Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2013, for New Mountain Finance Holdings, L.L.C. (the Operating Company), New Mountain Finance Corporation (NMFC), and New Mountain Finance AIV Holdings Corporation (AIV Holdings). The Operating Company is a Business Development Company (BDC) focused on originating debt securities at all levels of the capital structure for defensive growth companies. As of the reporting date, the portfolio consisted of 61 companies with a fair value of approximately $1.03 billion.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total Assets | $1,063.4 million | $1,025.6 million |
| Investments at Fair Value | $1,030.9 million | $989.8 million |
| Net Investment Income | $11.6 million | $9.9 million |
| Net Increase in Capital (Operations) | $24.6 million | $23.7 million |
| Net Asset Value (NAV) per Unit/Share | $14.31 | $14.06 |
| Total Debt Outstanding | $430.2 million | $421.2 million |
| Cash and Cash Equivalents | $15.9 million | $12.8 million |
| Asset Coverage Ratio | 241.92% | 232.84% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 33% to $25.3 million, driven primarily by a 35% increase in interest income ($25.0 million vs. $18.6 million). This growth is attributed to larger invested balances resulting from primary offerings and increased leverage.
- Expense Increases: Total operating expenses rose 50% to $13.7 million. The incentive fee increased 83% to $6.1 million (including $2.7 million in hypothetical capital gains fees), and management fees increased 42% to $3.6 million due to higher asset balances.
- Capital Appreciation: Net change in unrealized appreciation decreased slightly to $11.9 million from $12.7 million in the prior year. Net realized gains remained relatively flat at $1.0 million.
- Liquidity: Cash used in operating activities improved significantly, decreasing from a use of $30.1 million in Q1 2012 to $15.8 million in Q1 2013.
Outlook, Risks, and Unusual Items
- Dividends: A quarterly distribution of $0.34 per unit/share was declared for Q1 2013. A subsequent Q2 2013 distribution of $0.34 per unit/share was declared on May 6, 2013.
- Capital Gains Incentive Fee: The Operating Company accrued $2.7 million in hypothetical capital gains incentive fees. However, no actual capital gains incentive fee was owed under the Investment Management Agreement as cumulative net Adjusted Realized Gains did not exceed cumulative Adjusted Unrealized Depreciation.
- Non-Accrual Status: The first lien positions in ATI Acquisition Company remain on non-accrual status due to the portfolio company's inability to service interest payments. The aggregate cost basis is $5.9 million with a fair value of $0.6 million.
- Leverage: The company utilizes two revolving credit facilities (Holdings and SLF) totaling $430.2 million in outstanding borrowings. The SLF facility is fully utilized, while the Holdings facility has approximately $14.8 million of remaining capacity.
- Market Risk: The portfolio is subject to interest rate risk. A 100 basis point increase in interest rates is estimated to decrease net interest income by 4.33%, while a 25 basis point decrease would increase it by 0.98%.
Investor Verification Checklist
- Verify the status and potential recovery value of the ATI Acquisition Company investment, which is on non-accrual with a significant write-down in fair value.
- Confirm the impact of the hypothetical capital gains incentive fee ($2.7 million) on future cash distributions versus actual payable fees.
- Monitor the utilization of the SLF Credit Facility, which is currently at maximum capacity ($215 million), and the availability of the Holdings facility.
- Review the expense cap provisions in the Administration Agreement, noting that the company incurred $829,000 in expenses in excess of the cap for the quarter.
- Assess the weighted average yield to maturity of 9.8% against current market conditions for similar defensive growth credit assets.