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 report covers the quarterly period ended June 30, 2018.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total investment income increased by approximately 15% ($14.2 million) compared to the prior year period. This was driven by a $8.3 million increase in dividend income (largely from New Mountain Net Lease Corporation and PIK dividends) and higher interest income due to larger invested balances and rising LIBOR rates.
• Expense Increase: Net expenses increased by approximately $12.1 million. This was primarily due to a $6.7 million increase in interest and financing expenses resulting from new unsecured note issuances, higher drawn balances on credit facilities, and rising rates. Management fees also increased by $2.1 million net of waivers.
• Realized and Unrealized Gains/Losses: The company reported a net loss of $4.5 million from realized and unrealized gains/losses, compared to a net gain of $8.5 million in the prior year. The current period loss was driven by a realized loss on the sale of American Tire Distributors, Inc. (ATD) and unrealized depreciation on certain portfolio companies.
• Portfolio Expansion: The portfolio grew to 89 companies with a fair value of $2.10 billion, up from 84 companies valued at $1.83 billion at year-end 2017. New investments totaled $560.5 million.

Guidance, Outlook, and Risks

• Regulatory Change: Following the passage of the Small Business Credit Availability Act (SBCA) and stockholder approval, NMFC is now subject to a minimum asset coverage ratio of 150.0% (down from 200.0%), effective June 9, 2018. This allows for increased leverage capacity.
• Recent Debt Issuance: On July 5, 2018, the company issued $50.0 million in 5.36% Series 2018B Unsecured Notes due 2023.
• Distributions: The board declared a third-quarter 2018 distribution of $0.34 per share, payable September 28, 2018. The company intends to distribute approximately all net investment income quarterly to maintain Regulated Investment Company (RIC) status.
• Non-Accrual Status: Investments in Education Management Corporation (EDMC) were placed on non-accrual status as the company announced liquidation. A portion of the investment in National HME, Inc. (NHME) was also placed on non-accrual, with preferred shares written down to zero fair value.
• Legal Contingency: The company is involved in a dispute regarding a collateralized securities purchase agreement with a private hedge fund in liquidation (Black Elk Energy). A claim was filed with Cayman Islands liquidators, and the company received a $1.5 million insurance payment in the period.

Investor Verification Checklist

• Asset Coverage Ratio: Verify the impact of the new 150.0% asset coverage requirement on future leverage capacity and risk profile.
• Non-Accrual Investments: Review the specific valuation and recovery prospects for the EDMC and NHME positions placed on non-accrual status.
• Interest Rate Sensitivity: Assess the exposure to rising interest rates, as approximately 86.4% of the portfolio consists of floating-rate investments, while debt costs are also largely floating.
• Realized Losses: Investigate the details of the realized loss on the American Tire Distributors, Inc. sale and its impact on future portfolio turnover strategy.
• Debt Maturities: Review the contractual obligations table for upcoming debt maturities, specifically the $155.3 million Convertible Notes maturing in June 2019.