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 (first and second lien, mezzanine) and equity interests in defensive growth companies. This report covers the quarter ended March 31, 2016.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net Asset Value (NAV) per Share | $12.87 | $13.89 |
| Net Investment Income | $21.6 million | $19.1 million |
| Net Increase in Net Assets from Operations | $8.1 million | $22.9 million |
| Basic Earnings Per Share (EPS) | $0.13 | $0.40 |
| Total Investments at Fair Value | $1,490.2 million | $1,512.2 million |
| Total Borrowings (Net) | $713.5 million | $728.1 million |
| Cash and Cash Equivalents | $32.7 million | $30.1 million |
| Asset Coverage Ratio | 234.95% | 228.75% |
| Dividends Declared per Share | $0.34 | $0.34 |
Material Changes vs. Prior Period
- Operating Results: Net increase in net assets from operations decreased significantly to $8.1 million from $22.9 million in Q1 2015. This decline was primarily driven by a net unrealized depreciation of $14.4 million in Q1 2016, compared to net unrealized appreciation of $4.5 million in the prior year period.
- Revenue Growth: Total investment income increased 12% to $41.0 million, driven by a 13% increase in interest income due to larger invested balances and leverage utilization.
- Expense Increases: Net expenses rose 12% to $19.4 million. Interest and other financing expenses increased 21% due to higher drawn balances on credit facilities and SBA-guaranteed debentures.
- Portfolio Valuation: The fair value of the portfolio decreased by approximately $22 million quarter-over-quarter, reflecting market price declines across the portfolio.
Outlook, Risks, and Unusual Items
- Share Repurchase Program: The company authorized a $50 million share repurchase program in February 2016. During Q1 2016, it repurchased 124,950 shares for approximately $1.4 million at a weighted average price of $11.47.
- Non-Accrual Investments: Investments in ATI Acquisition Company and Ancora Acquisition LLC remain on non-accrual status due to regulatory constraints and inability to service interest. These positions have a cost basis of $1.6 million and a fair value of $0.4 million.
- Recent Restructurings: The company previously recognized significant realized losses on Edmentum, Education Management Corporation (EDMC), and UniTek Global Services due to restructurings in 2014 and 2015. Post-restructuring, these investments have been restored to full accrual status.
- Subsequent Events: In May 2016, the company increased its NMFC Credit Facility commitment to $122.5 million and entered into an agreement to issue $50 million of senior unsecured notes at a 5.313% fixed rate.
- Risk Factors: The portfolio is concentrated in Business Services (24.4%) and Software (24.1%). Approximately 86% of investments are floating-rate, exposing the company to interest rate fluctuations. Leverage magnifies potential gains and losses.
Investor Verification Checklist
- Unrealized Depreciation: Verify the specific portfolio companies driving the $14.4 million unrealized loss and assess the sustainability of these valuation declines.
- Non-Accrual Status: Review the status of ATI Acquisition Company and Ancora Acquisition LLC to determine potential for further impairment or recovery.
- Leverage Utilization: Confirm the impact of increased borrowing on the NMFC Credit Facility and SBA debentures on future interest expense and asset coverage ratios.
- Dividend Coverage: Assess whether the $0.34 per share dividend is fully covered by Adjusted Net Investment Income given the decline in operating earnings.
- Share Repurchase Impact: Monitor the execution of the $50 million repurchase program and its effect on NAV per share.