Business Context and Reporting Period
This summary covers the Form 10-K for the fiscal year ended December 31, 2013, filed by 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) managed by New Mountain Finance Advisers BDC, L.L.C., focusing on debt securities (first and second lien) and equity interests in U.S. middle-market defensive growth companies. NMFC and AIV Holdings are holding companies with no direct operations; their sole asset is their ownership interest in the Operating Company.
Key Financial Metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total Investment Income | $114.9 million | $85.8 million |
| Net Investment Income | $63.7 million | $45.2 million |
| Net Increase in Net Assets from Operations | $78.9 million | $74.0 million |
| Net Asset Value (NAV) per Unit/Share | $14.38 | $14.06 |
| Total Portfolio Fair Value | $1,115.7 million | $989.8 million |
| Number of Portfolio Companies | 59 | 63 |
| Weighted Average Yield to Maturity | 10.6% | 10.1% |
| Total Debt Outstanding | $436.5 million | $421.2 million |
| Cash and Cash Equivalents | $15.0 million | $12.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 34.0% to $114.9 million, driven by larger invested balances from equity offerings and leverage, as well as prepayment fees and commitment fees.
- Expense Increase: Net expenses rose to $51.2 million from $40.6 million. This was primarily due to higher management fees ($14.9 million vs. $11.1 million) and incentive fees ($19.7 million vs. $15.9 million) resulting from increased asset levels.
- Portfolio Composition: The portfolio fair value grew by approximately 12.7%. The number of portfolio companies decreased from 63 to 59. First lien loans comprised 49.6% of the portfolio, while second lien loans comprised 42.0%.
- Realized Gains: Net realized gains decreased to $7.3 million from $18.9 million in 2012. This included a $4.3 million realized loss on the sale of a first lien position in ATI Acquisition Company.
- Dividends: NMFC declared total dividends of $1.48 per share for 2013, compared to $1.71 per share in 2012.
Guidance, Outlook, and Risks
Recent Developments: In February 2014, AIV Holdings sold its remaining units in the Operating Company via a secondary offering, resulting in NMFC owning 100% of the Operating Company. The company received a "green light" letter from the SBA to pursue a Small Business Investment Company (SBIC) license, which could provide additional capital.
Management Commentary: Management continues to focus on sourcing debt securities in defensive growth industries. The portfolio is heavily weighted toward floating-rate investments (85%), providing some protection against rising interest rates, though the company notes that rising rates could increase borrowing costs.
Risks and Contingencies:
- Credit Risk: Investments in middle-market companies carry high credit risk. Two portfolio companies (ATI Acquisition Company and Ancora Acquisition LLC) were rated "Investment Rating 4" (substantially below expectations) due to regulatory constraints and underperformance.
- Leverage: The company utilizes significant leverage through two revolving credit facilities (Holdings Credit Facility and SLF Credit Facility). Total debt was $436.5 million as of year-end. Asset coverage ratios must be maintained at 200% to issue senior securities or pay distributions.
- Valuation Uncertainty: A significant portion of the portfolio (Level III assets) is valued using unobservable inputs, requiring management judgment and creating potential volatility in NAV.
- Regulatory Compliance: Failure to maintain BDC or Regulated Investment Company (RIC) status could result in corporate-level taxation and restrictions on distributions.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the 200% asset coverage ratio required under the 1940 Act and the specific covenants of the Holdings and SLF Credit Facilities.
- Non-Accrual Status: Review the status of the ATI Acquisition Company investment, which was on non-accrual and resulted in a realized loss.
- Expense Cap: Confirm the status of the expense cap with the Administrator, which expired on March 31, 2014, potentially leading to higher future operating expenses.
- Dividend Sustainability: Assess whether Net Investment Income ($63.7 million) is sufficient to cover declared dividends ($65.1 million) and maintain RIC status without relying on return of capital.
- Concentration Risk: Note that Software (22.3%) and Education (21.1%) industries represent nearly half of the total portfolio fair value.