Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2012, for 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) focused on originating debt securities (first and second lien) and equity interests in 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. As of September 30, 2012, NMFC owned approximately 56.1% and AIV Holdings owned 43.9% of the Operating Company's units.
Key Financial Metrics
| Metric | Amount (Nine Months Ended Sep 30, 2012) | Amount (Three Months Ended Sep 30, 2012) |
|---|---|---|
| Total Assets | $886.8 million | $886.8 million |
| Investments at Fair Value | $858.9 million | $858.9 million |
| Net Investment Income | $31.7 million | $10.1 million |
| Net Realized Gains | $14.6 million | $1.6 million |
| Net Change in Unrealized Appreciation | $10.7 million | $10.5 million |
| Total Net Increase in Capital | $57.0 million | $22.2 million |
| Net Asset Value (NAV) per Unit | $14.10 | $14.10 |
| Total Debt Outstanding | $335.7 million | $335.7 million |
| Cash and Cash Equivalents | $12.7 million | $12.7 million |
Debt Composition: The total debt consists of $200.0 million under the SLF Credit Facility and $135.7 million under the Holdings Credit Facility. The weighted average interest rates for the nine months ended September 30, 2012, were 2.4% for the SLF facility and 3.1% for the Holdings facility.
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 55% to $61.1 million for the nine months ended September 30, 2012, compared to $39.4 million in the prior year period. This was driven by larger invested balances from the May 2011 IPO, a July 2012 public offering, and increased leverage.
- Expense Increases: Total operating expenses rose significantly to $29.4 million (nine months 2012) from $10.4 million (nine months 2011). This increase is primarily due to higher incentive fees ($11.7 million vs. $1.2 million) and management fees ($7.9 million vs. $2.7 million) resulting from the larger asset base and the accrual of hypothetical capital gains incentive fees.
- Portfolio Performance: The portfolio generated a net gain of $25.3 million from realized and unrealized changes in the nine months ended September 30, 2012, a reversal from the net loss of $15.2 million in the same period in 2011. This improvement reflects an overall increase in market prices and portfolio quality.
- Capital Structure: The Operating Company raised $82.3 million in net proceeds from the issuance of membership units during the nine months ended September 30, 2012.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted that the portfolio's weighted average Yield to Maturity was approximately 9.9% as of September 30, 2012. The company continues to focus on defensive growth companies with sustainable secular growth drivers. A significant portion of the incentive fee expense ($3.5 million for the nine months) relates to hypothetical capital gains on a liquidation basis, which may not be paid in cash until actual gains are realized.
Risks and Contingencies:
- Credit Risk: The portfolio includes investments in ATI Acquisition Company, which are on non-accrual status due to regulatory constraints and underperformance. The aggregate cost basis for these positions is $5.9 million with a fair value of $1.5 million.
- Liquidity and Leverage: The company utilizes leverage to maximize returns, which magnifies potential losses. The SLF Credit Facility is fully drawn ($200 million), while the Holdings Credit Facility has approximately $49.3 million of remaining capacity.
- Valuation Uncertainty: A significant portion of the portfolio ($107.7 million or 12.5%) is classified as Level III assets, requiring significant management judgment for valuation due to a lack of observable market inputs.
Investor Verification Checklist
- ATI Acquisition Exposure: Verify the status and potential recovery value of the $5.9 million investment in ATI Acquisition Company, which is currently on non-accrual and significantly impaired.
- Incentive Fee Structure: Confirm the distinction between cash-paid incentive fees and the accrued hypothetical capital gains fees ($3.5 million) to understand true cash flow impacts.
- Debt Covenants: Review compliance with asset coverage ratios and other covenants under the Holdings and SLF Credit Facilities, particularly given the full draw on the SLF facility.
- Level III Valuations: Assess the sensitivity of the $107.7 million in Level III assets to changes in valuation methodologies (e.g., EBITDA multiples, discount rates).
- Dividend Sustainability: Evaluate whether the Adjusted Net Investment Income ($32.6 million for nine months) supports the declared dividend rate of $0.34 per share/unit.