New Mountain Finance Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. NMFC is a business development company focused primarily on debt and selected equity investments in middle-market companies. Unless noted, dollar amounts below are in millions.
Financial performance and condition
- Q2 investment income: $73.1, up 10% from $66.6 in Q2 2021. Net investment income was $31.7, versus $29.2; basic earnings were $0.16 per share, versus $0.78.
- Q2 realized and unrealized results: Net loss of $16.6, compared with a $50.0 gain in Q2 2021. Net increase in net assets attributable to NMFC was $16.0, versus $75.8.
- First-half results: Investment income of $142.1, up 6% year over year; net investment income of $61.6, versus $58.2. Basic EPS was $0.52, versus $1.31, reflecting a shift from $72.8 in first-half 2021 realized and unrealized gains to a $9.4 loss in 2022.
- Expenses and income ratio: First-half net expenses were $80.5, up from $76.1. Net investment income was 9.13% of average net assets for the six months, compared with 9.51% in 2021.
- Portfolio and NAV: Investments had a fair value of $3,300.2 across 107 portfolio companies, versus $3,174.4 across 106 at year-end 2021. NMFC net assets were $1,351.6; NAV was $13.42 per share, down from $13.49 at year-end.
- Cash flow and liquidity: Cash was $40.7, down from $58.1 at year-end. First-half operating activities used $79.1; financing activities provided $61.9; cash decreased $17.2. Unfunded investment commitments were $280.8, with additional investment purchase commitments of $62.1.
- Debt and leverage: Net borrowings were $1,999.5 and total liabilities were $2,039.6. Asset coverage was 178.8%, above the 150% statutory minimum. Management reported compliance with applicable facility covenants.
- Distributions and equity issuance: NMFC declared and paid $0.30 per share in each of Q1 and Q2. It raised $37.1 net through at-the-market share sales in the first half. The board declared a further $0.30 distribution for Q3, payable September 30, 2022.
Material changes and portfolio developments
- Interest income increased year over year, which management attributed to higher portfolio balances and higher LIBOR and SOFR rates. Financing expenses also rose, driven by larger facility borrowings, higher rates, and the June issuance of $75.0 of 5.90% unsecured notes due 2027.
- During the second quarter, NMFC placed part of its Integro second-lien position and its National HME second-lien positions on non-accrual. National HME had $36.5 cost basis and $8.5 fair value; the Integro non-accrual position had $3.6 cost basis and $2.4 fair value.
- Other disclosed non-accrual investments include American Achievement Corporation, UniTek, Sierra Hamilton, and Education Management. Fair values include significant write-downs or zero values for some positions.
- The portfolio’s reported risk ratings were 91.7% Green, 6.2% Yellow, 1.2% Orange and 0.9% Red by fair value. Software was the largest industry concentration at 26.7%; healthcare services and business services were also significant.
- Most investments were floating rate: 87.56% of investment fair value. Management estimated that a 100-basis-point rate increase would raise net interest income, net of interest expense, by 9.23%, based on a model of positions held at June 30; actual results may differ materially.
Outlook, risks and unusual items
- The filing provides no specific earnings or portfolio guidance. Management said it expects current liquidity needs to be met through operating cash flows and other activities.
- Management highlighted risks from credit defaults, below-investment-grade and illiquid holdings, leverage, rising interest rates, economic and market volatility, COVID-19 effects, supply-chain interruptions and possible recession. Fair values rely substantially on unobservable inputs: $3,129.5 of investments were classified as Level III.
- A collateralized resale agreement remains on non-accrual, with $30.0 cost and $19.4 fair value. The hedge-fund counterparty is in Cayman Islands liquidation, breached its repurchase obligation, and the company’s rights to the collateral remain unresolved through the liquidation process.
- Haven Midstream’s Haven KS processing plant ceased operations after a fire on April 14, 2022. The company was assessing insurance coverage, payout timing and rebuild feasibility.
- After quarter-end, NMFC repaid $55.0 of 2017A unsecured notes on July 14, 2022. The interim financial information received a review by Deloitte; the reviewer reported no material modifications needed for GAAP conformity.
Key facts for investors to verify
- Whether portfolio marks and non-accrual assumptions—especially National HME, Integro, AAC and UniTek—remain supportable, and how subsequent borrower performance affects expected recoveries.
- How the unresolved collateralized resale agreement and Haven Midstream fire affect recoveries, income and fair value.
- Whether rising floating-rate asset yields continue to exceed the impact of higher funding costs, and whether liquidity and asset coverage remain adequate as debt matures.
- Whether net investment income and cash collections support the $0.30 quarterly distribution, considering PIK/non-cash income and unfunded commitments.
- The effect of ATM share issuance on per-share NAV and earnings, and the status of the company’s application to expand affiliate co-investment authority.