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, 2018.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Income Growth: Total investment income increased by approximately $9.6 million (22%) to $52.9 million, driven by rising LIBOR rates and increased prepayment fees. Dividend income rose by $5.6 million, largely due to payment-in-kind (PIK) dividends from five equity positions.
• Expense Increases: Net operating expenses increased by $7.3 million to $27.1 million. This was primarily due to higher management and incentive fees resulting from larger invested balances and the absence of incentive fee waivers in Q1 2018 (compared to $1.8 million waived in Q1 2017). Interest and financing expenses rose by $2.9 million due to new unsecured note issuances and higher drawn balances.
• Capital Gains/Losses: The company reported a net loss of $1.9 million from realized and unrealized gains/losses, a reversal from the $7.0 million net gain in Q1 2017. This decline was driven by a decrease in market prices of investments.
• Debt Expansion: Net borrowings increased by approximately $105.5 million. Notably, the company issued $90.0 million in new unsecured notes in January 2018, increasing the total unsecured notes balance to $235.0 million.

Outlook, Risks, and Unusual Items

• Asset Coverage Ratio Change: The Board approved the application of the modified asset coverage requirements under the Small Business Credit Availability Act (SBCA), which would lower the minimum asset coverage ratio from 200% to 150%. This requires stockholder approval at a special meeting scheduled for June 8, 2018. If approved, this would allow the company to significantly increase leverage.
• Non-Accrual Status: First lien positions in Education Management II LLC (EDMC) were placed on non-accrual status as the company announced its intention to wind down and liquidate. As of March 31, 2018, these investments had a cost basis of $1.0 million and a fair value of $0.1 million.
• Collateralized Agreement Breach: The company holds a collateralized agreement to resell with a private hedge fund currently in liquidation in the Cayman Islands. The fund breached its repurchase obligation, and a claim has been filed with the liquidators.
• Portfolio Activity: The portfolio grew to 89 companies with a fair value of $1.98 billion. New investments totaled $237.8 million, while debt repayments were $84.0 million.
• Distributions: The Board declared a second-quarter 2018 distribution of $0.34 per share, payable on June 29, 2018.

Investor Verification Checklist

• Stockholder Vote on Leverage: Verify the outcome of the June 8, 2018, special meeting regarding the reduction of the asset coverage ratio to 150% and the associated increase in leverage risk.
• EDMC Liquidation: Monitor the liquidation process of Education Management II LLC to assess potential recovery rates on the non-accrual investment.
• Collateralized Agreement Recovery: Track the status of the claim filed against the liquidating hedge fund to determine potential recovery of the $25.2 million carrying value.
• Interest Rate Sensitivity: Review the impact of rising interest rates on the company's floating-rate debt portfolio (86.8% of investments) versus its floating-rate borrowings.
• Unsecured Note Issuance: Confirm the terms and market reception of the $90 million unsecured notes issued in January 2018 and their impact on the overall cost of capital.