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 (first and second lien, mezzanine) and equity interests in defensive growth companies. This summary covers the quarterly report (Form 10-Q) for the period ended September 30, 2020.
Key Financial Metrics
| Metric | Q3 2020 (Three Months) | YTD 2020 (Nine Months) | YTD 2019 (Nine Months) |
|---|---|---|---|
| Total Investment Income | $65.5 million | $205.6 million | $203.3 million |
| Net Investment Income | $29.0 million | $87.9 million | $86.6 million |
| Net Realized Gains (Losses) | $0.05 million | ($3.6 million) | $0.45 million |
| Net Change in Unrealized Appreciation (Depreciation) | $60.2 million | ($91.2 million) | $5.3 million |
| Net Increase (Decrease) in Net Assets from Operations | $88.2 million | ($7.7 million) | $91.1 million |
| Basic EPS | $0.91 | ($0.08) | $1.11 |
| Net Asset Value (NAV) per Share | $12.24 | $12.24 | $13.35 |
| Total Investments at Fair Value | $2.90 billion (as of Sept 30, 2020) | ||
| Total Borrowings (Net) | $1.79 billion (as of Sept 30, 2020) | ||
| Cash and Cash Equivalents | $68.7 million (as of Sept 30, 2020) |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments decreased from $3.16 billion at December 31, 2019, to $2.90 billion at September 30, 2020. This decline was primarily driven by a net unrealized depreciation of approximately $91.2 million for the nine months ended September 30, 2020, attributed to the impact of the COVID-19 pandemic on market prices.
- Net Asset Value: NAV per share declined from $13.26 at the beginning of the year to $12.24 at period end, a decrease of approximately 7.7%.
- Operating Results: While Net Investment Income remained relatively stable year-over-year ($87.9 million vs. $86.6 million), the company reported a net decrease in net assets from operations for the nine-month period ($7.7 million loss) compared to a significant increase in the prior year ($91.1 million gain), largely due to the unrealized losses mentioned above.
- Debt Levels: Net borrowings decreased from $1.94 billion at year-end 2019 to $1.79 billion at September 30, 2020, reflecting repayments on the Holdings Credit Facility and NMFC Credit Facility.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 Impact: Management explicitly states that the pandemic has had a material adverse impact on the U.S. and global economy, resulting in significant unrealized depreciation in the portfolio. The company continues to monitor the situation, noting that future financial performance depends on the duration and spread of the virus and the broader economic recovery.
- Non-Accrual Investments: Several portfolio companies were placed on non-accrual status during the period due to restructuring or bankruptcy filings:
- Benevis Holding Corp: Placed on non-accrual in Q2 2020 following a Chapter 11 filing. Cost basis: $42.8 million; Fair value: $39.3 million.
- Permian Holdco entities: Placed on non-accrual due to Chapter 11 filing. Aggregate cost basis: $10.9 million; Fair value: $0.
- UniTek Global Services, Inc: Junior preferred shares placed on non-accrual. Cost basis: $34.4 million; Fair value: $3.6 million.
- Education Management Corporation (EDMC): Remains on non-accrual with a fair value of $0.
- Fee Waivers: The Investment Adviser waived approximately $2.8 million in management fees and $0.5 million in incentive fees for the quarter ended September 30, 2020. The Administrator also waived approximately $0.6 million in indirect administrative expenses.
- Collateralized Agreement: The company holds a collateralized agreement to resell with a cost basis of $30.0 million and a fair value of $21.4 million. The counterparty (PPVA Fund, L.P.) is in liquidation, and the agreement is on non-accrual.
- Distributions: The board declared a fourth-quarter 2020 distribution of $0.30 per share, payable December 30, 2020.
Key Facts for Investor Verification
- Asset Coverage Ratio: Verify the company's compliance with the 150% asset coverage requirement under the 1940 Act. As of September 30, 2020, the ratio was 178.7%.
- Non-Qualifying Assets: Confirm that non-qualifying assets (17.1% of total assets) remain within the 30% limit required by the 1940 Act.
- Unrealized Losses: Scrutinize the $91.2 million in unrealized depreciation for the nine-month period to understand the specific portfolio drivers and the likelihood of recovery.
- Non-Accrual Exposure: Assess the total exposure to non-accrual investments (Benevis, Permian, UniTek, EDMC, PPVA) and the potential for further write-downs.
- Liquidity Position: Review the availability of undrawn credit facilities (Holdings, DB, NMFC) to ensure sufficient liquidity for operations and distributions amidst market volatility.