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, 2018.
Key Financial Metrics
| Metric | Value (in thousands) |
|---|---|
| Net Asset Value (NAV) per Share | $13.58 |
| Total Investments at Fair Value | $2,294,759 |
| Total Assets | $2,521,774 |
| Total Liabilities | $1,488,244 |
| Net Assets | $1,033,530 |
| Cash and Cash Equivalents | $146,345 |
| Net Borrowings | $1,354,386 |
| Net Investment Income (9 months) | $78,574 |
| Net Increase in Net Assets from Operations (9 months) | $73,737 |
| Basic EPS (9 months) | $0.97 |
| Diluted EPS (9 months) | $0.91 |
| Asset Coverage Ratio | 185.7% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased from $1.83 billion at December 31, 2017, to $2.29 billion at September 30, 2018, driven by new investments of approximately $1.06 billion during the nine-month period.
- Revenue Increase: Total investment income for the nine months ended September 30, 2018, was $167.96 million, a 16% increase compared to $144.56 million in the prior year period. This was primarily due to increased dividend income (including PIK dividends) and larger invested balances funded by new debt issuances.
- Expense Increase: Net expenses increased to $89.10 million for the nine months ended September 30, 2018, from $68.70 million in the prior year. This increase was driven by higher interest and financing expenses due to new convertible and unsecured note issuances, as well as higher management and incentive fees resulting from a larger asset base.
- Realized Losses: The company reported net realized losses of $3.15 million for the nine months ended September 30, 2018, compared to $39.84 million in the prior year. The prior year's losses were significantly impacted by the restructuring of Sierra Hamilton and Transtar Holding Company.
- Debt Issuances: The company significantly expanded its capital base, issuing $115 million in Convertible Notes and $190 million in Unsecured Notes during the period, increasing total borrowings.
Guidance, Outlook, Risks, and Unusual Items
- Asset Coverage Change: Following shareholder approval in June 2018, the company adopted the 150% minimum asset coverage ratio (reduced from 200%) permitted by the Small Business Credit Availability Act, allowing for increased leverage capacity.
- Non-Accrual Investments:
- National HME, Inc. (NHME): A portion of the second lien position was placed on non-accrual status in Q2 2018, with preferred shares written down to $0. Aggregate cost basis was $28.5 million with a fair value of $13.7 million.
- Education Management Corporation (EDMC): First lien positions were placed on non-accrual status in Q1 2018 as the company announced liquidation. Aggregate cost basis was $1.5 million with a fair value of less than $0.1 million.
- Legal Proceedings: The company is involved in a dispute regarding a collateralized securities purchase agreement with a private hedge fund (Black Elk Energy Offshore Operations, LLC). The company settled a claim for $16 million and received a $1.5 million insurance payment during the period. The fair value of the agreement reflects the inherent risk.
- Dividends: The company declared a quarterly distribution of $0.34 per share for the fourth quarter of 2018, payable in December 2018. The company intends to distribute approximately all net investment income to maintain Regulated Investment Company (RIC) status.
- Market Risk: Approximately 87.2% of the investment portfolio consists of floating-rate investments. A 100 basis point increase in interest rates is estimated to increase net interest income by 8.77%.
Investor Verification Checklist
- Non-Accrual Exposure: Verify the current status and potential recovery value of the National HME and Education Management Corporation investments, which represent significant write-downs.
- Leverage Utilization: Confirm the company's ability to deploy capital efficiently given the new 150% asset coverage ratio and the recent increase in total borrowings to over $1.35 billion.
- Fee Waivers: Monitor the Investment Adviser's continued practice of waiving management fees (approximately $4.6 million waived in the nine-month period) and whether this trend continues.
- Debt Maturities: Review the maturity schedule of the Convertible Notes (2014 and 2018 series) and Unsecured Notes to assess refinancing risks and cash flow requirements.
- Portfolio Concentration: Assess the impact of the top five industry concentrations (Business Services, Software, Healthcare Services, Education, Investment Funds) on overall portfolio performance.