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 company focuses on generating current income and capital appreciation through debt and equity investments in defensive growth companies. This summary covers the quarterly period ended March 31, 2017.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total Assets | $1,880.9 million | $1,656.0 million |
| Total Investments (Fair Value) | $1,786.9 million | $1,558.8 million |
| Total Net Assets | $946.7 million | $938.6 million |
| Net Asset Value (NAV) per Share | $13.56 | $13.46 |
| Net Investment Income | $23.4 million | $21.6 million |
| Net Increase in Net Assets from Operations | $30.4 million | $8.1 million |
| Basic Earnings Per Share (EPS) | $0.44 | $0.13 |
| Diluted Earnings Per Share (EPS) | $0.40 | $0.13 |
| Total Borrowings (Net) | $853.6 million | $696.7 million |
| Cash and Cash Equivalents | $37.7 million | $45.9 million |
| Asset Coverage Ratio | 227.10% | 234.95% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased by approximately $228 million (14.6%) compared to the prior year quarter, driven by new investments of $349.4 million in 24 portfolio companies.
- Income Performance: Net investment income increased by 8.6% to $23.4 million. This was primarily driven by a significant increase in dividend income ($6.7 million vs. $1.6 million in Q1 2016), largely due to distributions from Senior Loan Programs (SLP I and SLP II) and New Mountain Net Lease Corporation (NMNLC).
- Realized and Unrealized Gains: The company reported a net gain of $7.0 million in Q1 2017, a significant improvement from a net loss of $13.5 million in Q1 2016. This shift was driven by an overall increase in the market prices of investments.
- Leverage: Net borrowings increased by $156.9 million to $853.6 million. This increase was due to higher drawn balances on the Holdings Credit Facility ($376.9 million vs. $333.5 million) and the NMFC Credit Facility ($122.5 million vs. $10.0 million), as well as the issuance of Unsecured Notes and Convertible Notes in late 2016.
- Expense Management: Total expenses increased slightly to $19.8 million (net of waivers). Notably, the Investment Adviser waived approximately $1.8 million in incentive fees for the quarter.
Outlook, Risks, and Unusual Items
- Non-Accrual Status: The company placed its entire first lien position in Sierra Hamilton LLC on non-accrual status due to ongoing restructuring. Additionally, the second lien position in Transtar Holding Company remains on non-accrual status. These positions represent significant fair value impairments relative to cost basis.
- Collateralized Agreement Litigation: The company is engaged in ongoing litigation in New York and the Cayman Islands regarding a collateralized agreement to resell with a private hedge fund. The counterparty failed to repurchase the collateral at par value as required. The carrying value is approximately $28.4 million.
- Fee Waivers: The Investment Adviser waived $1.36 million in management fees and $1.8 million in incentive fees for the quarter. The Administrator also waived approximately $0.4 million in indirect administrative expenses.
- Recent Capital Raise: Subsequent to the period end, on April 7, 2017, the company completed a public offering of 5.75 million shares, raising approximately $81.5 million in net proceeds.
- Distributions: The company declared a quarterly distribution of $0.34 per share, consistent with the prior year.
Investor Verification Checklist
- Non-Accrual Exposure: Verify the current status and potential recovery value of the Sierra Hamilton and Transtar Holding Company investments.
- Litigation Outcome: Monitor the resolution of the litigation regarding the $28.4 million collateralized agreement with the private hedge fund.
- Leverage Utilization: Assess the impact of increased leverage (Asset Coverage Ratio of 227.10%) on future distribution sustainability and NAV volatility.
- Fee Waiver Sustainability: Determine if the significant fee waivers ($3.16 million total) are a one-time occurrence or indicative of future expense management.
- Portfolio Yield: Confirm the weighted average Yield to Maturity at Cost (11.1%) remains stable given the mix of floating and fixed-rate assets.