set to make incremental loans to existing well-performing portfolio companies seeking to pursue accretive M&A.

Page 16 presents an interest rate analysis that provides insight into the effective base rates on NMFC's earnings. The NMFC loan portfolio is 86% floating rate and 14% fixed rate while our liabilities are 48% fixed rate and 52% floating rate as of quarter end. As a reminder, during Q1, we fully swapped our investment-grade bond issuance from fixed to floating rate. As we access the investment-grade market in the future, we would expect to hedge interest rate risk in this manner.

We highlight our sensitivity to interest rates on the bottom chart. While we would expect to see some earnings pressure in the scenario where base rates decrease, we believe we have some opportunities to offset that by optimizing our liability stack and potentially refinancing some shorter dated, higher cost fixed rate debt. Specifically, our 7.5% converts mature in October 2025 and our 8.25% baby bonds are callable at par in November of 2025, both of which represent opportunities to hopefully refinance at lower rates.

Moving on to Page 17. In Q2, we saw strong portfolio velocity. We originated $437 million of assets and had nearly $300 million of repayments. Our originations consisted of investments in our core defensive growth power alleys, including niches of enterprise software and business services. I'd highlight that 5 of our repayments during the second quarter were second lien positions, 2 of which completed opportunistic refinancings where we participated in the new first lien.

Turning to Page 18. We continue to show good momentum in rotating our asset mix more senior, where approximately 75% of our investments, inclusive of first lien SLPs and net lease are senior in nature, up from 69% last quarter. Second lien positions decreased from 18% in Q2 of last year and 14% last quarter to just 9% this quarter. 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 all of which we believe are making positive progress in advance of potential medium-term exits. Our ability to own and operate businesses is a key differentiator. We leveraged the full operating capabilities of our private equity team and approach our credit equity positions like any other New Mountain Capital owned business.

Page 19 shows that the average yield of NMFC's portfolio remained consistent at 11.1% for Q2. 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.

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. This is primarily attributable to originations of some larger companies as well as growth at the individual companies we lend to. While we first and foremost concentrate on how an opportunity maps against our defensive growth criteria and internal New Mountain knowledge, we believe that larger borrowers tend to be marginally safer, all else equal.

We also show the relevant leverage and interest coverage stats across the portfolio. Portfolio company leverage has decreased slightly over the last several quarters. Loan to values continue to be quite compelling, and the current portfolio has an average loan-to-value of 44%. Interest coverage ratios have stabilized as expected and the weighted average interest coverage on the portfolio was flat at 1.7x this quarter. We've seen sponsors continue to proactively support company liquidity and continued M&A activity. This is a great indication that our portfolio consists of companies that are performing well and are able to attract additional investment in healthy evaluations.

Finally, as illustrated on Page 21, we have a diversified portfolio across 123 portfolio companies. The top 15 investments inclusive of our SLP funds and net lease account for approximately 41% of total fair value and represents our highest conviction name.

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

[Kris Corbett, executive]

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 22, the portfolio had approximately $3.2 billion in investments at fair value on June 30 and total assets of $3.4 billion, with total liabilities of $2 billion, of which total statutory debt outstanding was $1.7 billion. Net asset value of $1.4 billion or $12.74 per share was down slightly compared to the prior quarter. At quarter end, our statutory debt-to-equity ratio was [ 1.21:1 and 1.4:1 ] net of available cash on the balance sheet, which continues to be within our target range. While we ended the quarter at the higher end of our range, our average leverage during the quarter was in the middle of our target range.

On Slide 23, we show our quarterly income statement results. 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. As a reminder, the investment adviser 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. The investment adviser has pledged to reduce its incentive fee to fully support the $0.32 per share regular dividend through the end of 2024. 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. It is important to note that the investment adviser cannot recoup fees previously waived.

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. As Slide 24 demonstrates, 93% of our total investment income is recurring in Q2. We saw higher nonrecurring income during the quarter due to increased portfolio velocity and a onetime dividend following the strong performance of one of our equity positions. You will see historically that over 90% of our quarterly income is recurring in nature and on average, over 80% of our income is regularly paid in cash. We believe this consistency shows the stability and predictability of our investment income. Importantly, over 98% of our quarterly noncash income is generated from our green rated names.

Turning to Slide 25, the red line shows the coverage of our regular dividend. This quarter, adjusted 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.

On Slide 26, we highlight our various financing sources and diversified leverage profile. 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 base limitations. Our significant borrowing capacity continues to highlight our strong liquidity position. Subsequent to quarter end, we successfully negotiated a repricing on our Wells Fargo credit facility, which reduced are spread from SOFR plus 2.50% to SOFR plus 2.15%. The successful repricing will partially mitigate the aforementioned spread tightening seen in the market, and we believe this represents very strong execution for a facility of this nature. 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 more during volatile market conditions.

Finally, on Slide 27, we show our leverage maturity schedule. As we've diversified our debt issuance, including through our inaugural investment-grade bond issuance earlier this year. 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.

With that, I would like to turn the call back over to John.

[John Kline, executive]

Thank you, Chris. As we look forward over the remainder of 2024, we are confident in the continued strong performance of NMFC's portfolio and believe we are on track to continue to deliver great risk-adjusted returns to our shareholders. 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]

[Operator Instructions] The first question comes from Finian O'Shea with Wells Fargo.

[Finian O'Shea, analyst]

First question on capital raising. It looks like you may have only hit book value in [ trade ] a little bit. So one, was there any ATM capital raise below NAV? And two, what sort of posture should we expect if and when the stock reaches NAV again?

[John Kline, executive]

Sure. Yes. So when we issue shares on 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 on any new ATM shares. And then the posture around growing through the ATM is one of, I think, of focus. We do want to continue to grow NMFC. We think there's a huge opportunity for us to grow our direct lending franchise in general. As you know, we're more of a midsized lender and we stay long ideas and all a little bit short of capital. So when we issue ATM shares, we have no problem investing those proceeds 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.

[Finian O'Shea, analyst]

And a second one on the color ratings you provided, which are very helpful. I think you said there are no changes this quarter and in the [ queue ], it says Transcendia is on green. So assuming it was on green last quarter with the comments, so are the color ratings market value adjusted or something like that? Or if this was the case, like why was Transcendia on green last quarter?

[Laura Holson, executive]

Yes. So when any time when one of the portfolio companies restructure, we kind of reset kind of the color mapping from a heat map perspective. 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, 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?

[Operator]

Next question comes from Bryce Rowe with B. Riley.

[Bryce Rowe, analyst]

So maybe I'll start with kind of an income statement question. And Kris, you called out the onetime dividend, 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? ]

[Kris Corbett, executive]

Yes. So the dividend that we received during the quarter was approximately $2 million 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.

[John Kline, executive]

Bryce, as you know, for quite a long period of time, we just didn't have a lot of portfolio velocity, and we're really -- in Q2, we just saw that change and that does change the nature of our income a little bit.

[Bryce Rowe, analyst]

And then you guys made a comment about -- and we've seen some other BDCs do this in swapping the fixed rate on some of the unsecured into floating. 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 the assets and liabilities from, I guess, an ALM perspective, asset liability management perspective?

[Laura Holson, executive]

Yes, 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, 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.

[Bryce Rowe, analyst]

Last one for me, just kind of thinking about activity in the back half of the year and certainly heard your comments about M&A activity or circulating M&A activity might be more of a '25 event than '24. But curious how you're kind of seeing the back half of the year from a maybe a net perspective, what's the pipeline look like origination wise? What's the visibility into repayments?

And then 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.

[Laura Holson, executive]

Yes. So as we think about kind of just overall activity, I think what we've demonstrated in Q2 is that even in a somewhat depressed M&A environment, granted it was a little bit better than Q1. We've still been very active from an origination and just velocity perspective. And I attribute that to the incumbency position that we have in a lot of the portfolio and just a lot of portfolio activity when we think about incrementals, opportunistic refis, kind of all of that type of thing. So the pipeline remains decent for the back half of the year despite what I said about M&A activity seemingly not totally unlocking maybe until 2025. We're still seeing a handful of new deals 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.

And I think on the second lien side, that is a trend that I would expect to continue. I'm not sure if it will be at that same pace that we saw just the migration over the last couple of quarters. But as you know, the Unitranche really has taken market share from the first lien, second lien capital structures. And so most of what we're looking at in terms of new deal activity tends to be more first lien/unitranche.

[Operator]

Next question comes from Robert Dodd with Raymond James.

[Robert Dodd, analyst]

On the -- going back kind of [indiscernible] a 1/3 of your second lien basically repaid in the quarter. I mean the market has shifted. What do you think could change that to go back quite? You have generated pretty attractive returns historically in the second lien and the fact that they keep repaying the credit risk is pretty decent. So what do you need to see imbalance? What do you think the market needs a secret, the second lien to get more appealing market-wise and more appealing to you to maybe increase that mix? Maybe not back up to the highs, but [ back end ] in the single digits. So just that's something that's just not on the cards for you anymore.

[John Kline, executive]

Well, I would, first of all, say that second lien is just a little bit of an out of favor classification of debt. I think one reason is because unitranche just is widely accepted and I think really widely liked by sponsors and folks that are financing their companies. Second liens, typically our cash-oriented yielding 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 noncash pay debt-like instruments. And so I just think that when we look at the market, it's a unitranche market. And if folks want to stretch beyond that, it's a unitranche and pref market.

In some cases, we do see first lien, second lien structures more on the larger companies where you have a syndicated first and perhaps a second lien. And right now, just given the competitive environment in that larger, more syndicated market, the second liens that do exist are being priced at extremely tight levels, in many cases, in the low to mid 500 on a spread basis, which I think when you compare that relative value to even the first lien and unitranche market, I think that relative value is pretty poor. So those are really the reasons, and I don't know what the impetus for the second lien market sort of improving will be, it could be lower base rates and things always change in our market so you never know. When we look at whether it's first lien, second lien pref positions 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.

[Robert Dodd, analyst]

And a second one, if I can. On [ Laura ], comment on kind of the pipeline, maybe it's more 2025 than the second half of this year. I mean how soon will you know -- I guess the question, obviously, I mean, rates might move in September. The market might liven up but it might not, there's an election. I mean, 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're thinking of?

[John Kline, executive]

No. I mean I think Laura expressed her view that -- and I think it's a good view that '25 will be really busy. But the back half of '24, I think could be pretty busy. Deals can pop up very quickly. And 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.

[Operator]

[Operator Instructions] The next question comes from Finian O'Shea of Wells Fargo with a follow-up.

[Finian O'Shea, analyst]

Just curious on -- for like platform design and work out when you have a name where you've taken the keys and then Edmentum and UniTek and so forth. Is that then fully run by the private equity side? Or do you still have your, say, origination point person or some or a group in the credit business that primarily runs it? Just any color you could provide on the backdrop of support for these names.

[John Kline, executive]

Sure. I mean it's exactly as I think you said, which is 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. And that is what we think is a really big competitive advantage for getting great outcomes on positions that turn from debt to equity. So that is the way we do it. Credit is still involved, but the decision-making, the effectuation of affecting positive operating change in the business is really driven by our private equity team and our operating partners.

[Operator]

The next question comes from Paul Johnson with KBW.

[Paul Johnson, analyst]

On the high level of origination activity this quarter, how much, if any, of those originations is just due to PIK accruing?

[Laura Holson, executive]

So I think in today's environment, we're seeing a decent amount of new deal activity have some form of PIK flexibility, but it tends to be still pretty small percentage of the overall yield. So in a typical deal, what we might see is a SOFR 500 or [ 5.25 ] type pricing in terms of the overall spread and the ability for the borrower to pick 100 or 200 basis points of the spread for a 25 or 50 basis point premium. So I would say that's kind of the typical new market deal for unitranche right now. So of our new originations, I would say, certainly, probably a good handful of them have that kind of PIK flexibility, but it's still pretty small in the context of the overall yield. And importantly, I think it is one of the reasons why, 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 a direct lending solution over the syndicated market.

And the other thing I would note is just because the deal is structured with a little bit of that PIK 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 Johnson, analyst]

But within the $437 million of originations this quarter, I mean, is there any PIK accruent -- accrual included in that number at all?

[Laura Holson, executive]

No, it's not. That's just pure new deal activity and

DDTL draws.

[Paul Johnson, analyst]

And just generally on PIK utilization rates in the quarter, I mean how did that trend this quarter higher or lower kind of what did you see there?

[Laura Holson, executive]

Yes, I would say no material change. The borrowers that have been utilizing a little bit of their PIK flexibility probably continue to do so, but we haven't seen any material uptick in that. And if anything, maybe slightly going the other way that as people kind of grow into their capital structures, they're swapping to kind of all cash.

[Paul Johnson, analyst]

And then I mean, not to [ belabor ] the point, but going forward, on new origination activity, I mean, how do you factor in, I guess, the higher utilization rate in the portfolio today to just managing PIK income going forward? I mean it probably isn't reasonable to expect that a new issue loan is going to be paying PIK income so soon after origination. But how do you kind of factor that into new deals that you fund today?

[John Kline, executive]

Sure. So our strategy is really to try to invest in the best direct lending credit within our core industries as we can find. The fact of the matter is this PIK flexibility is a term that is a market standard term. And if we want access to the best deals that we see in the direct lending market within our core industries, we have to accept that. So when we think about managing our overall PIK portfolio, I think we're going to accept this partial PIK feature on great loans with really creditworthy borrowers. And the way that we plan to reduce the overall PIK in the portfolio is some of the older names that we think are coming up for refinancing in the very near future that we think that may have 100% PIK, they may be preferred investments. 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% PIK positions. And so the goal would be to actually be able to reduce the PIK over the next year. Although as you're noting and as you're alluding to, I think the headwind is just the PIK component that is just in existence on these unitranche loans.

[Paul Johnson, analyst]

And then last one for me. It sounded like a lot of the activity this quarter was driven kind of by add-on opportunities within the portfolio. Did those type of add-on deals, are those mainly M&A driven? Or are there other things that they're using the capital for?

[Laura Holson, executive]

Yes. I think it's largely M&A-driven, certainly kind of the buy and build strategy, as we've talked about in the past is, I think, key to a lot of sponsors thesis for post acquisition of an additional or an initial portfolio company. So I think most of it is M&A related. There's a handful of cases where it could have been for specific investments that the sponsor has identified, and then the other category would be kind of the refi activity that I mentioned, where maybe there was a first lien, second lien capital structure that the sponsor refinanced into an all first lien, or first lien 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.

[John Kline, executive]

We like making loans to companies that we know well and have performed well for us. So when we see the sort of activity that Laura is talking about, we think that's just a healthy sign and indicates that we're picking good credit, and we're sticking with those companies.

[Operator]

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

[John Kline, executive]

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