Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2013, for New Mountain Finance Holdings, L.L.C. (the Operating Company), New Mountain Finance Corporation (NMFC), and New Mountain Finance AIV Holdings Corporation (AIV Holdings). The Operating Company is a Business Development Company (BDC) focused on investing in debt securities of defensive growth companies. NMFC and AIV Holdings are holding companies that own the Operating Company's units. As of June 30, 2013, the Operating Company held a portfolio of 59 investments with a fair value of approximately $1.059 billion.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|
| Total Investment Income | $60.5 million | $39.3 million |
| Net Investment Income | $35.2 million | $21.6 million |
| Net Realized Gains | $4.4 million | $13.0 million |
| Net Change in Unrealized Appreciation | ($0.1 million) | $0.2 million |
| Net Increase in Members' Capital | $39.4 million | $34.8 million |
| Total Assets | $1.094 billion | $1.026 billion |
| Total Liabilities | $454.1 million | $455.6 million |
| Members' Capital / Net Assets | $640.3 million | $569.9 million |
| Net Asset Value (NAV) per Unit/Share | $14.32 | $14.06 |
| Cash and Cash Equivalents | $15.9 million | $12.8 million |
| Total Debt Outstanding | $416.5 million | $421.2 million |
| Asset Coverage Ratio | 253.72% | 237.15% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 54% ($21.2 million) compared to the prior year period, driven by larger invested balances from equity offerings and leverage, as well as prepayment fees and dividend income from warrant investments.
- Expense Increases: Net expenses rose by 42% ($7.5 million) year-over-year. This was primarily due to higher management and incentive fees resulting from increased asset levels and higher interest expenses on credit facilities due to increased average debt outstanding.
- Realized Gains Decline: Net realized gains decreased by 66% ($8.6 million) compared to the prior year, attributed to fewer sales of securities and repayments relative to the prior period.
- Capital Raising: The Operating Company received net proceeds of approximately $57.0 million from net contributions during the six-month period, including proceeds from NMFC's public offerings.
Guidance, Outlook, and Risks
Management Commentary: Management noted that the portfolio's weighted average yield to maturity was approximately 10.3% as of June 30, 2013. The company continues to focus on sourcing debt securities in defensive growth companies. The increase in net investment income is expected to support continued quarterly distributions.
Distributions: On August 7, 2013, the boards declared a third-quarter 2013 distribution of $0.34 per unit/share and a special distribution of $0.12 per unit/share.
Risks and Contingencies:
- Credit Risk: The portfolio includes investments in ATI Acquisition Company, which are on non-accrual status with a significant decline in fair value (cost basis of $5.9 million vs. fair value of $0.4 million).
- Leverage: The company utilizes significant leverage (Holdings Credit Facility and SLF Credit Facility totaling $416.5 million). While covenants are generally tied to portfolio performance rather than mark-to-market fluctuations, leverage magnifies the potential for gain or loss.
- Valuation Uncertainty: A significant portion of the portfolio ($113.2 million or 10.7%) is classified as Level III fair value, relying on unobservable inputs and management judgment.
Investor Verification Checklist
- ATI Acquisition Company Status: Verify the current status and potential recovery value of the non-accrual investment in ATI Acquisition Company, which represents a material unrealized loss.
- Debt Covenants: Confirm compliance with asset coverage ratios and other covenants under the Holdings and SLF Credit Facilities, particularly given the high leverage ratio.
- Expense Cap: Review the Administration Agreement expense cap ($4.25 million for the period April 1, 2013, to March 31, 2014) and the extent of expense waivers/reimbursements ($1.7 million for the six months ended June 30, 2013).
- Level III Valuations: Assess the sensitivity of the $113.2 million Level III portfolio to changes in valuation assumptions (EBITDA multiples and discount rates).
- Distribution Sustainability: Evaluate whether Adjusted Net Investment Income is sufficient to cover the declared distribution rate of $0.34 per quarter on a sustainable basis.