Rob Hamwee - CEO
Steve Klinsky - Chairman, NFMC, and CEO, New Mountain Capital
Dave Cordova - CFO
Greg Mason - KBW
J.T. Rogers - Janney Capital Markets
Jonathan Bock - Wells Fargo Securities
New Mountain Finance Corporation (NMFC) Q2 2013 Earnings Call August 8, 2013 10:00 AM ET
Good morning, and welcome to the New Mountain Finance Corporation Q2 2013 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please also note this event is being recorded.
I would now like to turn the conference over to Rob Hamwee, CEO. Please go ahead Sir.
Thank you and good morning everyone. With me here today is Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; and Dave Cordova, CFO of NMFC. Steve Klinsky is going to make some introductory remarks. Before he does, I would like to ask Dave to make some important statements regarding today's call.
Thank you, Rob. I would like to advice 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 earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our August 7, 2013, press release and on page two 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 by law. Any references to New Mountain Capital or New Mountain are referring to New Mountain Capital, LLC or its affiliates and may be referring to our investment advisor, New Mountain Finance Advisers BDC, L.L.C. where appropriate.
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 or call us at 212-720-0300.
At this time, I would like to turn the call over to Steve Klinsky, the Chairman of New Mountain Finance Corporation, who will give some highlights beginning on page four of the slide presentation. Steve?
Thanks everybody. Before turning the call back over to Rob and Dave, I wanted to welcome you all to New Mountain Finance Corporation's second quarter earnings call for 2013. Rob and Dave will go through the details, but I'm once again pleased to present the highlights of another strong quarter for new Mountain Finance.
New Mountain Finance's adjusted net investment income for the quarter ended June 30, 2013, was $0.50 per share. After deducting the one-time YP distribution of $0.12 per share our pro forma adjusted net investment income was $0.38 per share, which exceeds our previously announced range of $0.33 to $0.35 per share, and more than covers our previously announced Q2 dividend of $0.34 per share.
The company's book value on June 30th was $14.32 per share, an increase of 1% from Q1 and an all time high for the company. We're also able to announce our regular dividend for the quarter ending September 30, 2013. The regular dividend will again be $0.34 per share, consistent with our previously communicated view that we have reached a fully ramped steady state dividend level.
Additionally, we will be paying a $0.12 per share special dividend this quarter from the proceeds of a distribution we received from one of our equity holdings YP LLC.
The credit quality of the company's loan portfolio continues to be strong with once again no new loans placed on non-accrual this quarter. We have had only one issuer default since October 2008 when the debt effort began, and it represented just 0.6% of the cost basis of our existing portfolio, and under 0.3% of cumulative investments made to-date.
New Mountain Finance continue to expand its asset base in Q2. The company invested $150 million in gross originations in Q2, largely deploying the proceeds from June's $29 million equity capital raise and related credit facility upsizing.
Targeted yields on new investments continue to be consistent with our previously communicated expectations. Our portfolio continues to emphasize positions in recession resistant, acyclical industries pursuant to New Mountain's overall strengths and strategy.
We continue to be very pleased with the progress of New Mountain Finance to-date and we are pleased to address you as fellow shareholders as well as management.
With that, let me turn the call over to Rob Hamwee, New Mountain Finance Corporation's Chief Executive Officer.
Thank you, Steve. As always I would like to start with a brief review of NMFC and our strategy. As outlined on Page 5 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm, with more than $9 billion of assets under management, and approximately 100 staff members, including nearly 60 investment professionals.
NMFC takes New Mountains approach to private equity and applies it to corporate credit with a consistent focus on defensive growth, business models, and extensive fundamental research.
Some of the key hallmarks of the defensive growth business models include acyclicality, sustainable sector growth drivers, high barriers of competitive entry, niche market dominant, repetitive revenue, variable cost structures, and strong free cash flow.
With a historically successful business model focused approach in mind, our mandate since the inception of New Mountains debt investment program in 2008 has been to primarily target what we believe to be high quality business that demonstrate most or all of the defensive growth attributes that are important to us, and to do so with an industry's that are already well researched by New Mountain. Or more simply put, we invest in recession in each different businesses that we really know and that we really like it.
We believe this approach results in a differentiated and sustainable model that will allow us to generate attractive risk adjusted rate of return across changing market cycle and market condition. To achieve our mandate, we utilize the existing New Mountain investment team as our primary underwriting resource.
Turning to Page 6, you can see our total return performance from our IPO in May 2011 to August 2nd, 2013. We continue to be very pleased with both our absolute and relative return performance.
As outlined on Page 7, credit market saw a significant volatility in late May and June, as long-term treasury rates spike by over 100 basis points. This served as a catalyst for meaningful outflows in high yield market, which in turn grow credit spreads higher. The market has stabilized so far in Q3 and credit spreads have recovered somewhat.
Recent history has shown that market conditions can change quickly. We would like to reemphasize that New Mountain Capital and accordingly NMFC have always been proactively focused on defensive acylical business models and that our financing has turned out until late 2016 and not subject to traditional mark-to-market margin cost.
Given the recent rise in long-term interest rates, and the renewed focus in the market on the possibility of future short-term and long-term rate increases, we wanted to highlight NMFC's defensive positing relative to this potential issue.
If you can see on Page 8, 88% our portfolio is invested in floating rate debt. Therefore, even in the phase of the material rise in interest rates, assuming a consistently shaped yield curve, we would not expect to see a significant change on our book value.
Furthermore, as the table at the bottom of the page demonstrates, a meaningful rise in short-term rates will generally increase our NII per share with the only exception being a modest drive having a negative impact as the cost of our borrowing rise, while our interest income does not initially go up given the presence of LIBOR floor is on our assets.
Our singly highest priority continues to be our focus on risk control and credit performance, which we believe overtime, is the single biggest differentiator of total return in the BDC space.
If you refer to Page 9, we once again layout the cost basis of our investments, with the current 6/30/13 portfolio and our accumulated investments since the inception of our credit business in 2008. And then, show what if anything has migrated down the performance flatter.
In Q2, no assets had negative credit migration. We continue to have one SLF asset with a cost of $13.5 million and the fair market value of $8.9 million that previously migrated from internal rating of 2 to an internal rating of 3, indicating operating performance materially below our expectations but no near or medium term expectation for non-accrual. We continue to have only one Portfolio Company on non-accrual representing a cost 0.6% of our total portfolio and under 0.1% of fair market value.
Since the inception of our credit efforts in 2008, we've made investments in 116 portfolio companies of which only one has migrated to non-accrual. Over 99% of our portfolio at fair market value has currently rated 1 or 2 on our internal scale.
Pages 10 and 11 show the operating company and SLF, respectively leverage multiple for all of our holdings above $7.5 million when we entered into an investment and leverage level for the same investment as of the end of the current quarter. Well, not a perfect metric, the asset by asset trend and leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical, fundamental support for our internal ratings and marks.
As you can see by looking at the two table, leverage multiples are in almost all cases trending in the right direction, and even more importantly, no single company in either page has had a material increase in leverage multiple with the exception of one loan in the SLF.
Page 12, provides a little more detail on the $0.12 special dividend for our investment in YP. As you can see, we made a relatively modest investment of $10 million into this business a little over a year ago, primarily in the form of second lien debt. The business has outperformed our expectations in terms of both operating performance and cash flow generation, resulting in a significantly recapitalization transaction. We've now been fully repaid this 15% interest on our debt position, and have cumulatively received $6.9 million of dividend on our $500,000 equity investment. We continue to own approximately 1% of the equity in the company. And as part of the recapitalization, we invested $31 million into a new first lien term loan.
On Page 13, we show a table depicting how NMFC's have publicly traded flow have increased by 350% based on the five equity offerings we have completed since our IPO. We now have $38.1 million shares in our flow, representing 85% of the total shares outstanding and liquidity and daily trading volume have increased commensurably.
The chart on Page 14; helps to track the company's overall economic performance since its IPO. At the top of the page, we show how the regularly quarterly dividend is being covered at of net investment income. As you can see, we continue to cover 100% of our cumulative regular dividend out of NII. And on bottom of the page, we focused on below the line items. First, we look at realized gains and realized credit and other losses. While you can see the individual, annual, and quarterly data, I draw your attention to the number highlighted in blue, which shows cumulative net realized gains of $19.1 million into our IPO.
Next, we look at unrealized depreciation. As you can see highlighted in grey we accumulated net unrealized depreciation of $13 million. For clarity, our mark-to-market loss on our one defaulted investment, ATI, of $5.50 million is reflected in this number along with various other mark-to-market gains and losses reflected on our schedule of investments.
Finally, we combined net realized with unrealized appreciation to derive the final line in the table, which in the yellow box shows a current cumulative net realized and unrealized depreciation of $32.1 million.
The point here is to show that on both the realized and combined realized unrealized basis, we have offset any credit losses or impairments below the line gains also in the portfolio.
In fact, by this methodology we have built a $32 million cushion to offer any future credit losses some of which we have paid out of special dividend. Our market driven volatility around unrealized appreciation and depreciation may cause the bottom-line number to vary over time through economic gains and losses will accumulate in the realized bucket where we will start to retain a positive balance.
Moving on to portfolio activity, as seen on Page 15, in Q2, we made significant investments in six portfolio companies and have total growth originations of $150 million. As you can see, the bulk of the investment activity came later in the quarter when we were able to take advantage of the market volatility I described earlier.
The payments totaled $115 million and opportunistic sales were $1 million for total net origination less sales of $34 million. All the investments in keeping with our strategy are in industries and businesses that are well known to us through our historical private equity activities.
For example, Deltek is an enterprise software business we owned in our private equity fund for over seven years. The in-depth knowledge of the company derived from our private ownership gives us great confidence in the accuracy over underwriting of the prospects of the business going forward.
Pages 16 and 17 show the impact of Q2 investment and disposition activity on asset types and yields respectively. Asset net origination type was modestly skewed towards first lien investments. Yields on originations and disposals were broadly consistent. The modest increase in the portfolio yield for maturity from 10.4% to 10.7% was entirely a function of an increase in the forward LIBOR curve.
Moving on to Page18, we continue to selectively find attractive opportunity to deploy capital. We continue to operate with our credit facilities, fully deployed, allowing for an optimized level of earnings, just like in recent quarters where we raised only as much capital as we have visibility to deploy in the near term, any balance sheet expansion from here will be a function of both how the pipeline of attractively priced and structured opportunities develops going forward and the magnitude of repayments received.
In terms of the portfolio review on Page 19, the key statistics as of 6/30 look very similar to 3/31. As always we maintain a portfolio comprised of companies in the defensive growth industries like software, healthcare, business services and education that we believe will outperform in an uncertain economic environment.
Finally, as illustrated on Page 20, we have a broadly diversified portfolio with our largest investment at 4.2% of fair value and the top 15 investments accounting for 46% of fair value consistent with past quarters.
With that, I will now turn it over to our CFO, Dave Cordova, to discuss the financial statements and key financial metrics. David?
Thank you, Rob. For more details on the financial results in today's commentary please refer to the Form 10-Q that was filed last evening with the SEC.
Before we turn to Slide 21, I want to mention that we have included a structured chart as Appendix A in the presentation. Similar to prior calls, I will spend a moment reviewing the company's structure as a brief refresher.
The structure was set up similar to an UPREIT structure whereby the public company Pubco has no direct operations of its own and its sole asset is its units of our operating business OpCo. Today the other units of OpCo are held by a private BDC owned by New Mountain’s private equity fund, AIV Holdings. This structure is a master feeder whereby the financial statements for OpCo flow to Pubco and AIV Holdings pro rata based on the respective ownership.
All discussion throughout this call and presentation is focused on OpCo and its operations. Additionally, OpCo owns the equity of a non-recourse vehicle, the SLF. This vehicle originates lower yielding first lien loans, but with greater leverage at 2:1. For GAAP, asset coverage, and presentation purposes, we consolidate this SLF vehicle into the operations of OpCo.
Now I would like to turn your attention to Slide 21. The OpCo and SLF portfolios had approximately $1.06 billion in investments at fair value at June 30, 2013. We had approximately $15.9 million of cash and about $19.5 million of other assets, which includes approximately $11.2 million of interest in dividends receivable, much of which we've already received, $5.2 million of deferred credit facility costs, these costs to amortize over the life of our credit facilities, $0.7 million receivable from affiliates, and $2.4 million of other assets, which includes deferred offering cost and other prepaid expenses and assets.
We had total debt outstanding of about $416.5 million on our two credit facilities, which is made up of $209.4 million on our OpCo credit facility, which has $250 million of capacity at 6/30 and $207.1 million on our SLF credit facility, which has $215 million capacity at 6/30.
We had about $37.6 million of other liabilities, which is made up of $19.6 million payable for unsettled securities purchased, which settled in mid-July, approximately $14.5 million of payable to affiliates for management incentive fees, which is further broken down to $3.7 million in management fees, $5.4 million in Part I incentive fees, and $5.4 million in capital gains incentive fees, approximately $0.8 million of interest payable, and $2.7 million of vendor payables for various expenses.
This all gets us to a net asset value of $640.3 million or $14.32 per share at June 30, 2013. This is an increase of $0.01 per share over the March 31, 2013 NAV of $14.31 per share, and an increase of $0.49 per share from the June 30, 2012 NAV of $13.83 per share.
Our consolidated debt-to-equity ratio at 6/30 was 0.65:1, which is at the low end of our targeted debt-to-equity ratio range. As a reminder, our credit facilities allow us advanced rates of 25%, 45%, or 70%, depending on the type of the underlying asset.
At our OpCo facility, the rate is LIBOR plus 2.75% and at the SLF facility the rate is approximately LIBOR plus 2%. Both facilities do not mature until October 2016. Importantly our credit facility covenants are generally tied to the operating performance of the underlying businesses rather than the marks of our investment at any given time.
On Slide 22, we show our consolidated income statement for the full quarter at the OpCo level. As was discussed in prior quarters, the main reason for the creation of our up BDC structure was to make sure that the built in gains that were in the portfolio at the time of the IPO are only allocated to AID holdings, therefore not burdening the public shareholders with any of those taxable gains or increased depreciation on the predecessor investments over time.
Since we were not able to step up the assets for GAAP, our income statement will generally show greater accretion than if a step up had occurred, until the predecessor assets are sold, mature, or are repaid.
Therefore on this Slide we show the GAAP income statement in the left column and then adjusting income statement to reflect it as if all the assets were stepped up to fair value at the IPO and the normal adjustments column, which are highlighted in blue. We use the adjusted income statement to judge our performance to the portfolio during the period and it is also the basis for calculating our dividend and incentive fees.
We then make an adjustment for the capital gains incentive fee. This adjustment, which is highlighted in grey, represents the reclassification of the non-cash capital gains incentive fee from above to below the adjusted net investment line, as under GAAP we are required to accrue incentive fee assuming a hypothetical liquidation of the entire portfolio at the balance sheet date.
Lastly we further deduct the one-time YP distribution which adjustments are highlighted in yellow to arrive at our pro forma adjusted net investment income in the far right column. We believe pro forma net investment income represents a more accurate comparison of our earnings results to prior quarters.
Focusing on pro forma adjusted net investment income in the far right column, we earned total investment income of approximately $28.5 million. I will walk through the components of investment income in greater detail when we turn to Slide 23. For the second quarter, we incurred net expenses of approximately $12 million. The increases in management and the Part I incentive fees from the prior quarter are primarily attributable to higher total assets as a result of the capital deployment from our June equity offering and higher prepayment fees respectively.
Our interest expense of $3.1 million is broken out to represent about $2.6 million of actual interest expense on our borrowings, $100,000 of non-usage and custodian fees and about $378, 000 of amortization of our upfront borrowing costs. We have half the amount of our expenses reimbursable to the administrator for our 30 years of public company at $4.25 million. For this quarter, our combined amount of professional fees, administrative expenses, and other general and admin expenses are approximately $1.9 million gross, and approximately $1.06 million net of expenses waived and reimbursed. These amounts relate to legal costs, auditing tax or costs, other admin expenses and indirect expenses reimbursable under our administration agreement.
The bottom line is second quarter pro forma adjusted net investment income of $16.5 million or $0.38 per weighted average share, which exceeds the adjusted net investment income range discussed on our May 7th, 2013, call of between $0.33 and $0.35 per share and more than covers our Q2 dividend of $0.34 per share.
We are pleased that we were able to complete a strategic capital raise in June and still deliver adjusted net investment income that exceeded our expected range.
Shifting to below the pro forma adjusted net investment income line; we had adjusted net realized gains of $0.6 million as a result of repayments above our adjusted cost basis. Adjusted unrealized losses of $9.1 million were primarily driven by reclassifying approximately $5 million of previously unrealized gains associated with our investment in YP, and to dividend income, along with realizations on investments during the quarter previously marked above par and lower marked on the broader portfolio. As a result of the unrealized losses in the quarter, we reduced our capital gains incentive fee accrual by approximately $1.7 million. However as of June 30th, 2013, cumulative net adjusted realized gain did not exceed cumulative adjusted unrealized depreciation, and therefore we would not pay any capital gains incentive fees at least for year-end.
In total, for the quarter ended June 30th, 2013, we had a net increase in member's capital resulting from operations of $14.8 million. As previously mentioned we earned $0.12 from the YP distribution bringing total adjusted net investment income for the second quarter to $21.6 million or $0.50 per weighted average share a record for the company.
Turning to Slide 23, we breakout the components of both interest income and total investment income for the current and prior quarters. As has historically been the case, our total investment income is predominantly paid in cash. Though the amount of prepayment fees vary from quarter-to-quarter based on repayments, our historical earnings have consistently shown some material prepayment fee income. Therefore, we showed total interest income as a percentage of total investment income, both with and without prepayment fees, which is one measurement of the stability and predictability of our investment income.
The second quarter range of 87% to 95% is slightly lower than previous quarters and is a function of an increasing Q2 prepayment fees relative to prior quarters. During the quarter we received prepayment fees related to the repayment of five investments, four of which had meaningful call protection. Lastly, other income of approximately $1.4 million was made up of delayed compensation, revolver fees, and consent amendment, and forbearance fees.
On Slide 24, we show the quarterly migration of our adjusted net investment income starting with the current quarter pro forma adjusted net investment income, and the prior three quarters adjusted net investment income. Once again this highlights that while realization and unrealized appreciation, depreciation can be volatile below the line, we continue to generate and grow net investment income above the line.
Now, I will turn your attention to Slide 25. As previously discussed earlier the $16.5 million of pro forma adjusted net investment income for the second quarter exceeded the range we discussed on our Q1 earnings call of $13.9 million to $15.1 million or $0.33 to $0.35 per share. We paid a $0.34 per share dividend, which we believe to be our fully ramped run rate adjusted net investment income. Therefore, we expect to fall within the range of $14.5 million to $15.9 million of adjusted net investment income in the third quarter of 2013 or $0.33 to 0.35 per share. Although this is simply an estimate it could materially change.
Given our belief that our fully ramped run rate dividend will continue to fall in the previously declared expected range of $0.33 to $0.35 per share, our Board has declared a Q3, 2013, dividend of $0.34 per share in line with the previous five quarters. The Q3 2013 quarterly dividend of $0.34 per share will be paid on September 30th, 2013, to holders of record on September 16th, 2013.
Additionally as a result of the YP distribution our Board has declared a special dividend of $0.12 per share. The special dividend of $0.12 per share will be paid on August 30th, 2013, to holders of record on August 20th, 2013.
At this time, I would like to turn the call back over to Rob.
Thanks, Dave. Well, once again we do not plan to give explicit forward guidance. It continues to remain our intention to consistently pay $0.34 per share on a quarterly basis for future quarters, so long as the adjusted NII covers the dividend in line with our current expectations.
In closing, I would just like to say that we continue to be extremely pleased with our performance to-date. Most importantly, from a credit perspective our portfolio continues to be very healthy. Once again, we like to thank you for your support and interest and at this point turn things back to the operator to begin Q&A. Operator?
Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Greg Mason of KBW. Please go ahead.
Greg Mason - KBW
First, could you talk about the, I believe kind of $9 million of net depreciation in the quarter, obviously no new non-accruals so that was positive. What would you ascribe as the breakout of mark-to-market versus credit related in the [marks] [ph] this quarter?
Yeah, I mean it was almost all mark to - first of all, remember over half of it, $5 million, was just re-classing the YP that was in unrealized gain into the income statement, right. So the real number is $4 million. And of that $4 million I would say that the significant majority of that was just the market that moved down from March 31st to June 30th and impacted some marks. And I really would say there was really no material idiosyncratic credit driven net impact there.
Greg Mason - KBW
And then, could you talk about one bigger picture and then kind of a smaller picture. Your ability to maintain the yields in the portfolio on the pro forma adjusted you had 10.7% yield last quarter, 10.7% yield this quarter. Can you just talk about what you are seeing in terms of yield compression? And then, also just kind of define that a little more, the 2Q originations were 10.1% yield in the sales and repayments were 10.8%. So also struggling little bit with how to connect the 10.7% last quarter to staying at 10.7% this quarter, so big picture and then smaller picture question?
Yeah, I’ll start with smaller picture, I mean, that's just the modest delta between the 10.1% and the 10.8% and the modest ins and outs. So if you rounded it to two decimals you would obviously see some slight decline. But at one decimal it's just -- it's not enough 70 bps differential on 10% portfolio churn it's just not enough to move it at one decimal place.
On the macro, looks that's obviously an important strategy and challenge for us I think we were getting more worried right until things moved our way in the back half of the second quarter, we could have seen this moving three or four times now over the last couple of years where spreads seem to compress and then something happens in the world.
So we're currently and you can see it initially in our early originations for this quarter. We're just looking at our pipeline we think we have reasonable comfort at this point that without changing our risk profile we can maintain those yields and that is obviously our -- after making sure we have no issues on the credit side that's our second biggest challenge.
Our next question comes from J.T. Rogers of Janney Capital Markets. Please go ahead.
J.T. Rogers - Janney Capital Markets
First one, just wondering what you guys are seeing in terms of private equity sponsor activity on the new M&A front. I had some commentary from some of your competitors that that is increasing. And then, may be also sort of willingness of business owners to sell given the current environment in the middle market?
Yeah. And I would say we obviously have a very good insight into that through both our own activities but also through the activity of our PE business. We are seeing significantly increased activity and would expect a pretty busy post Labor Day period through the end of the year. I don't know Steve if you want to add anything to that.
Well, for New Mountain itself on private equity, our new acquisition flow was actually very, very good. But I think it's important - I think it’s true of New Mountain finance as well. The important thing for an organization is to build its own team up enough that it can deliver whatever the market conditions are. And so, I think New Mountain's deal flow is better on private equities, our team has gotten bigger and stronger as the years have gone on and we're trying to do the exact thing in New Mountain Finance to outweigh any kind of market currents which is the stronger team. So I think we feel good on both fronts.
Yeah. And so, to your other point in terms of seller’s willingness to transact, look I think that has increased and there are a number of reasons for that. But I think that the net effect that you're seeing, and most part, is evaluations are not low. So sellers are not giving their businesses away by any means. But I do think you're -- people have -- except some period of time for people to accustom themselves to this new post '07 environment that we're in, but I think five years later, I think the enough time had passed that people's valuation expectations are more consistent with reality and so, I do think that's part of the driver of the increased flow.
J.T. Rogers - Janney Capital Markets
Steve you mentioned building the team, I'm just wondering how many folks have you guys added at the NMFC level and are you looking to expand further?
Yeah, we've added at all parts of the firm and all parts of the firm support NMFC. As Rob explained we used the core team as the underwriting. So we've gone actually from around 28 investment professionals back in 2007 when we launched the private equity fund three we now have over 50, including about 20 people who were former Corporate CEOs or COOs or management consultants. We built up the specialist on the New Mountain Finance team kind of in parallel to that. And so, we just keep trying to continuously improve ourselves as an organization and it works we think for all parts of the organization, including NMFC.
J.T. Rogers - Janney Capital Markets
And just one last question. I was just wondering is there any place in the capital structure that you find is offering the best risk return right now that unit tranche Mezzanine first lien loan, second lien loans?
Yeah, I wouldn't say there is any specific outliers. Sometimes in the past, we said that we're seeing particularly compelling value in first lien, other times in more junior portions. I think it's roughly in balance, so it's more about finding the right business. And then, it is there or is there not an opportunity somewhere in the capital structure to attractively deploy capital. But no, there is no obvious dislocation at this point in time in our judgment in any particular layer of the capital structure.
(Operator Instructions) Our next question comes from Jonathan Bock of Wells Fargo Securities. Please go ahead.
Jonathan Bock - Wells Fargo Securities
Rob, one question for you. As it relates to the prices one willing to pay for a certain leverage level, can you give us a sense of your comfort level in terms of all in leverage for deal whether it is 5 or 6.1 or 6.5 times? And what you believe to be kind of the appropriate rate as leverage continually creeps up for very strong and acyclical and very healthy companies that you target?
Yeah, and that's a good question. I mean, Jon we're -- well, we obviously are looking at absolute leverage multiples. I think we start by looking at enterprise value relative to leverage multiples, right. So I'll say, I'd rather be 6 times levered on a 11 times business, and 4.5 times levered on a 5 times business. And that obviously, means you have to have high degree of confidence in your judgments around that denominator so that's a critical component, right if you think its 11 but it really what 7, you're going to find yourself in a bad place. And so, that's where I think the private equity D&A and team is so critical in helping us make those judgments, in really making those judgments.
So that being said obviously, as absolute leverage creeps up you do have to look at coverage ratios and make sure that companies are properly hedging themselves from an interest rate perspective. And you obviously, will want to charge more for any given level of leverage for the same company.
I can’t sit here and give you a sort of hard and fast rule though that five times leverage equals X percent and six times leverage equals Y percent. It really is going to be situation specific. And we also look not just that obviously the last dollar of leverage, but the average dollar of leverage, right. The different between being a thin five to six slug slice of mass under is being a two to six thick second lien or something like that. So, we have to take that into account as well.
All I can say is we are quite conformable. And I think certainly the margin we could be getting more yield if we wanted to, but we are focused first and foremost on what we call zero loss underwriting, where we are not taking a portfolio approach assuming some percent are going to go bad. We are really each and every one of investments we make we believe has in our lines in obvious path to full repayment. Obviously, at some point we are going to make a mistake or two, but we are focused on kind of keeping our yield consistent with the minimal amount of risk. And I still think we are able to pull that off despite the modest creeping we have seen in leverage multiples like, you say in the highest quality businesses.
Jonathan Bock - Wells Fargo Securities
I appreciate that. And let’s say the current environment remains the same and perhaps gets tighter assuming the Fed, there is lot of big assumptions in that, but let us just assume that’s the case. What would you say portfolio velocity or more importantly, repayment activity looks like in the event the status quo at the current market is remains the same?
Yeah, I think we have always guided towards roughly a third of the portfolio churning in environment like you described. I think that still our expectation may be if we get even tighter from here, you will see that move up to 35% or 40%. So, that kind of how we are running the business again. And I think that the data validates that as well as just our insight into looking ahead from what we know about prophecies towards for the next two or three months, when we do have visibility and that’s really how we manage the business. And we always first and foremost make sure that we have enough quality originations to replace our churn, which is significant and then, and only then do we think about raising incremental capital to fund incremental deal flow.
Jonathan Bock - Wells Fargo Securities
I appreciate that. And then lastly, as we look at maybe a few newer transactions that were perhaps done at relatively attractive yield, just perhaps interested in the 17% rate that once getting on preferred shares in Black Oak, which we find very attractive in this environment. Maybe what are some of the unique items that are part of that investment that allows you to earn such a substantial risk adjusted return relative to perhaps the markets today, which are closer to 10% to 12%?
Yeah. I think one of the items is to know there is a bit of a short-term security. So, it’s not we expect it to get taken out in the first half of next year. So, we were able I think to, so that type of callability for this type of junior security we are able to charge a near-term rate. It was not quite as attractive sale as it appears it like to be getting 17% for the next three or four years, but that is not the case.
And then secondly, there was a timing element, there was a reason why the issuer needed to move quickly and we were able to do that given some relationships and knowledge that we had and get paid for that. And thirdly, I think the fact that it isn’t that preferred as opposed to debt, I think you always get paid extra for that because there is just lots of other natural buyers, who don’t have a bucket for preferred.
Jonathan Bock - Wells Fargo Securities
And last question I understand why YP congrats that was an excellent investment. So, as one, participated in the refinance, which is also part of a very large dividend recap. What percentage of new investments today were recap, dividend recapitalization?
Just for the quarter?
Jonathan Bock - Wells Fargo Securities
Yeah, for about the 150 and originations that you made, may be ballpark, how many of those transactions were involved in dividend recapitalization?
I would tell you the exact number is going to be about 30%.
And this concludes our question-and-answer session. I would like to turn the conference back over to our leaders for any final remarks.
Yeah. Well, thanks everyone for your time and your interest and your support. We appreciate it and look forward to speaking next quarter and of course in the interim. Always happy to take calls at any point in time. So, thanks again and enjoy the day. Bye, bye.
The conference is now concluded and we thank you all for attending today’s presentation. You may now disconnect and have a wonderful day.
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