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 September 30, 2014. During this period, the Company completed a significant restructuring effective May 8, 2014, consolidating its operations directly under NMFC and dissolving the previous master-feeder structure involving New Mountain Finance Holdings, L.L.C. (NMF Holdings) and New Mountain Finance AIV Holdings Corporation.
Key Financial Metrics
| Metric | Value (in thousands) |
|---|---|
| Total Assets | $1,398,141 |
| Total Investments (Fair Value) | $1,353,669 |
| Total Liabilities | $650,684 |
| Total Net Assets | $747,457 |
| Net Asset Value (NAV) per Share | $14.33 |
| Net Investment Income (9 months) | $54,147 |
| Net Increase in Net Assets from Operations (9 months) | $54,521 |
| Basic EPS (9 months) | $1.09 |
| Diluted EPS (9 months) | $1.05 |
| Cash and Cash Equivalents | $17,857 |
| Weighted Average Yield to Maturity at Cost | 10.7% |
Debt and Liquidity
- Holdings Credit Facility: $258,962 outstanding (Matures Oct 2016).
- SLF Credit Facility: $204,867 outstanding (Matures Oct 2016).
- Convertible Notes: $115,000 outstanding (Matures June 2019, 5.0% interest).
- NMFC Credit Facility: $22,000 outstanding (Matures June 2019).
- Total Debt: Approximately $600.9 million in contractual obligations.
- Asset Coverage Ratio: 224.40%.
Material Changes vs. Prior Period
Comparisons are made against the nine months ended September 30, 2013, noting the structural changes in 2014.
- Investment Income: Increased 15% to $98.85 million (9 months 2014) from $86.27 million (9 months 2013), driven by larger invested balances from equity offerings and leverage.
- Net Expenses: Increased 16% to $44.71 million (9 months 2014) from $38.44 million (9 months 2013), primarily due to higher management and incentive fees associated with increased assets.
- Realized Gains/Losses: The Company reported a net realized loss of $299 thousand (9 months 2014) compared to a net realized gain of $9.52 million (9 months 2013). This shift was influenced by a large distribution from a warrant investment in the prior year and a partial write-down of a portfolio company in the current period.
- Unrealized Appreciation/Depreciation: Net change in unrealized appreciation was a depreciation of $8.56 million (9 months 2014) compared to an appreciation of $2.52 million (9 months 2013), reflecting market price decreases.
Guidance, Outlook, and Risks
Management Commentary: The Company focuses on debt securities of defensive growth companies. The portfolio consists of 70 companies with top concentrations in Education (20.6%), Business Services (18.7%), and Software (18.1%). The Company maintains an "opt-out" dividend reinvestment plan and intends to distribute substantially all taxable income annually to maintain RIC status.
Recent Developments:
- Completed a public offering of 5.75 million shares in October 2014, raising approximately $82.5 million in net proceeds.
- Declared a fourth-quarter 2014 distribution of $0.34 per share.
Risks and Contingencies:
- Credit Risk: Investments are primarily below investment grade (leveraged loans), subject to default risk. Two portfolio companies (ATI Acquisition Company and UniTek Global Services) were placed on non-accrual status as of September 30, 2014.
- Liquidity Risk: The Company relies on revolving credit facilities and periodic equity offerings for liquidity. Leverage magnifies potential gains and losses.
- Interest Rate Risk: Approximately 87.1% of the portfolio consists of floating-rate investments. A 100 basis point increase in rates would decrease net interest income by approximately 3.38%.
Investor Verification Checklist
- Non-Accrual Status: Verify the recovery prospects and valuation adjustments for ATI Acquisition Company and UniTek Global Services, which are on non-accrual status.
- Expense Cap Expiration: Confirm the impact of the expired expense cap (March 31, 2014) on future administrative expense reimbursements.
- Convertible Notes Dilution: Assess the potential dilution from the $115 million Convertible Notes (conversion price ~$15.93) if interest rates or stock prices trigger conversion.
- Debt Maturities: Monitor the repayment schedule for the Holdings and SLF Credit Facilities, both maturing in October 2016.
- Portfolio Concentration: Review the exposure to the Education sector (20.6% of portfolio), which may be sensitive to regulatory changes.