New Mountain Finance Corporation — FY2023 Form 10-K
Reporting period: Year ended December 31, 2023. NMFC is an externally managed business development company focused on lending to U.S. middle-market businesses, primarily sponsor-backed companies in defensive-growth sectors. The filing is an annual report, not a standalone fourth-quarter earnings report.
Financial and portfolio performance
| Metric | FY2023 / year-end | FY2022 / prior year-end |
|---|---|---|
| Total investment income | $374.8 million | $294.6 million |
| Net investment income | $159.9 million; $1.57 per share | $119.6 million; $1.18 per share |
| Net increase from operations attributable to NMFC | $135.3 million; $1.34 basic EPS | $74.7 million; $0.75 basic EPS |
| Net realized and unrealized losses | $23.8 million loss | $45.1 million loss |
| Net asset value per share | $12.87 | $13.02 |
| Cash and cash equivalents | $70.1 million | $71.2 million |
| Debt outstanding | $1,807.6 million | $1,997.8 million |
| Asset coverage ratio | 187.54% | 177.42% |
| Distributions declared per share | $1.49 | $1.22 |
- Investment income rose 27%, principally because higher SOFR increased returns on floating-rate assets. Net investment income increased about 34%; interest and financing expense rose to $124.8 million from $92.4 million, reflecting higher rates and changes in the debt mix. Net investment income was approximately 42.7% of investment income, versus 40.6% in 2022.
- Net cash provided by operating activities was $332.7 million, compared with $35.0 million in 2022. Cash flow reflected investment purchases, repayments and sales; it should not be read as equivalent to recurring earnings.
- Portfolio fair value was $3,011.3 million across 110 companies, down from $3,221.2 million across 107 companies. New investments were $283.4 million, versus $620.7 million in 2022; repayments were $358.3 million. At fair value, the portfolio was 55.9% first lien, 14.1% second lien, 3.0% subordinated debt and 27.0% equity and other.
- Software, business services and healthcare were the largest sector exposures. Approximately 88.8% of investments were floating-rate at year-end. Management’s modeled estimate was that a 100-basis-point rate increase would raise net interest income, before incentive fees and other expenses, by 7.87%; a 25-basis-point decrease would reduce it by 1.97%.
- PIK and other non-cash interest and dividends totaled approximately $61.0 million in 2023, up from $39.9 million in 2022. These amounts are accrued income and are not necessarily cash collected.
Material changes, outlook and notable items
- Reported annual total return was 15.48% based on market value and 10.64% based on NAV. NAV per share declined $0.15 despite higher net investment income, mainly reflecting distributions and net realized/unrealized losses.
- Annual distributions exceeded net investment income per share ($1.49 versus $1.57? No: distributions were below NII per share); the filing reports total distributions of $150.7 million and NII of $159.9 million. The board declared a $0.32 regular first-quarter 2024 distribution plus a $0.04 supplemental distribution.
- Year-end debt included $515.1 million under the Holdings Credit Facility, $506.5 million of unsecured notes, $300.0 million of SBA debentures, $260.2 million of convertible notes and other facilities. The 2023 average cost of borrowing was 5.9% in management’s leverage illustration. The 150% BDC asset-coverage minimum and contractual debt covenants constrain borrowing and distributions.
- After year-end, NMFC repaid $116.5 million of 2019A notes on February 5, 2024, and issued $300.0 million of 6.875% notes due 2029 for net proceeds of approximately $293.9 million. The board re-approved the investment management agreement for 12 months beginning March 1, 2024. A base management fee waiver targeting a 1.25% rate on gross assets is scheduled through the fourth quarter of 2024; $4.1 million was waived in 2023.
- Credit concerns include non-accrual positions in American Achievement Corporation, National HME, Transcendia and UniTek securities, and a defaulted collateralized resale agreement with fair value of $16.5 million against $30.0 million cost. The Cayman Islands liquidation process and related claims remain ongoing. The filing reports no material pending legal proceedings.
- Management stated it expects current liquidity needs to be met through operating cash flows and other activities, but gave no specific earnings or portfolio-growth guidance. It highlighted market and credit uncertainty, higher funding costs, inflation, leverage, illiquid private-asset valuations, industry concentration, regulatory and tax requirements, and conflicts related to the external adviser.
- Deloitte issued unqualified opinions on the financial statements and internal controls. Investment valuation was identified as a critical audit matter because of significant judgment and unobservable valuation inputs.
Important facts for investors to verify
- Reconcile portfolio fair-value totals: the balance sheet and investment schedule report $3,011.3 million, while the portfolio risk-rating table reports $3,027.8 million.
- Assess credit quality, non-accrual recoveries and the cash collectability of PIK income, including the sizeable challenged positions and the collateralized-agreement claims.
- Review debt maturities, refinancing costs and covenant headroom, including the 2024 facility maturity, 2025 convertible-note and SBA-debenture maturities, and post-year-end note issuance and repayment.
- Evaluate the sustainability of distributions against cash NII, non-cash income, funding costs and RIC distribution requirements; verify final tax characterization of distributions.
- Examine private-asset valuation assumptions and concentration risk, especially software, business services, healthcare and equity/other holdings.