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 and equity investments in defensive growth companies. This summary covers the quarterly report (Form 10-Q) for the period ended September 30, 2019.
Key Financial Metrics
| Metric | Amount (in thousands) |
|---|---|
| Total Assets | $3,132,128 |
| Total Investments (Fair Value) | $2,998,180 |
| Total Net Assets | $1,169,279 |
| Net Asset Value (NAV) per Share | $13.35 |
| Net Investment Income (9 months) | $86,568 |
| Net Increase in Net Assets from Operations (9 months) | $91,115 |
| Basic EPS (9 months) | $1.11 |
| Diluted EPS (9 months) | $1.01 |
| Total Borrowings (Net) | $1,810,777 |
| Cash and Cash Equivalents | $69,815 |
| Asset Coverage Ratio | 171.1% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased from $2,341,953 (Dec 31, 2018) to $2,998,180 (Sep 30, 2019), driven by new investments of approximately $827.6 million during the nine-month period.
- Revenue Increase: Total investment income for the nine months ended Sep 30, 2019, was $203,250, a 21% increase compared to $167,956 in the prior year period. This was primarily due to larger invested balances and higher LIBOR rates.
- Expense Increase: Net expenses increased to $116,669 for the nine months ended Sep 30, 2019, from $89,096 in the prior year. This increase was driven by higher interest and financing expenses ($61,695 vs. $38,873) due to increased leverage and note issuances.
- Capital Raising: The company completed two public offerings of common stock in 2019 (February and July), raising approximately $153.5 million in net proceeds, increasing shares outstanding from 76.1 million to 87.6 million.
- Unrealized Gains: The company reported a net realized and unrealized gain of $4,547 for the nine months ended Sep 30, 2019, compared to a net loss of $4,837 in the same period in 2018.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue making distributions sufficient to maintain Regulated Investment Company (RIC) status. The company maintains a focus on defensive growth companies with sustainable secular growth drivers.
- Recent Developments:
- On October 25, 2019, the company completed a public offering of 9.2 million shares at $13.25 per share, raising approximately $125.1 million in net proceeds.
- On November 4, 2019, the Board declared a fourth-quarter 2019 distribution of $0.34 per share.
- The DB Credit Facility was expanded to $230 million with the addition of Hitachi Capital America Corp.
- Risks and Contingencies:
- Collateralized Agreement: The company holds a security purchased under a collateralized agreement to resell with a cost basis of $30 million and a fair value of $22.2 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 and continues to monitor the liquidation.
- Non-Accrual Status: Investments in Education Management Corporation (EDMC) remain on non-accrual status with a fair value of approximately $3,000 (cost basis $970,000) as the company winds down operations.
- Leverage: The company utilizes leverage up to the maximum permitted by law (150% asset coverage ratio). As of Sep 30, 2019, the ratio was 171.1%.
Key Facts for Investor Verification
- Portfolio Concentration: Top five industry concentrations are Software (21.84%), Business Services (21.80%), Healthcare Services (18.96%), Education (9.39%), and Investment Funds (6.75%).
- Debt Structure: Significant borrowings include the Holdings Credit Facility ($637.6M), Unsecured Notes ($453.3M), DB Credit Facility ($202.0M), and Convertible Notes ($201.6M).
- Valuation Methodology: Approximately 79.4% of the portfolio ($2,382,107) is classified as Level III (unobservable inputs), requiring significant management judgment in valuation.
- Dividend Policy: The company declared a quarterly distribution of $0.34 per share for Q3 2019 and Q4 2019, consistent with its historical payout rate.
- Unfunded Commitments: As of Sep 30, 2019, the company had unfunded commitments of $55.3 million on revolving credit facilities and $115.9 million in delayed draws/other future funding commitments.