New Mountain Finance Corp SEC 10-Q Report

New Mountain Finance Corp (NMFC), a business development company specializing in debt and equity investments, has released its Form 10-Q report for the quarter ending September 30, 2024. The report provides a comprehensive overview of the company's financial performance, business operations, strategic initiatives, and the challenges it faces in the current market environment.

Financial Highlights

• Total Investment Income: $280.471 million, reflecting a slight decrease from $281.794 million in the same period last year.
• Total Expenses: $171.469 million, up from $165.575 million in the same period last year, primarily due to increased interest and other financing expenses.
• Net Investment Income: $111.381 million, down from $118.990 million in the same period last year.
• Net Realized and Unrealized Losses: $24.619 million, compared to $10.401 million in the same period last year, indicating higher losses on investments.
• Net Increase in Net Assets Resulting from Operations: $86.762 million, down from $108.589 million in the same period last year.
• Basic Earnings Per Share: $0.81, down from $1.07 in the same period last year.
• Diluted Earnings Per Share: $0.78, down from $0.98 in the same period last year.
• Distributions Declared and Paid Per Share: $1.04, slightly up from $1.03 in the same period last year.

Business Highlights

• Revenue Segments: The company reported revenue from various segments including non-controlled/non-affiliated investments, non-controlled/affiliated investments, and controlled investments. The fair value of non-controlled/non-affiliated investments was $2,446,773, non-controlled/affiliated investments was $113,017, and controlled investments was $705,481 as of September 30, 2024.
• Geographical Performance: The company’s investments span multiple regions including the United States, Jersey, United Kingdom, and Australia. Notable investments include $2,117,968 in the United States, $60,416 in Jersey, $55,487 in the United Kingdom, and $4,799 in Australia.
• Sales Units: The company’s portfolio includes a variety of funded debt investments across different industries such as software, healthcare, business services, and consumer services. Specific investments include $81,004 in Paw Midco, Inc. (Consumer Services), $66,244 in Knockout Intermediate Holdings I Inc. (Software), and $61,915 in GC Waves Holdings, Inc. (Financial Services).
• New Product Launches: During the reporting period, the company launched new investment products in various sectors. For instance, new investments were made in OA Topco, L.P. (Healthcare) with a fair value of $60,830 and Associations Finance, Inc. (Business Services) with a fair value of $60,205.
• New Production Launches: The company expanded its investment portfolio with new production facilities and capacity expansions. Notable new investments include $46,547 in OEConnection LLC (Software) and $44,107 in Model N, Inc. (Software).
• Future Outlook: The company anticipates continued growth in its investment portfolio, with a focus on expanding its presence in high-growth sectors such as software, healthcare, and business services. Management expects to leverage its strategic investments to drive long-term value creation for shareholders.

Strategic Initiatives

• Investment Portfolio Enhancement: NMFC has focused on improving its investment portfolio by increasing its investments at fair value from $3,011,322 as of December 31, 2023, to $3,265,271 as of September 30, 2024. This includes significant investments in non-controlled/non-affiliated investments, non-controlled/affiliated investments, and controlled investments.
• Credit Facility Management: NMFC has been active in managing its credit facilities, including the Holdings Credit Facility, NMFC Credit Facility, and NMNLC Credit Facility II, to optimize its capital structure and support its investment activities.
• Capital Management Activities: The company issued $594,981 in Unsecured Notes and repaid $116,500 of previously issued Unsecured Notes. It also managed its credit facilities by drawing $558,400 from the Holdings Credit Facility and repaying $665,900. Furthermore, NMFC repurchased $186,400 of its DB Credit Facility and issued $67,691 in new shares. The company declared and paid distributions totaling $111,602 to stockholders from net investment income.
• Future Outlook: Looking ahead, NMFC plans to continue its strategic focus on enhancing its investment portfolio and optimizing its capital structure. The company aims to leverage its strong financial position to pursue new investment opportunities and generate sustainable returns for shareholders. NMFC also intends to maintain its disciplined approach to capital management, including potential future share repurchases and dividend payments, to maximize shareholder value. The company remains committed to exploring new avenues for growth and investment, with an emphasis on maintaining a balanced and diversified portfolio.

Challenges and Risks

• Interest Rate Fluctuations: The company is subject to financial market risks, such as interest rate fluctuations. The Federal Reserve's actions from March 2022 to July 2023, including periodic interest rate increases to combat inflation, have impacted the company’s net investment income. The Federal Reserve's potential future rate cuts in 2024 add uncertainty.
• Floating-Rate Investments: As of September 30, 2024, approximately 84.94% of the company’s investments at fair value are floating-rate investments with a SOFR, SONIA, or EURIBOR floor, exposing the company to risks associated with changes in these base rates.
• Non-Accrual Investments: Certain loans in the portfolio are on non-accrual status, impacting the company’s income and valuation of these investments. For example, the second lien positions in National HME, Inc. and first lien term loans in American Achievement Corporation are on non-accrual status.
• Hedging and Derivatives: The company uses derivatives to hedge against fluctuations in market interest rates or currency exchange rates. However, hedging transactions may not always be effective and could expose the company to additional risks, including early termination risk and valuation uncertainties.
• Interest Rate Sensitivity: The company provided a table estimating potential changes in interest income, net of interest expense, under various interest rate scenarios. A decrease of 200 basis points could reduce net interest income by 14.16%, while an increase of 200 basis points could increase it by 14.16%.
• Foreign Securities Investment Risks: If the company invests in foreign securities, it could face additional risks such as changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets, and less available information.
• Regulatory Risks Related to Derivatives: The SEC's Rule 18f-4 under the 1940 Act imposes new requirements on the use of derivatives and other transactions that create future payment or delivery obligations. Compliance with these requirements may increase the company’s cost of doing business and limit its ability to use derivatives and enter into certain financial contracts.
• Valuation of OTC Derivatives: Valuing OTC derivatives is less certain than valuing actively traded financial instruments. The lack of uniform terms and the potential for early termination by counterparties could result in significant losses for the company.
• Resolution and Insolvency Proceedings: Regulations requiring certain terms in derivatives contracts to delay or restrict the rights of counterparties in the event of resolution or insolvency proceedings could adversely affect the company’s ability to terminate existing derivatives contracts or exercise default rights.
• Early Termination Risk: OTC derivatives counterparties may have the right to close out positions due to certain events, potentially resulting in significant losses for the company. This risk is heightened by the potential for dramatic intraday moves in the company’s NAV.
• Operational Risks: The company faces operational risks related to the performance and financial trends of its portfolio companies. The investment risk rating system used to monitor these risks categorizes investments based on operating performance and business characteristics. As of September 30, 2024, the majority of the company’s investments had a Green Risk Rating, but some had Yellow or Orange Risk Ratings, indicating moderate to significant underperformance or market headwinds.
• Credit Facility Risks: The company’s credit facilities are subject to floating interest rates, which could increase borrowing costs in a rising interest rate environment. The termination of the DB Credit Facility and the issuance of new unsecured notes also impact the company’s financing expenses and liquidity.
• Market Risks: The company’s portfolio is concentrated in certain industries, such as software, business services, healthcare, investment funds, and consumer services. Changes in market conditions or industry-specific risks could adversely affect the company’s investments and financial performance.
• Management's Strategies to Address Risks: The company employs hedging techniques to minimize currency and interest rate risks, although the effectiveness of these strategies is not guaranteed. The company monitors the performance and financial trends of its portfolio companies on a quarterly basis to identify and address any developments that may alter its investment strategy. The company has established a risk rating system to categorize and monitor the credit profile and expected level of returns on each investment, allowing for proactive management of underperforming investments.

SEC Filing: New Mountain Finance Corp [ NMFC ] - 10-Q - Oct. 30, 2024