Business Context and Reporting Period
Company: New Mountain Finance Corporation (NMFC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2017
Business Model: NMFC is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). It targets current income and capital appreciation by investing in debt securities (first and second lien, mezzanine) and equity of U.S. middle-market "defensive growth" companies.
Key Financial Metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total Assets | $1,928.0 million | $1,656.0 million |
| Total Net Assets | $1,035.0 million | $938.6 million |
| Net Asset Value (NAV) per Share | $13.63 | $13.46 |
| Investment Income | $197.8 million | $168.1 million |
| Net Investment Income | $102.2 million | $88.1 million |
| Net Increase in Net Assets from Operations | $109.4 million | $111.7 million |
| Portfolio Fair Value | $1,825.7 million | $1,558.8 million |
| Portfolio Companies | 84 | 78 |
| Weighted Avg. Yield to Maturity (YTM) at Cost | 10.9% | 11.1% |
| Total Debt Outstanding | $885.2 million | $710.8 million |
| Cash and Cash Equivalents | $34.9 million | $45.9 million |
Material Changes vs. Prior Period
- Portfolio Growth: The portfolio fair value increased by approximately 17.1% to $1.826 billion, driven by $999.7 million in new investments across 64 portfolio companies.
- Revenue Increase: Total investment income rose 17.7% to $197.8 million, primarily due to larger invested balances and increased dividend income from joint ventures (SLP II) and net lease properties.
- Expense Growth: Net expenses increased to $95.6 million (from $80.0 million in 2016), driven by higher management and incentive fees due to asset growth, and increased interest expenses from new unsecured notes and higher LIBOR rates.
- Realized Losses: Net realized losses on investments were $39.7 million, significantly higher than the $16.7 million loss in 2016. This was largely due to the restructuring of two portfolio companies: Transtar Holding Company ($27.6 million loss) and Sierra Hamilton ($14.4 million loss).
- Unrealized Gains: Net change in unrealized appreciation was $50.8 million, offsetting the realized losses and contributing to a net increase in net assets from operations.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management continues to focus on sourcing debt securities in defensive growth industries. The company raised approximately $81.5 million in net proceeds from a common stock offering in April 2017. In early 2018, the company increased its NMFC Credit Facility commitment to $150.0 million and issued $90.0 million in new unsecured notes.
Key Risks & Contingencies:
- Legal Proceedings: NMFC settled a fraudulent conveyance claim related to a Black Elk Energy investment for a net payment of $14.5 million (after insurance contribution). The company intends to seek recourse against the private hedge fund involved.
- Liquidity & Leverage: The company utilizes significant leverage (Holdings Credit Facility, NMFC Credit Facility, Convertible Notes, Unsecured Notes, and SBA-guaranteed debentures). A decline in asset values could impair the ability to meet asset coverage ratios required by the 1940 Act.
- Interest Rate Risk: Approximately 86.5% of the portfolio consists of floating-rate investments. Rising rates increase income but also increase borrowing costs.
- Concentration Risk: The portfolio is concentrated in Business Services (31.9%) and Software (16.3%).
Investor Verification Checklist
- Realized Losses: Verify the impact of the Transtar and Sierra Hamilton restructurings on future earnings and the status of any remaining exposure to these entities.
- Debt Maturities: Review the maturity schedule of the $885.2 million in debt, specifically the Convertible Notes (June 2019) and NMFC Credit Facility (June 2019, extended to 2022 in Feb 2018).
- Fee Waivers: Note that the Investment Adviser waived $5.6 million in management fees and $1.8 million in incentive fees for 2017; verify if these waivers are sustainable.
- Non-Qualifying Assets: Confirm that non-qualifying assets (13.2% of total assets) remain within the 30% limit allowed under the 1940 Act.
- Legal Settlement: Monitor the status of the recourse claim against the private hedge fund related to the Black Elk settlement.