New Mountain Finance Corp. 10-Q Summary (Q3 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). 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 and nine months ended September 30, 2015.
Key Financial Metrics
| Metric | Q3 2015 (3 Months) | YTD 2015 (9 Months) | YTD 2014 (9 Months) |
|---|---|---|---|
| Total Investment Income | $37.4 million | $111.9 million | $98.9 million |
| Net Investment Income | $20.7 million | $60.0 million | $54.1 million |
| Net Realized Gains (Losses) | $(0.04) million | $(13.5) million | $(0.3) million |
| Net Change in Unrealized Appreciation | $(10.2) million | $7.7 million | $(8.6) million |
| Net Increase in Net Assets from Operations | $9.8 million | $53.0 million | $54.5 million |
| Basic EPS | $0.17 | $0.91 | $1.09 |
| Diluted EPS | $0.17 | $0.86 | $1.05 |
| Net Asset Value (NAV) per Share | $13.73 | $13.73 | $14.33 |
| Total Investments (Fair Value) | $1.478 billion | $1.478 billion | $1.425 billion |
| Total Debt Outstanding | $671.8 million | $671.8 million | $670.6 million |
| Cash and Cash Equivalents | $24.6 million | $24.6 million | $23.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased 13% year-over-year for the nine months ended September 30, 2015, driven by larger invested balances from capital raises and leverage deployment.
- Realized Losses: The company reported net realized losses of $13.5 million for the nine months ended September 30, 2015, compared to a loss of $0.3 million in the prior year. This was primarily due to $29.7 million in realized losses from the restructuring and extinguishment of investments in three portfolio companies (Edmentum, Education Management, and UniTek).
- Unrealized Gains: Net change in unrealized appreciation turned positive ($7.7 million) for the nine months ended September 30, 2015, reversing a depreciation of $8.6 million in the prior year period.
- Expense Increases: Net expenses increased 16% year-over-year, largely due to higher interest and financing expenses from the issuance of convertible notes and increased utilization of credit facilities.
- Capital Raise: In September 2015, the company completed a public offering of 5.75 million shares, raising approximately $79.4 million in net proceeds.
Guidance, Outlook, and Risks
- Dividends: The board declared a quarterly distribution of $0.34 per share for Q4 2015, payable December 30, 2015. The company intends to distribute approximately all Adjusted Net Investment Income quarterly to maintain Regulated Investment Company (RIC) status.
- Portfolio Performance: As of September 30, 2015, 97.2% of the portfolio (by fair value) was rated Investment Rating 1 or 2 (performing in-line or above expectations). Only 2.8% was rated 3 and 0.1% rated 4.
- Restructuring Activity: Significant realized losses were recognized due to the restructuring of Edmentum, Education Management, and UniTek. Post-restructuring, these investments have been restored to full accrual status.
- Non-Accrual Status: Investments in ATI Acquisition Company and Ancora Acquisition LLC remain on non-accrual status due to regulatory constraints and inability to service interest payments.
- Liquidity: The company maintains significant liquidity through revolving credit facilities (Holdings Credit Facility and NMFC Credit Facility) and cash flows from operations. Asset coverage ratio stood at 254.69%.
Investor Verification Checklist
- Restructuring Impact: Verify the long-term performance and credit quality of the restructured portfolio companies (Edmentum, Education Management, UniTek) following their extinguishment and re-entry into the portfolio.
- Non-Accrual Exposure: Assess the recovery potential and fair value stability of the ATI Acquisition Company and Ancora Acquisition LLC positions, which are currently on non-accrual.
- Debt Utilization: Monitor the utilization rates of the Holdings Credit Facility ($385.5M outstanding) and NMFC Credit Facility ($67.5M outstanding) relative to the $495M and $95M capacities, respectively.
- Convertible Notes: Review the conversion premium and price adjustments for the $115M Convertible Notes due 2019, noting the current conversion price of $15.80.
- Expense Waivers: Confirm the sustainability of management fee waivers ($3.9M for YTD 2015) and expense reimbursements, which significantly impact net investment income.