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 report (Form 10-Q) for the period ended June 30, 2021.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Performance: The company reported a significant recovery in net asset value compared to the prior year, driven by a net gain of $72.8 million in realized and unrealized gains for the six months ended June 30, 2021, compared to a net loss of $154.6 million in the same period in 2020. This shift was primarily due to unrealized appreciation in investments such as TVG-Edmentum, NM CLFX LP, and NM GLCR LP, contrasting with the market-wide depreciation experienced in 2020 due to the COVID-19 pandemic.
• Revenue Trends: Total investment income decreased by approximately 4% ($5.8 million) year-over-year. The decline in interest income was attributed to lower LIBOR rates and smaller invested balances resulting from asset repayments exceeding originations in 2020. However, dividend income increased significantly, driven by cash dividends from Senior Loan Program III (SLP III) and payment-in-kind (PIK) dividends from new investments.
• Expense Management: Net operating expenses decreased by approximately $5.1 million year-over-year. This reduction was driven by lower interest and financing expenses due to lower LIBOR rates and the repayment of higher-cost unsecured notes (2016 and 5.75% notes) with proceeds from lower-cost 2021A Unsecured Notes. Additionally, the management fee waiver increased, reducing the effective base management fee to a target of 1.25% on gross assets.
• Liquidity: Cash and cash equivalents decreased from $79.0 million to $27.8 million, reflecting net cash used in operating activities of $9.3 million and financing activities of $41.8 million, primarily due to distributions paid and net repayments on credit facilities.

Guidance, Outlook, and Risks

• Management Commentary: Management highlighted the recovery of the portfolio's net asset value from the lows seen in late 2020. The company continues to monitor the impact of the COVID-19 pandemic, noting that while restrictions have eased in some areas, surges in cases could lead to renewed economic disruptions. The company maintains a "Risk Rating" system for portfolio companies, with 86.6% of the portfolio rated "Green" (least severe impact) as of June 30, 2021.
• Fee Waiver: The Investment Adviser has entered into a fee waiver agreement effective through December 31, 2022, to reduce the base management fee to 1.25% on gross assets, providing a benefit to shareholders.
• Key Risks:
  • Credit Risk: The portfolio consists largely of below-investment-grade debt, which carries a higher risk of default.
  • Liquidity Risk: Many investments are illiquid private securities, and an active trading market may not exist for all positions.
  • Interest Rate Risk: The company utilizes leverage, which magnifies the impact of interest rate fluctuations on net asset value.
  • Non-Accrual Investments: As of June 30, 2021, specific investments including UniTek Global Services (junior and senior preferred shares), Education Management Corporation, and a collateralized agreement to resell (PPVA Fund) remain on non-accrual status with significant fair value impairments.

Important Facts for Investor Verification

• Non-Accrual Exposure: Verify the status and potential recovery value of investments on non-accrual, specifically the $34.4 million cost basis in UniTek junior preferred shares (fair value $0) and the $30.0 million cost basis in the PPVA Fund collateralized agreement (fair value $21.4 million).
• Fee Waiver Sustainability: Confirm the terms and duration of the management fee waiver agreement, which is currently set to expire on December 31, 2022.
• Leverage Levels: Monitor the asset coverage ratio (currently 183.9%) against the 150.0% regulatory minimum to assess borrowing capacity and compliance.
• Portfolio Concentration: Review the top five industry concentrations (Software, Business Services, Healthcare Services, Education, and Investment Funds) to understand sector-specific risks.
• Dividend Sustainability: Assess the company's ability to maintain its quarterly distribution of $0.30 per share given the mix of cash and PIK income and the impact of interest rate environments on investment income.