NMFC

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 and equity investments in defensive growth companies. This summary covers the quarterly period ended March 31, 2022.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Income: Total investment income increased by approximately $1.26 million (2%) to $68.96 million, driven primarily by higher LIBOR rates on larger invested balances and increased cash dividends from joint ventures (SLP III and SLP IV).
• Operating Expenses: Net expenses increased slightly to $38.96 million from $38.71 million. Management fees (net of waivers) increased to $10.46 million, while interest and financing expenses decreased to $18.64 million due to the acceleration of deferred financing costs in the prior year.
• Realized and Unrealized Gains: Net realized and unrealized gains decreased significantly to $7.14 million from $22.86 million in Q1 2021. The current quarter included a net realized gain of $19.17 million, offset by a net unrealized depreciation of $9.93 million. The prior year was driven by market recovery from the pandemic.
• Portfolio Composition: The portfolio fair value increased by $82.6 million. The top five industry concentrations remain Software (25.1%), Business Services (16.3%), Healthcare Services (15.8%), Education (8.1%), and Investment Funds (7.8%).

Guidance, Outlook, Risks, and Unusual Items

• Management Commentary: Management noted that the portfolio has recovered from the NAV reduction experienced during the 2020 pandemic period. The company maintains a "Green" risk rating for the majority of its portfolio (90.6% by fair value), with only a small portion rated Red, Orange, or Yellow.
• Unusual Items / Non-Accruals:
  • American Achievement Corporation (AAC): Placed on non-accrual status with a Red Risk Rating. Aggregate cost basis of $12.7 million vs. fair value of $7.0 million.
  • Sierra Hamilton Holdings: Second lien position on non-accrual with a Red Risk Rating; fair value is $0.
  • UniTek Global Services: Junior preferred shares on non-accrual (fair value $0); senior preferred shares on non-accrual (fair value $3.6 million).
  • Education Management Corporation (EDMC): First lien positions on non-accrual as the company winds down; fair value is $0.
  • PPVA Fund: A collateralized agreement to resell ($30 million cost) is on non-accrual with a fair value of $19.4 million due to the liquidation of the counterparty hedge fund.
• Risks: The company highlights risks related to the COVID-19 pandemic, interest rate fluctuations, and the illiquidity of private credit markets. Approximately 86.2% of investments are floating-rate, providing some hedge against rising rates.
• Capital Resources: The company raised approximately $20.5 million in net proceeds from at-the-market (ATM) equity offerings during the quarter. Approximately $216.6 million remains available under the ATM agreement.

Investor Verification Checklist

• Non-Accrual Exposure: Verify the specific impact of the Red-rated portfolio companies (AAC, Sierra, UniTek, EDMC) on future income and potential write-downs.
• Collateralized Agreement: Monitor the status of the PPVA Fund liquidation and the recoverability of the $19.4 million fair value position.
• Interest Rate Sensitivity: Assess the impact of rising interest rates on the company's floating-rate debt facilities versus its floating-rate investment portfolio.
• Fee Waivers: Confirm the duration and terms of the management fee waiver agreement, which is currently effective through December 31, 2023.
• Debt Maturities: Review the contractual obligations table for upcoming maturities, specifically the $55 million 2017A Unsecured Notes maturing in July 2022.