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, unitranche, mezzanine) and equity interests in defensive growth companies. This summary covers the quarterly report (Form 10-Q) for the period ended June 30, 2020.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|
| Total Investment Income | $140.1 million | $130.7 million |
| Net Investment Income | $58.9 million | $55.4 million |
| Net Realized and Unrealized Gains (Losses) | $(154.6) million | $12.3 million |
| Net Increase (Decrease) in Net Assets from Operations | $(95.9) million | $67.7 million |
| Net Asset Value (NAV) per Share | $11.63 | $13.41 |
| Basic Earnings (Loss) per Share | $(0.99) | $0.85 |
| Total Investments at Fair Value | $2.83 billion | $3.16 billion |
| Total Borrowings (Net) | $1.73 billion | $1.94 billion |
| Cash and Cash Equivalents | $56.2 million | $87.2 million |
| Asset Coverage Ratio | 177.7% | 175.1% |
Material Changes vs. Prior Period
- Significant NAV Decline: NAV per share decreased from $13.26 at year-end 2019 to $11.63 at June 30, 2020, a decline of approximately 12.3%. This was primarily driven by a net unrealized depreciation of $151.5 million in the portfolio.
- COVID-19 Impact: Management attributes the significant reduction in fair value to the global economic impact of the COVID-19 pandemic, which caused a broad decrease in market prices for portfolio investments.
- Investment Income Growth: Despite the market downturn, total investment income increased by 7% year-over-year to $140.1 million, driven by larger invested balances from new debt issuances and revolving credit facility draws.
- Debt Reduction: Net borrowings decreased by approximately $211 million compared to the prior year-end, as the company utilized cash from investment sales and paydowns to repay revolving credit facilities.
Guidance, Outlook, Risks, and Unusual Items
- Non-Accrual Status: Several portfolio companies were placed on non-accrual status due to restructuring or bankruptcy filings:
- Benevis Holding Corp: $42.8 million cost basis placed on non-accrual (Rating 4) due to expected Chapter 11 filing.
- Permian Holdco entities: Subordinated and preferred positions placed on non-accrual (Rating 4) due to restructuring and expected Chapter 11 filing.
- UniTek Global Services: Junior preferred shares placed on non-accrual (Rating 4).
- Education Management Corporation (EDMC): Remains on non-accrual (Rating 4) as the company winds down operations.
- PIK Reversals: The company reversed $3.4 million of previously recorded PIK dividends (Permian Holdco 1) and $2.0 million of PIK interest (Permian Holdco 2 & 3) deemed uncollectible.
- Collateralized Agreement Risk: A $30 million collateralized agreement to resell with PPVA Fund, L.P. remains on non-accrual with a fair value of $21.4 million. The counterparty is in liquidation in the Cayman Islands.
- Outlook: Management states that the extent of the COVID-19 impact on future financial performance is highly uncertain. They continue to monitor portfolio companies and have assigned "Risk Ratings" (Red, Orange, Yellow, Green) to assess pandemic exposure.
- Distributions: A quarterly distribution of $0.30 per share was declared for the third quarter of 2020.
Key Facts for Investor Verification
- Portfolio Concentration: Verify the exposure to the top five industries: Software (27.4%), Business Services (21.2%), Healthcare Services (15.2%), Education (8.1%), and Investment Funds (7.5%).
- Non-Qualifying Assets: As of June 30, 2020, 17.1% of total assets are considered non-qualifying under Section 55(a) of the 1940 Act, which limits the ability to acquire additional non-qualifying assets.
- Leverage Utilization: Confirm the asset coverage ratio of 177.7% remains above the 150% regulatory minimum, noting that SBA-guaranteed debentures are excluded from this calculation.
- Unfunded Commitments: The company has $64.2 million in unfunded revolving credit commitments and $67.3 million in delayed draw commitments, representing potential future cash outflows.
- Valuation Methodology: Approximately 95.6% of the portfolio ($2.7 billion) is classified as Level III (unobservable inputs), requiring significant management judgment in valuation.