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 September 30, 2017.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Portfolio Growth: Total investments at fair value increased from $1,558,817 at December 31, 2016, to $1,846,043 at September 30, 2017, driven by new investments and capital raises.
• Revenue Increase: Total investment income for the nine months ended September 30, 2017, was $144,562, a 16% increase compared to $124,300 in the prior year period. This was primarily due to a $19.9 million increase in dividend income from investments in senior loan programs and equity positions.
• Expense Increase: Net expenses increased to $68,700 for the nine months ended September 30, 2017, from $59,059 in the prior year. This reflects higher management and incentive fees due to larger asset balances and increased interest expenses from new debt issuances.
• Realized Losses: The company recognized net realized losses of $39,843 for the nine months ended September 30, 2017, compared to net realized gains of $2,191 in the prior year. Significant losses were realized from the restructuring of Sierra Hamilton ($14.4 million) and Transtar Holding Company ($27.6 million).
• Capital Transactions: The company raised approximately $81.5 million in net proceeds from a public offering of common stock in April 2017.

Outlook, Risks, and Unusual Items

• Restructuring Realizations: The company completed restructurings for Sierra Hamilton and Transtar Holding Company during the period, converting debt to equity or receiving partial repayments, which resulted in significant realized losses but removed non-performing assets from the portfolio.
• Legal Proceedings: A trustee for Black Elk Energy Offshore Operations, LLC, has asserted a fraudulent conveyance claim seeking the return of $20.54 million related to a 2014 transaction. NMFC is evaluating the claim and its recourse against the private hedge fund involved, which is in liquidation.
• Liquidity and Leverage: The company maintains significant liquidity through revolving credit facilities (Holdings Credit Facility and NMFC Credit Facility) and SBA-guaranteed debentures. As of September 30, 2017, the asset coverage ratio was 248.37%, well above the 200% regulatory minimum.
• Dividend Policy: The board declared a quarterly distribution of $0.34 per share for the fourth quarter of 2017, consistent with the prior three quarters.
• Market Risk: Approximately 86.7% of the investment portfolio consists of floating-rate investments, exposing the company to interest rate fluctuations. A 100 basis point increase in interest rates is estimated to increase net interest income by 8.00%.

Investor Verification Checklist

• Realized Loss Impact: Verify the long-term impact of the $42 million in realized losses from Sierra Hamilton and Transtar restructurings on future NAV and income generation.
• Legal Claim Status: Monitor the status of the $20.54 million fraudulent conveyance claim from the Black Elk Energy trustee and the likelihood of recovery.
• Debt Maturity Profile: Review the maturity schedule of the $827 million in net borrowings, particularly the Holdings Credit Facility and Convertible Notes maturing in 2019.
• Fee Waivers: Note that the Investment Adviser waived $4.3 million in management fees and $1.8 million in incentive fees for the nine-month period; assess the sustainability of these waivers.
• Non-Qualifying Assets: Confirm that non-qualifying assets (14.9% of total investments) remain within the 30% limit required by the 1940 Act.