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 and equity investments in defensive growth companies. This summary covers the quarterly period ended March 31, 2019.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net Asset Value (NAV) per Share | $13.45 | $13.60 |
| Total Investments (Fair Value) | $2,522.3 million | $2,342.0 million |
| Net Investment Income | $27.45 million | $25.74 million |
| Net Increase in Net Assets from Operations | $43.92 million | $23.84 million |
| Basic Earnings Per Share (EPS) | $0.56 | $0.31 |
| Diluted Earnings Per Share (EPS) | $0.49 | $0.30 |
| Total Borrowings (Net) | $1,507.9 million | $1,384.1 million |
| Cash and Cash Equivalents | $65.6 million | $49.7 million |
| Asset Coverage Ratio | 179.7% | 222.8% |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased by approximately 21% to $64.2 million, driven by larger invested balances from recent capital raises (convertible notes, unsecured notes, and equity offerings) and rising LIBOR rates.
- Expense Increase: Net operating expenses rose by approximately $9.6 million to $36.7 million. This was primarily due to a $7.9 million increase in interest and financing expenses resulting from higher debt balances and rising rates.
- Unrealized Gains: The company reported a net change in unrealized appreciation of $16.3 million, a significant improvement from a $2.2 million depreciation in the prior year period, driven by overall increases in market prices of portfolio investments.
- Portfolio Expansion: The portfolio grew to 97 companies with a fair value of $2.52 billion, up from 92 companies valued at $2.34 billion at year-end 2018.
Guidance, Outlook, and Risks
- Capital Deployment: Management continues to deploy capital from recent issuances (including a $59.3 million equity offering in February 2019) to originate new investments. The company maintains a weighted average yield to maturity at cost of approximately 10.0%.
- Liquidity: Liquidity is supported by cash flows from operations, revolving credit facilities (Holdings, NMFC, and DB Credit Facilities), and potential follow-on equity offerings. As of March 31, 2019, the company had $135.6 million in unfunded commitments.
- Regulatory Compliance: The company is subject to a 150.0% minimum asset coverage ratio under the 1940 Act (excluding SBA-guaranteed debentures). The current ratio of 179.7% indicates compliance.
- Contingencies:
- Education Management Corporation (EDMC): Investments in EDMC are on non-accrual status with an aggregate fair value of less than $0.1 million due to the company's liquidation.
- Collateralized Agreement: A $30 million collateralized agreement to resell with a private hedge fund in liquidation (Cayman Islands) has a fair value of $23.5 million, reflecting increased risk.
- Black Elk Claim: The company is pursuing a $16 million claim related to a settled fraudulent conveyance claim against a trustee of Black Elk Energy Offshore Operations, LLC.
Key Facts for Investor Verification
- Debt Maturities: Verify the repayment schedule for the $270.3 million in Convertible Notes, specifically the $155.3 million maturing in June 2019 (2014 Convertible Notes).
- Asset Coverage: Confirm the company's ability to maintain the 150.0% asset coverage ratio given the increase in leverage and potential market volatility.
- Non-Accrual Assets: Monitor the status of the EDMC investment and the $23.5 million collateralized agreement to resell, as these represent concentrated risks.
- Interest Rate Sensitivity: Assess the impact of rising LIBOR rates on the company's floating-rate debt obligations versus its floating-rate investment income.
- Unfunded Commitments: Review the $135.6 million in unfunded commitments to understand future capital deployment requirements.