Business Context and Reporting Period
Company: New Mountain Finance Corporation (NMFC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2021
Business Overview: NMFC is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). It focuses on generating current income and capital appreciation through debt securities (first and second lien, unitranche) and equity interests in defensive growth companies. The portfolio is concentrated in Software, Business Services, and Healthcare Services.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | As of Sep 30, 2021 |
|---|---|---|---|
| Total Investment Income | $68.47 million | $202.74 million | — |
| Net Investment Income | $30.65 million | $88.83 million | — |
| Net Realized Gains (Losses) | $23.01 million | $12.69 million | — |
| Net Change in Unrealized Appreciation (Depreciation) | ($30.74 million) | $52.53 million | — |
| Net Increase in Net Assets from Operations | $22.91 million | $153.94 million | — |
| Basic EPS | $0.23 | $1.54 | — |
| Diluted EPS | $0.22 | $1.42 | — |
| Net Asset Value (NAV) per Share | — | — | $13.26 |
| Total Investments at Fair Value | — | — | $3.01 billion |
| Total Borrowings (Net) | — | — | $1.81 billion |
| Cash and Cash Equivalents | — | — | $83.36 million |
| Asset Coverage Ratio | — | — | 184.0% |
Material Changes vs. Prior Comparable Period
- Investment Income: For the nine months ended September 30, 2021, total investment income decreased by approximately $2.8 million (1%) compared to the same period in 2020. This was primarily driven by a $20.8 million decrease in interest income due to lower LIBOR rates and smaller invested balances resulting from asset sales and repayments exceeding originations in 2020. Conversely, dividend income increased by $11.8 million, driven by cash dividends from Senior Loan Program III (SLP III) and new PIK dividend investments.
- Operating Expenses: Net expenses decreased by approximately $3.7 million for the nine-month period. This reduction was largely due to a decrease in interest and other financing expenses ($4.6 million) attributed to lower LIBOR rates and the repayment of higher-cost unsecured notes in Q1 2021. Management fees net of waivers also decreased slightly.
- Realized and Unrealized Gains: The company reported a net gain of $65.1 million for the nine months ended September 30, 2021, a significant improvement from a net loss of $94.0 million in the prior year period. The 2021 gain was driven by realized gains and unrealized appreciation in Edmentum, NM CLFX LP, and NM GLCR LP, partially offset by unrealized depreciation in AAC, Tenawa, and UniTek.
- Portfolio Composition: The portfolio grew to 106 companies with a fair value of $3.01 billion as of September 30, 2021, compared to 104 companies valued at $2.95 billion at year-end 2020.
Guidance, Outlook, Risks, and Unusual Items
- Fee Waivers: The Investment Adviser has entered into a Fee Waiver Agreement to reduce the base management fee to a target of 1.25% of gross assets (down from 1.75%). This waiver is effective through December 31, 2023 (extended from the original 2022 end date). For the nine months ended September 30, 2021, management fees waived totaled $11.19 million.
- Non-Accrual Investments: Several portfolio companies were placed on non-accrual status during the quarter, including American Achievement Corporation (AAC), Tenawa Resource Management LLC, and UniTek Global Services, Inc. These positions carry significant risk of loss and have been assigned an Investment Rating of 4.
- Collateralized Agreement Risk: The company holds a collateralized agreement to resell with a cost basis of $30.0 million and a fair value of $21.4 million. The counterparty, a private hedge fund, is in liquidation in the Cayman Islands and has breached the repurchase agreement. The company has filed a claim with liquidators.
- COVID-19 Impact: Management continues to monitor the pandemic's impact. While the NAV has recovered from the lows of March 2020, the company notes that future outbreaks or economic downturns could materially adversely affect portfolio company performance and investment valuations.
- Subsequent Events: On October 27, 2021, the Board declared a fourth-quarter distribution of $0.30 per share. On November 1, 2021, the Base Management Fee was reduced to 1.4% of gross assets.
Key Facts for Investor Verification
- Non-Accrual Exposure: Verify the specific fair value and cost basis of investments placed on non-accrual (AAC, Tenawa, UniTek, Sierra Hamilton) and the potential for further write-downs.
- Fee Waiver Sustainability: Confirm the duration and terms of the management fee waiver agreement, which significantly impacts net investment income and distributions.
- Liquidity and Leverage: Review the asset coverage ratio (184.0%) and the utilization of revolving credit facilities (Holdings, DB, NMFC) to assess leverage risk and borrowing capacity.
- Collateralized Agreement Recovery: Monitor the status of the claim against the liquidating hedge fund regarding the $30 million collateralized agreement to resell.
- Portfolio Concentration: Assess the impact of the top five industry concentrations (Software, Business Services, Healthcare Services, Investment Funds, Education) on overall portfolio risk.