New Mountain Finance Corp. 10-Q Summary (Q2 2015)
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2015 for New Mountain Finance Corp. (NMFC), a closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). The Company focuses on generating current income and capital appreciation through debt securities (first and second lien) and equity interests in defensive growth companies. As of the reporting date, the portfolio consisted of 65 portfolio companies.
Key Financial Metrics
| Metric | Q2 2015 (Three Months) | YTD 2015 (Six Months) | YTD 2014 (Six Months) |
|---|---|---|---|
| Total Investment Income | $37.9 million | $74.4 million | $64.1 million |
| Net Investment Income | $20.3 million | $39.3 million | $33.3 million |
| Net Realized Gains (Losses) | $(13.3) million | $(13.5) million | $(1.1) million |
| Net Change in Unrealized Appreciation | $13.5 million | $18.0 million | $5.7 million |
| Net Increase in Net Assets from Operations | $20.3 million | $43.2 million | $47.1 million |
| Basic EPS | $0.35 | $0.74 | $0.95 |
| Diluted EPS | $0.33 | $0.70 | $0.94 |
| Net Asset Value (NAV) per Share | $13.90 | $13.90 | $14.65 |
| Total Investments at Fair Value | $1,308.9 million | $1,308.9 million | $1,424.7 million |
| Total Debt Outstanding | $567.9 million | $567.9 million | $670.6 million |
| Cash and Cash Equivalents | $24.2 million | $24.2 million | $23.4 million |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased 12% in Q2 2015 compared to Q2 2014, driven by larger invested balances from the October 2014 primary offering, increased leverage, and prepayment fees. YTD 2015 income increased 16% over YTD 2014.
- Realized Losses: The Company reported significant net realized losses of $13.3 million in Q2 2015 and $13.5 million YTD 2015. These losses were primarily due to the extinguishment of investments in three portfolio companies (Edmentum, Education Management LLC, and UniTek Global Services) following restructurings, which triggered realized losses of approximately $15.2 million, $1.6 million, and $12.8 million, respectively.
- Expense Increases: Net operating expenses increased 7% in Q2 2015 and 13% YTD 2015 compared to the prior year periods. This was driven by higher management and incentive fees due to larger asset bases and increased interest/financing expenses from the issuance of $115 million in convertible notes and the utilization of credit facilities.
- Portfolio Turnover: Portfolio turnover was 14.01% for the six months ended June 30, 2015, compared to 11.39% in the prior year period.
Guidance, Outlook, and Risks
- Dividends: The Company declared a quarterly distribution of $0.34 per share for the second quarter of 2015. On August 4, 2015, the Board declared a third-quarter distribution of $0.34 per share, payable September 30, 2015.
- Capital Gains Incentive Fee: As of June 30, 2015, no actual capital gains incentive fee was owed to the Investment Adviser because cumulative net Adjusted Realized Gains did not exceed cumulative Adjusted Unrealized Depreciation. However, a hypothetical accrual of $0.5 million was recorded for GAAP purposes.
- Non-Accrual Status: Investments in ATI Acquisition Company and Ancora Acquisition LLC remain on non-accrual status due to regulatory constraints and underperformance. Investments in Edmentum, EDMC, and UniTek were restored to full accrual status following their respective restructurings.
- Liquidity: The Company maintains significant liquidity through revolving credit facilities (Holdings Credit Facility and NMFC Credit Facility) and cash flows from operations. As of June 30, 2015, approximately $135.1 million of capacity remained under the Holdings Credit Facility and $57.0 million under the NMFC Credit Facility.
- Risks: Key risks include the impact of credit market liquidity, the ability of portfolio companies to service debt, and the potential for further realized losses if additional restructurings occur. The Company is also subject to interest rate risk, with approximately 84% of its portfolio at fair value consisting of floating-rate investments.
Investor Verification Checklist
- Restructuring Impact: Verify the long-term credit quality and yield of the restructured investments in Edmentum, EDMC, and UniTek following their extinguishment and re-entry into the portfolio.
- Non-Accrual Exposure: Assess the recovery potential and fair value adjustments for the non-accrual positions in ATI Acquisition Company and Ancora Acquisition LLC.
- Leverage Utilization: Monitor the Company's asset coverage ratio and the utilization of its $495 million Holdings Credit Facility and $95 million NMFC Credit Facility.
- Expense Waivers: Confirm the status of the expense cap expiration (March 31, 2014) and the extent of future expense waivers or reimbursements by the Administrator.
- Convertible Notes: Review the terms of the $115 million Convertible Notes, including the conversion price ($15.80 as of June 30, 2015) and potential dilution impact.