New Mountain Finance Corp quarterly report, Q1 FY2024

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New Mountain Finance Corporation — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024. NMFC is a business development company focused on lending to U.S. upper-middle-market companies. Unless stated otherwise, dollar amounts below are in millions.

Key financial results

  • Investment income: $90.6, down 1.5% from $92.0 in Q1 2023. Interest income declined $3.6, partly offset by higher dividend income.
  • Net investment income: $37.6, versus $38.4; $0.36 per share, versus $0.38. Distributions were $0.36 per share, compared with $0.32.
  • Results from operations: $28.1 consolidated, including $27.4 attributable to NMFC, versus $44.8 and $44.6, respectively, in Q1 2023. Basic EPS was $0.26, down from $0.44.
  • Realized and unrealized results: Net realized and unrealized losses were $9.5, compared with gains of $6.4 a year earlier. Management attributed the current-period loss mainly to a realized loss on TMK Hawk and unrealized depreciation in TVG-Edmentum and New Benevis.
  • Net asset value: $1.357 billion attributable to NMFC; $12.77 per share at quarter-end, versus $12.87 at December 31, 2023 and $13.14 at March 31, 2023.
  • Portfolio: Investments had fair value of $3.070 billion across 114 portfolio companies, versus $3.011 billion across 110 companies at year-end. Software was the largest industry concentration at 28.3%, followed by business services at 17.7% and healthcare at 15.4%. Floating-rate investments were 89.7% of the portfolio.
  • Cash flow and liquidity: Cash and cash equivalents were $107.5, up from $70.1 at year-end. Operating cash flow was $68.3, versus cash use of $3.5 in Q1 2023; financing activities used $30.8. The operating cash-flow figure included a $94.1 increase in payables for unsettled securities purchases.
  • Debt and leverage: Borrowings totaled $1.774 billion principal ($1.747 billion net of deferred financing costs) at quarter-end. Asset coverage was 192.3%, up from 177.6% a year earlier; the statutory minimum is 150%. NMFC issued $300 million of 6.875% unsecured notes in February and repaid $116.5 million of 2019A notes. The Holdings Credit Facility balance fell to $291.6 from $515.1 at year-end.
  • Other metrics: Total return was 2.45% based on market value and 1.99% based on NAV for the quarter. The stated weighted-average yield to maturity at cost was 11.1% for income-producing investments and 9.5% for all investments; these are estimates based on assumptions, exclude leverage, and are not forecasts.

Material changes versus comparable periods

  • Investment income and net investment income were modestly lower year over year, while net results from operations declined substantially, reflecting the shift from gains in Q1 2023 to net realized and unrealized losses in Q1 2024.
  • Portfolio investment purchases were $192.4, compared with $94.2 in Q1 2023; repayments were $145.5, compared with $31.5. Quarter-end fair value increased from year-end, and the portfolio expanded by four companies.
  • NMFC sold 3.73 million common shares through its at-the-market program for net proceeds of approximately $47.9; it sold no shares through the program in Q1 2023. Approximately $127.8 remained available under the program at quarter-end.
  • The company’s Q1 distribution rose to $0.36 per share from $0.32 a year earlier. The board subsequently declared a $0.32 regular Q2 distribution and a $0.02 supplemental distribution related to Q1 earnings.

Outlook, commentary, risks and unusual items

  • Management said it expects current liquidity needs to be met through operating cash flows and other activities. The filing provides no specific earnings or portfolio guidance for the rest of 2024.
  • Management cited lower leverage and a lower invested portfolio balance as factors reducing interest income, partly offset by higher yields on floating-rate assets. Financing costs were broadly flat year over year as higher funding costs were offset by lower balances on certain facilities.
  • Five positions were identified as non-accrual: National HME, American Achievement Corporation, UniTek preferred shares, Transcendia and New Trojan Parent (Careismatic). Careismatic was newly placed on non-accrual in Q1. Management reported three Red-rated, four Orange-rated and four Yellow-rated portfolio companies; Red-rated positions represented 0.1% of portfolio fair value under its risk-rating table.
  • A $30.0-cost collateralized resale agreement remained on non-accrual at a fair value of $16.5. The guarantor hedge fund is in liquidation, breached its repurchase obligation, and NMFC does not have full rights and title to the collateral; a claim is pending with the Cayman Islands liquidators.
  • Fair-value estimates require significant judgment: $3.015 billion of the $3.070 billion investment portfolio was Level III at quarter-end. The filing cautions that actual realizable values may differ materially from estimates.
  • Interest-rate sensitivity analysis estimated that a 100-basis-point increase would raise net interest income, before incentive fees and other expenses, by 7.56%; a 100-basis-point decrease was not presented. The filing also describes credit, leverage, illiquidity, foreign-currency, valuation and derivative risks.
  • Deloitte’s interim review reported that it was not aware of material modifications needed for the financial information to conform with U.S. GAAP; this was a review, not an audit. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Important facts for investors to verify

  • Track non-accrual exposures, recoveries and changes in marks, particularly Careismatic, AAC, Transcendia, National HME and UniTek.
  • Assess the collectability and legal resolution of the impaired $30.0 collateralized resale agreement and the separate Black Elk-related claim, carried at $8.0 fair value.
  • Reconcile reported operating cash flow with unsettled investment purchases, and monitor the $212.2 of unfunded commitments plus $6.3 of investment purchase commitments.
  • Review debt maturities, borrowing-base availability, covenant compliance and the effect of interest-rate movements on both investment income and financing costs.
  • Assess the sustainability of distributions relative to net investment income, NAV trends and future share issuance; the Q1 distribution equaled reported net investment income per share.
  • Examine the assumptions supporting Level III valuations and the sensitivity of portfolio values to company performance, comparable-company multiples and discount rates.