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 securities and equity interests in defensive growth companies. This report covers the quarterly period ended June 30, 2016.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Total Investment Income | $82.5 million | $74.4 million |
| Net Investment Income | $43.4 million | $39.3 million |
| Net Realized Gains (Losses) | $1.0 million | ($13.5 million) |
| Net Change in Unrealized Appreciation | $7.6 million | $18.0 million |
| Net Increase in Net Assets from Operations | $52.7 million | $43.2 million |
| Basic Earnings Per Share | $0.83 | $0.74 |
| Diluted Earnings Per Share | $0.77 | $0.70 |
| Net Asset Value (NAV) per Share | $13.23 | $13.90 |
| Total Investments at Fair Value | $1,498.1 million | $1,512.2 million |
| Total Borrowings (Net) | $707.8 million | $728.1 million |
| Cash and Cash Equivalents | $34.5 million | $30.1 million |
| Asset Coverage Ratio | 240.55% | 257.61% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 11% ($8.0 million) compared to the prior year period, driven primarily by a $7.4 million increase in interest income due to larger invested balances from equity offerings, new debt issuances, and leverage.
- Expense Increases: Net operating expenses rose by 12% ($3.9 million), attributed to higher management and incentive fees resulting from increased asset levels, as well as higher interest and financing expenses due to increased drawn balances on credit facilities and SBA-guaranteed debentures.
- Realized Gains: The company reported net realized gains of $1.0 million, a significant improvement from net realized losses of $13.5 million in the prior year period. The prior year losses were largely due to extinguishments of investments in restructuring portfolio companies.
- Portfolio Composition: The portfolio fair value decreased slightly to $1.498 billion from $1.512 billion. The portfolio consists of 72 companies, with top industry concentrations in Business Services (25.4%) and Software (25.2%).
Outlook, Risks, and Unusual Items
- Dividends: The company declared a quarterly distribution of $0.34 per share for the second quarter of 2016. On August 2, 2016, the board declared a third-quarter distribution of $0.34 per share.
- Share Repurchases: The company repurchased 248,499 shares of common stock for approximately $2.9 million during the six-month period under a $50 million authorization program.
- Non-Accrual Status: Portions of investments in Permian Tank & Manufacturing, Inc. and Transtar Holding Company were placed on non-accrual status due to ongoing restructurings. Investments in ATI Acquisition Company remain on non-accrual due to regulatory constraints and inability to service interest.
- Legal Proceedings: Litigation is ongoing regarding a collateralized agreement to resell where the counterparty failed to repurchase collateral at par value. The company does not expect this to have a material effect on operations.
- Liquidity: The company maintains significant liquidity through revolving credit facilities (Holdings Credit Facility and NMFC Credit Facility) and SBA-guaranteed debentures. As of June 30, 2016, approximately $147 million of capacity remained under the Holdings Credit Facility and $35.5 million under the NMFC Credit Facility.
Key Facts for Investor Verification
- Verify the status and potential recovery value of the non-accrual investments in Permian Tank, Transtar, and ATI Acquisition Company.
- Monitor the ongoing litigation regarding the collateralized agreement to resell and its potential impact on the $30 million asset.
- Review the company's leverage ratios and asset coverage ratio (240.55%) to ensure compliance with the 1940 Act requirements (minimum 200%).
- Assess the impact of the new $50 million Unsecured Notes issued in May 2016 on future interest expense and cash flow.
- Confirm the sustainability of the $0.34 per share quarterly dividend given the current net investment income coverage.