Business Context and Reporting Period
Company: New Mountain Finance Corporation (NMFC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2016
Business Model: NMFC is a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It targets current income and capital appreciation by investing in debt securities (first and second lien, mezzanine) and equity of U.S. middle-market "defensive growth" companies.
Key Financial Metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total Investment Income | $168.1 million | $153.9 million |
| Net Investment Income | $88.1 million | $82.5 million |
| Net Increase in Net Assets from Operations | $111.7 million | $33.0 million |
| Net Realized Gains (Losses) | ($16.7 million) | ($12.8 million) |
| Net Change in Unrealized Appreciation (Depreciation) | $40.1 million | ($35.3 million) |
| Total Assets | $1,656.0 million | $1,588.1 million |
| Total Net Assets | $938.6 million | $836.9 million |
| Net Asset Value (NAV) per Share | $13.46 | $13.08 |
| Portfolio Fair Value | $1,558.8 million | $1,512.2 million |
| Weighted Average Yield to Maturity at Cost | 11.1% | 10.7% |
| Total Debt Outstanding | $710.5 million | $742.1 million |
| Cash and Cash Equivalents | $45.9 million | $30.1 million |
Material Changes vs. Prior Period
- Operating Performance: Net increase in net assets from operations improved significantly to $111.7 million in 2016 from $33.0 million in 2015. This was driven by a $40.1 million net unrealized appreciation in 2016, reversing the $35.3 million depreciation recorded in 2015.
- Revenue Growth: Total investment income increased 9% to $168.1 million, primarily due to larger invested balances and prepayment fees. Interest income rose $7.4 million, and dividend income increased $5.4 million.
- Expense Increases: Net expenses increased to $80.0 million from $71.4 million. Management fees rose to $22.7 million (net of waivers) and incentive fees increased to $22.0 million. Interest and financing expenses increased $5.1 million due to new unsecured notes and convertible notes issuances.
- Portfolio Composition: The portfolio grew to 78 companies with a fair value of $1,558.8 million. Top industry concentrations remained Business Services (29.6%) and Software (27.0%).
- Capital Structure: The company issued $90.0 million in Unsecured Notes and an additional $40.3 million in Convertible Notes in 2016. Total debt decreased slightly year-over-year due to paydowns on credit facilities.
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary: Management highlighted the successful deployment of capital from the October 2016 primary offering and debt issuances. The portfolio yield increased to 11.1%. The company received a "green light" letter from the SBA in January 2017 to pursue a second SBIC license.
- Distributions: The company declared quarterly distributions of $0.34 per share throughout 2016 ($1.36 total). Approximately 89.5% of distributions were classified as ordinary income, with 10.5% as a return of capital.
- Unusual Items / Realized Losses: The company recognized a $17.9 million realized loss in 2016 due to the restructuring of Permian Tank & Manufacturing, Inc., which was accounted for as an extinguishment. Additionally, a $1.5 million loss was recognized on ATI Acquisition Company.
- Risks: Key risks include credit losses in the middle market, interest rate fluctuations (93.2% of the portfolio is floating rate), and the potential failure to maintain RIC status if distribution requirements are not met. The company faces regulatory constraints under the 1940 Act regarding asset coverage ratios.
Investor Verification Checklist
- Asset Coverage Ratio: Verify compliance with the 200% asset coverage requirement under the 1940 Act, excluding SBA-guaranteed debentures.
- Non-Accrual Status: Review the status of investments placed on non-accrual, specifically Sierra Hamilton LLC and Transtar Holding Company, and their impact on future income.
- Debt Maturities: Confirm the repayment schedule for the Holdings Credit Facility (maturing 2019) and Convertible Notes (maturing 2019) to assess refinancing risks.
- Management Fee Waivers: Note that the Investment Adviser waived approximately $4.8 million in management fees in 2016; verify if this waiver is expected to continue.
- SBIC License Status: Monitor the progress of the application for the second SBIC license to determine potential for additional leverage capacity.