NMFC

Business Context and Reporting Period

New Mountain Finance Corporation (NMFC) is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The company focuses on generating current income and capital appreciation through debt securities (first and second lien, mezzanine) and equity interests in defensive growth companies. This summary covers the quarterly period ended March 31, 2021.

Key Financial Metrics

Material Changes vs. Prior Period

• Recovery in NAV: NAV per share increased to $12.85 from $11.14 in Q1 2020, driven by a significant recovery in portfolio valuations following the market downturn in early 2020. The company reported a net gain of $22.86 million from realized and unrealized changes, compared to a net loss of $203.73 million in the prior year.
• Investment Income Decline: Total investment income decreased by approximately 9% to $67.7 million. This was primarily due to lower LIBOR rates and smaller invested balances resulting from asset repayments exceeding originations in 2020.
• Expense Reduction: Net operating expenses decreased by approximately $4.1 million to $38.7 million. This reduction was driven by lower management and incentive fees (due to smaller asset bases) and reduced interest expenses on borrowings.
• Debt Management: The company issued $200 million in new unsecured notes (2021A) and repaid $141.75 million of existing unsecured notes. Net borrowings decreased slightly compared to the prior year.

Guidance, Outlook, and Risks

• Distribution Policy: The Board declared a distribution of $0.30 per share for Q2 2021. Management intends to pay quarterly distributions of at least $0.30 per share for the next seven quarters (through Q4 2022), subject to legally distributable funds. The Investment Adviser has agreed to waive incentive fees if necessary to maintain this distribution level.
• Fee Waiver: Effective Q1 2021 through Q4 2022, the Investment Adviser agreed to waive a portion of the base management fee to target a reduced rate of 1.25% of gross assets (down from 1.75%).
• Portfolio Risk Ratings: As of March 31, 2021, 83.7% of the portfolio by cost was rated "Green" (least risk) regarding COVID-19 impact. Only 2.8% was rated "Red." However, specific investments in UniTek Global Services, Education Management Corporation, and PPVA Black Elk remain on non-accrual status with significant fair value impairments.
• COVID-19 Impact: While the portfolio has recovered from the initial pandemic shock, management notes that future outbreaks or economic recessions could materially adversely affect portfolio company performance and fair values.

Investor Verification Checklist

• Non-Accrual Assets: Verify the status and potential recovery value of investments in UniTek Global Services, Education Management Corporation, and PPVA Black Elk, which collectively represent significant cost basis with reduced or zero fair value.
• Leverage Levels: Confirm the company's ability to maintain the 150% asset coverage ratio required by the 1940 Act, particularly given the $1.75 billion in net borrowings.
• Fee Waiver Sustainability: Assess the long-term impact of the voluntary management fee waiver on the Investment Adviser's profitability and the company's future expense structure post-2022.
• Debt Maturities: Review the maturity schedule of unsecured notes and credit facilities, noting that $953.4 million of contractual obligations are due within 1-3 years.
• Portfolio Concentration: Note that Software (28.7%) and Business Services (21.5%) represent the largest industry concentrations, exposing the portfolio to sector-specific risks.