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). The company focuses on generating current income and capital appreciation through debt and equity investments in defensive growth companies. This summary covers the quarterly period ended March 31, 2020.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net Asset Value (NAV) per Share | $11.14 | $13.45 |
| Total Investments at Fair Value | $2,991.3 million | $3,160.3 million |
| Total Net Assets | $1,089.4 million | $1,083.3 million |
| Net Investment Income | $31.3 million | $27.5 million |
| Net Realized and Unrealized (Losses) Gains | $(203.7) million | $16.5 million |
| Net (Decrease) Increase in Net Assets from Operations | $(172.4) million | $43.9 million |
| Basic Earnings Per Share (EPS) | $(1.78) | $0.56 |
| Distributions Declared per Share | $0.34 | $0.34 |
| Cash and Cash Equivalents | $22.1 million | $48.6 million |
| Total Borrowings (Net) | $1,964.2 million | $1,942.3 million |
| Asset Coverage Ratio | 164.1% | 179.7% |
Material Changes vs. Prior Period
- Significant NAV Decline: NAV per share decreased by approximately 16.4% from $13.26 at year-end 2019 to $11.14 at March 31, 2020. This was primarily driven by a net unrealized depreciation of $203.7 million, attributed to the impact of the COVID-19 pandemic on market valuations.
- Investment Portfolio Valuation: Total investments at fair value declined from $3.16 billion to $2.99 billion. Level III investments (unobservable inputs) comprised approximately 95.9% of the portfolio.
- Non-Accrual Status: The company placed several investments on non-accrual status, including positions in Permian Holdco 1, Inc. and Permian Holdco 2, Inc. (Energy sector) and junior preferred shares in UniTek Global Services, Inc. (Business Services). The company reversed $3.4 million of previously recorded PIK dividends related to Permian Holdco 1, Inc.
- Liquidity: Cash and cash equivalents decreased by $26.5 million to $22.1 million due to operating cash outflows and investment purchases.
Guidance, Outlook, and Risks
- COVID-19 Impact: Management states that the pandemic has had a material adverse impact on the U.S. and global economy, leading to significant unrealized depreciation. The extent of future impact on portfolio companies and financial condition remains highly uncertain.
- Asset Coverage: As of March 31, 2020, the company remained in compliance with the 150% asset coverage requirement under the Investment Company Act of 1940 (ratio of 164.1%). However, management notes that continued unrealized depreciation increases the risk of breaching covenants.
- Distributions: The board declared a Q2 2020 distribution of $0.30 per share (subsequent to the reporting period), a reduction from the $0.34 per share paid in Q1.
- Unfunded Commitments: The company had unfunded commitments of approximately $150.9 million ($47.9 million in revolving credit facilities and $103.0 million in delayed draws) as of March 31, 2020.
Investor Verification Checklist
- Verify the specific portfolio companies placed on non-accrual status and the magnitude of the associated write-downs (specifically Permian Holdco and UniTek Global Services).
- Review the "Level III" valuation inputs (EBITDA multiples and discount rates) used to determine fair value, as these unobservable inputs drove the majority of the unrealized losses.
- Monitor the Asset Coverage Ratio closely in subsequent filings to ensure continued compliance with the 150% threshold required by the 1940 Act.
- Assess the sustainability of the quarterly distribution given the reduction in Q2 guidance and the significant decline in net investment income relative to the prior year's growth.
- Examine the liquidity position and the availability of undrawn credit facilities (Holdings, DB, and NMFC Credit Facilities) to fund future investment commitments or meet debt service obligations.