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 and equity interests in defensive growth companies. This summary covers the quarterly report (Form 10-Q) for the period ended June 30, 2017.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|
| Total Investment Income | $93.3 million | $82.5 million |
| Net Investment Income | $49.2 million | $43.4 million |
| Net Realized Gains (Losses) | ($25.6 million) | $1.0 million |
| Net Change in Unrealized Appreciation | $34.1 million | $7.6 million |
| Net Increase in Net Assets from Operations | $57.7 million | $52.7 million |
| Basic Earnings Per Share | $0.80 | $0.83 |
| Diluted Earnings Per Share | $0.74 | $0.77 |
| Net Asset Value (NAV) per Share | $13.63 | $13.23 |
| Total Assets | $1,949.8 million | $1,656.0 million |
| Total Investments at Fair Value | $1,855.0 million | $1,558.8 million |
| Total Borrowings (Net) | $865.3 million | $696.7 million |
| Cash and Cash Equivalents | $36.3 million | $45.9 million |
| Asset Coverage Ratio | 237.20% | 240.55% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased by approximately $296.2 million (19%) compared to December 31, 2016, driven by new investments in 39 portfolio companies totaling $607.6 million.
- Realized Losses: The company recognized a net realized loss of $25.6 million for the six months ended June 30, 2017, primarily due to a $27.6 million realized loss from the restructuring of Transtar Holding Company. This contrasts with a net realized gain of $1.0 million in the same period in 2016.
- Unrealized Gains: Net change in unrealized appreciation was $34.1 million, significantly higher than the $7.6 million in the prior year period, driven by overall increases in market prices of investments.
- Dividend Income: Dividend income increased by approximately $13.0 million year-over-year, largely due to distributions from Senior Loan Programs (SLP I and SLP II) and New Mountain Net Lease Corporation (NMNLC).
- Debt Levels: Net borrowings increased by $168.6 million, primarily due to increased utilization of the NMFC Credit Facility (from $10.0 million to $122.5 million) and the issuance of $55.0 million in new Unsecured Notes.
Guidance, Outlook, and Risks
- Distributions: The Board declared a third-quarter 2017 distribution of $0.34 per share, payable September 29, 2017. The company intends to distribute approximately all Adjusted Net Investment Income quarterly to maintain Regulated Investment Company (RIC) status.
- Capital Raising: In April 2017, the company completed a public offering of 5.75 million shares, raising approximately $81.5 million in net proceeds.
- Non-Accrual Status: As of June 30, 2017, the company placed its entire first lien position in Sierra Hamilton LLC on non-accrual status due to ongoing restructuring. The investment had a cost basis of $27.2 million and a fair value of $12.7 million.
- Litigation: Litigation is ongoing regarding a collateralized agreement to resell with a private hedge fund counterparty that failed to repurchase collateral at par value. The agreement has a carrying value of $28.4 million.
- Fee Waivers: The Investment Adviser waived approximately $2.8 million in management fees and $1.8 million in incentive fees for the six-month period.
Investor Verification Checklist
- Transtar Restructuring: Verify the final terms and recovery rates of the Transtar Holding Company restructuring, which resulted in a significant realized loss.
- Sierra Hamilton Exposure: Monitor the status of the Sierra Hamilton LLC investment on non-accrual status and potential further impairment.
- Collateralized Agreement Litigation: Track the progress of the litigation regarding the $28.4 million collateralized agreement to resell.
- Debt Covenants: Confirm continued compliance with asset coverage ratios and other covenants across the Holdings Credit Facility, NMFC Credit Facility, and Unsecured Notes.
- Portfolio Concentration: Review the top five industry concentrations (Business Services, Software, Healthcare Services, Investment Fund, Consumer Services) for sector-specific risks.