Business Context and Reporting Period
Company: New Mountain Finance Corp (NMFC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2019
Business Overview: NMFC is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). Its investment objective is to generate current income and capital appreciation through debt securities (first and second lien, mezzanine) and equity interests in defensive growth companies. The company utilizes leverage through various credit facilities and unsecured notes.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Total Investment Income | $130.7 million | $107.5 million |
| Net Investment Income | $55.4 million | $51.5 million |
| Net Realized and Unrealized Gains (Losses) | $12.3 million | ($4.5 million) |
| Net Increase in Net Assets from Operations | $67.7 million | $47.0 million |
| Basic Earnings Per Share (EPS) | $0.85 | $0.62 |
| Diluted Earnings Per Share (EPS) | $0.76 | $0.58 |
| Net Asset Value (NAV) per Share | $13.41 | $13.57 |
| Total Assets | $2.79 billion | $2.45 billion (Dec 31, 2018) |
| Total Investments at Fair Value | $2.64 billion | $2.34 billion (Dec 31, 2018) |
| Net Borrowings | $1.59 billion | $1.38 billion (Dec 31, 2018) |
| Cash and Cash Equivalents | $87.2 million | $49.7 million (Dec 31, 2018) |
| Asset Coverage Ratio | 175.1% | 210.9% (Six Months Ended June 30, 2018) |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 22% ($23.2 million) compared to the prior year period, driven by larger invested balances and higher LIBOR rates. Interest income rose by $22.7 million.
- Expense Increase: Net operating expenses increased by $19.2 million (34%) year-over-year. This was primarily due to a $15.8 million increase in interest and financing expenses resulting from new convertible and unsecured note issuances and higher drawn balances on credit facilities.
- Portfolio Expansion: The portfolio grew from $2.34 billion to $2.64 billion in fair value. The company made new investments in 32 portfolio companies totaling $341.7 million during the six-month period.
- Capital Markets Activity: In February 2019, the company completed a public offering of common stock raising approximately $59.3 million in net proceeds. In June 2019, it issued an additional $86.25 million in convertible notes.
- Unrealized Gains: The company reported a net unrealized appreciation of $12.3 million for the six months ended June 30, 2019, contrasting with a net unrealized depreciation of $2.9 million in the same period in 2018.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the increase in income to the successful deployment of capital raised from equity and debt offerings. The company maintains a focus on defensive growth companies with sustainable secular growth drivers.
- Dividends: The company declared a quarterly distribution of $0.34 per share for the third quarter of 2019, payable in September 2019. This aligns with the company's policy to distribute substantially all net investment income.
- Board Composition: Due to the untimely death of a director in June 2019, the Board of Directors temporarily did not consist of a majority of non-interested persons. The requirement for a majority of independent directors is suspended for 90 days under the 1940 Act while a replacement is sought.
- Risks and Contingencies:
- Non-Accrual Status: Investments in Education Management Corporation (EDMC) remain on non-accrual status with a fair value of approximately $12,000 against a cost basis of $1.0 million.
- Collateralized Agreement: The company holds a collateralized agreement to resell with a private hedge fund in liquidation (Cayman Islands). The fair value ($23.5 million) is below the cost basis ($30.0 million) due to the counterparty's default.
- Leverage: The company utilizes significant leverage (Asset Coverage Ratio of 175.1%), which magnifies the potential for gain or loss and increases interest rate risk.
Key Facts for Investor Verification
- Debt Maturities: Verify the maturity schedule of the $1.59 billion in net borrowings, specifically the 2014 Convertible Notes which matured in June 2019 and were repaid, and the 2018 Convertible Notes maturing in 2023.
- Asset Coverage Compliance: Confirm the company remains in compliance with the 150% asset coverage ratio required by the 1940 Act, particularly given the increased leverage.
- EDMC Exposure: Monitor the status of the Education Management Corporation investment, which is rated as a "Rating 4" (substantially below expectations) and on non-accrual.
- Board Independence: Track the appointment of a new independent director to restore the majority of non-interested persons on the Board of Directors within the 90-day suspension period.
- Unfunded Commitments: Note the $149.3 million in unfunded commitments (revolving credit facilities and delayed draws) which represent future liquidity outflows.