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 and equity interests in defensive growth companies. This summary covers the quarterly report (Form 10-Q) for the period ended September 30, 2016.
Key Financial Metrics
| Metric | Amount (in thousands) |
|---|---|
| Net Asset Value (NAV) per Share | $13.28 |
| Total Investments at Fair Value | $1,518,979 |
| Total Assets | $1,617,180 |
| Total Liabilities | $768,968 |
| Net Assets | $848,212 |
| Cash and Cash Equivalents | $49,794 |
| Net Borrowings | $703,672 |
| Net Investment Income (9 months) | $65,128 |
| Net Increase in Net Assets from Operations (9 months) | $77,823 |
| Basic EPS (9 months) | $1.22 |
| Diluted EPS (9 months) | $1.14 |
| Dividends Declared (9 months) | $1.02 per share |
Material Changes vs. Prior Period
- Investment Income: Total investment income for the nine months ended September 30, 2016, was $124.3 million, an 11% increase compared to $111.9 million in the same period in 2015. This was driven by larger invested balances from new debt issuances and leverage.
- Net Realized and Unrealized Gains: The company reported a net gain of $12.7 million for the nine months ended September 30, 2016, compared to a net loss of $7.0 million in the prior year period. The 2016 gain was driven by increased market prices of investments, partially offset by mark-downs on non-accrual assets.
- Debt Structure: Net borrowings decreased to $703.7 million from $728.1 million at year-end 2015. Notably, the company issued $90.0 million in Unsecured Notes during the period (initially $50.0 million in May, followed by $40.0 million in September) and increased Convertible Notes to $155.6 million.
- Portfolio Composition: The portfolio consists of 74 companies. Software (27.7%) and Business Services (26.2%) remain the largest industry concentrations. 88.1% of investments are floating-rate.
Outlook, Risks, and Unusual Items
- Non-Accrual Status: During the quarter, the company placed its entire second lien position in Transtar Holding Company on non-accrual status due to restructuring. Additionally, a portion of the first lien position in Permian Tank & Manufacturing, Inc. was placed on non-accrual. The company also wrote off its first lien positions in ATI Acquisition Company, recognizing a realized loss of $1.5 million.
- Litigation: Litigation is ongoing regarding a collateralized agreement to resell with a private hedge fund counterparty that failed to repurchase collateral at par value. The agreement is collateralized by a second lien bond in Northstar GOM Holdings Group LLC.
- Capital Activities: The company repurchased 248,499 shares under its repurchase program during the nine-month period. On October 28, 2016 (subsequent to the period end), the company completed a public offering of 5.75 million shares, raising approximately $79.1 million in net proceeds.
- Dividend Policy: The company intends to distribute approximately all of its Adjusted Net Investment Income quarterly. A fourth-quarter 2016 distribution of $0.34 per share was declared on November 4, 2016.
- Risk Factors: The company faces risks related to the credit quality of its portfolio (investments are generally below investment grade), interest rate fluctuations (though 88% of the portfolio is floating-rate), and the ability of portfolio companies to service debt.
Key Facts for Investor Verification
- Asset Coverage Ratio: Verify the asset coverage ratio of 242.09% to ensure compliance with the 1940 Act requirement of at least 200%.
- Non-Accrual Exposure: Review the specific fair value and cost basis of investments in Transtar, Permian, and ATI to assess potential future credit losses.
- Debt Maturities: Confirm the maturity schedule of the $718.4 million in contractual obligations, noting that significant portions of the Holdings Credit Facility and Convertible Notes mature in 2019.
- Level III Valuations: Approximately 64.6% of the portfolio ($981.2 million) is classified as Level III (unobservable inputs), requiring significant management judgment in valuation.
- Management Fee Waivers: Note that the Investment Adviser waived $3.7 million in management fees for the nine-month period, which impacts net expense ratios.