Business context and reporting period
New Mountain Finance Corporation (NASDAQ: NMFC) is an externally managed business development company (BDC) and regulated investment company (RIC) focused mainly on debt and equity investments in U.S. middle-market companies. This summary covers the fiscal year ended December 31, 2022; comparisons are primarily with 2021.
At year-end, NMFC held investments with a reported fair value of approximately $3.22 billion across 107 portfolio companies, versus $3.17 billion across 106 companies a year earlier. By fair value, the portfolio was 54.5% first-lien loans, 17.4% second-lien loans, 2.4% subordinated debt and 25.7% equity and other. Software and business services were the largest industries.
Financial and operating highlights
| Metric | 2022 | 2021 |
|---|---|---|
| Total investment income | $294.6 million | $271.0 million |
| Net investment income | $119.6 million; $1.18 per share | $118.8 million; $1.21 per share |
| Net realized and unrealized gains (losses) | $(45.1) million | $88.3 million |
| Net increase in net assets from operations attributable to NMFC | $74.7 million; $0.75 per share | $201.4 million; $2.08 per share |
| Cash provided by (used in) operating activities | $35.0 million | $(22.1) million |
| Year-end NAV per share | $13.02 | $13.49 |
| Year-end cash and cash equivalents | $71.2 million | $58.1 million |
| Year-end borrowings | $2.00 billion | $1.93 billion |
| Asset coverage ratio | 177.42% | 181.21% |
| Distributions declared per share | $1.22 | $1.20 |
Investment income rose 9%, primarily as higher LIBOR and SOFR rates increased interest income on invested balances; dividend income also increased. Net investment income was nearly flat, while expenses increased: net expenses before income taxes were $174.2 million, compared with $152.0 million. Interest and other financing expenses rose to $92.4 million from $73.1 million, reflecting higher floating-rate borrowing costs and new notes.
Net realized and unrealized results swung to a loss, mainly from unrealized depreciation in investments including NM CLFX, Ansira, National HME and TVG-Edmentum; realized gains partly offset the declines. NAV per share fell 3.5%. Total return based on NAV was 5.71%, compared with 16.97% in 2021; market-value total return was (0.56)%, compared with 31.91%.
Distributions of $1.22 per share exceeded net investment income of $1.18 per share. For 2022, the company reported distributions as 70.59% ordinary income, 20.79% long-term capital gains and 8.62% return of capital for tax purposes. Tax character is not the same as cash coverage.
Material changes and financing
- New investments were $620.7 million, down from $1.13 billion in 2021; repayments were $395.1 million versus $857.8 million. Securities sales were $188.8 million versus $208.9 million.
- Weighted average yield to maturity at cost increased to 11.3% from 9.1% for income-producing investments; the comparable measure for all investments increased to 10.0% from 8.4%. These are estimates based on assumptions including no prepayments or losses and are not realized returns.
- Floating-rate investments represented 88.53% of investments at fair value; the filing estimates net interest income would increase 8.34% for a 100-basis-point rate increase, and decrease 2.08% for a 25-basis-point decrease, based on a year-end portfolio model.
- NMFC issued $75 million of 5.90% unsecured notes and $200 million of 7.50% convertible notes in 2022, and repurchased $84.4 million principal amount of its 5.75% 2018 convertible notes. ATM offerings generated approximately $40.0 million net proceeds from 2.95 million shares issued.
- Year-end borrowings included $619.0 million under the Holdings Credit Facility, $531.5 million of unsecured notes, $316.8 million of convertible notes, $300.0 million of SBA-guaranteed debentures, and other facilities. The company reported compliance with applicable borrowing covenants.
Outlook, risks and unusual items
Management said it expects current liquidity needs to be met through operating cash flows and other activities, and intends to continue quarterly distributions sufficient to support RIC status. The filing does not provide quantitative earnings or investment-return guidance. The board declared a first-quarter 2023 distribution of $0.32 per share.
Key risks include credit deterioration and defaults in leveraged, often illiquid portfolio companies; valuation uncertainty for private investments; leverage and rising funding costs; industry concentration; refinancing and access to capital; and the potential effects of economic slowdown, inflation and market volatility. Software and business services together represented approximately 46% of portfolio fair value. The company reported that 92.2% of portfolio fair value had a Green risk rating, with nine Yellow, five Orange and two Red portfolio companies.
Several investments were on non-accrual. Notable positions included Ansira, with $18.6 million fair value on $41.4 million cost; National HME, with $5.4 million fair value on $25.3 million cost; and AAC non-accrual positions with $8.2 million fair value on $13.0 million cost. NMFC reversed $11.2 million of National HME PIK interest and $1.5 million of related other income deemed uncollectible. A collateralized resale agreement with a Cayman Islands hedge fund in liquidation remained non-accrual, with $16.5 million fair value against $30.0 million cost; the company is pursuing its contractual claim.
Fair valuation is a significant judgment area: $3.14 billion of portfolio investments were classified as Level III at year-end. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting, and identified investment valuation as a critical audit matter. No material pending legal proceedings were reported. Subsequent events include repayment of $90 million of 2018A unsecured notes in January 2023 and the CFO’s announced resignation effective April 1, 2023; the company named an interim CFO while conducting a search.
Important facts for investors to verify
- Whether portfolio-company performance, non-accruals and recoveries support reported fair values, particularly for Level III and impaired positions.
- Whether recurring cash income—not accrued PIK income, non-cash dividends or realized gains—covers distributions and financing costs.
- Near-term refinancing and repayment plans for the $116.8 million 2018 convertible notes due August 2023 and $50 million 2018B unsecured notes due June 2023, in addition to the 2018A notes repaid after year-end.
- Headroom under asset-coverage and facility covenants, liquidity after unfunded investment commitments of $224.1 million, and the effect of further interest-rate changes on both asset yields and borrowing costs.
- The sustainability of the $0.32 quarterly distribution, the impact of ATM share issuance on per-share NAV, and the CFO transition.