New Mountain Finance Corp. 10-Q Summary (Q1 2015)
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) and a Regulated Investment Company (RIC). The filing covers the quarterly period ended March 31, 2015. The Company focuses on sourcing and originating debt securities (first and second lien, mezzanine) and equity interests in defensive growth companies.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net Asset Value (NAV) per Share | $13.89 | $14.53 |
| Total Investments (Fair Value) | $1,404.8 million | $1,424.7 million |
| Total Investment Income | $36.5 million | $30.4 million |
| Net Investment Income | $19.1 million | $16.1 million |
| Net Increase in Net Assets from Operations | $22.9 million | $23.4 million |
| Basic Earnings Per Share (EPS) | $0.40 | $0.50 |
| Diluted Earnings Per Share (EPS) | $0.37 | $0.50 |
| Cash and Cash Equivalents | $22.2 million | $0 (Predecessor structure) |
| Total Debt Outstanding | $663.9 million | $347.8 million (Predecessor) |
| Asset Coverage Ratio | 228.75% | 243.20% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased 18% to $36.5 million, driven primarily by a $5.2 million increase in interest income due to larger invested balances from capital raises and leverage.
- Expense Increases: Net expenses increased 18% to $17.3 million. Interest and financing expenses rose 60% due to the issuance of $115 million in Convertible Notes and increased utilization of credit facilities.
- Realized Losses: The Company reported net realized losses of $0.1 million, compared to gains of $2.8 million in Q1 2014. This was primarily due to $14.4 million in realized losses from the restructuring/extinguishment of investments in UniTek Global Services and Education Management LLC, partially offset by $14.2 million in gains from sales.
- Portfolio Composition: The portfolio fair value decreased slightly to $1.4 billion. The weighted average Yield to Maturity at Cost was 10.6%.
Guidance, Outlook, and Risks
- Dividends: The Board declared a quarterly distribution of $0.34 per share for Q2 2015, payable June 30, 2015. The Company intends to distribute approximately all Adjusted Net Investment Income quarterly to maintain RIC status.
- Restructuring Activity: Significant portfolio activity included the emergence of UniTek Global Services from Chapter 11 bankruptcy (restored to accrual) and the restructuring of Education Management LLC (EDMC). A portion of the Edmentum, Inc. second lien position was placed on non-accrual status due to ongoing restructuring.
- Liquidity: The Company maintains liquidity through revolving credit facilities (Holdings Credit Facility and NMFC Credit Facility) and cash flows. As of March 31, 2015, approximately $52.4 million remained available under the Holdings Credit Facility and $11.2 million under the NMFC Credit Facility.
- Risks: Key risks include the credit quality of portfolio companies (with 6.8% of the portfolio rated 3 or 4), interest rate fluctuations (86% of the portfolio is floating rate), and the impact of leverage on net asset value.
Investor Verification Checklist
- Non-Accrual Status: Verify the impact of the non-accrual status on the Edmentum, Inc. second lien position and the ATI Acquisition Company/Anora Acquisition LLC investments.
- Restructuring Outcomes: Monitor the final terms and recovery rates for the UniTek and EDMC restructurings to assess the realized loss impact.
- Debt Covenants: Confirm continued compliance with asset coverage ratios (currently 228.75%) given the high leverage levels.
- Expense Waivers: Note that the expense cap expired in Q1 2014; verify if future expense waivers (currently $1.4 million management fee waiver) will continue.
- Convertible Notes: Assess the dilution impact of the $115 million Convertible Notes (conversion price ~$15.93) relative to the current market price.