New Mountain Finance (NMFC) Dividend Coverage & Risk Profile Update

The following is from the NMFC Quick Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).

For Q2 2019, NMFC reported just above base case projections with another quarter of lower-than-expected portfolio yield and dividend income but strong portfolio growth fully covering its dividend since its IPO. The company continues to increase its use of leverage due to shareholder approval to reduce its asset coverage ratio (effective June 9, 2018) driving higher interest and total income. The Board declared a Q3 2019 distribution of $0.34 per share payable on September 27, 2019, to holders of record as of September 13, 2019.

On July 11, 2019, NMFC completed its offering of 6.9 million shares at a price of $13.68 per share. The Investment Adviser paid a $0.39 per share portion of the $0.42 per share underwriters’ sales load for net proceeds of $13.65 per share or $94.2 million. NMFC had over $240 million of originations and commitments since the end of Q2 2019through August 1, 2019, and management is expecting to fully invest in the proceeds from recent equity offering:

Robert Hamwee, CEO, commented: “The second quarter represented another solid quarter of performance for NMFC. We originated $183 million of investments and once again had no new investments placed on non-accrual. Additionally, we anticipate an active third quarter of originations, allowing us to remain fully invested after our recent equity raise.”

As predicted in previous reports and shown below, income from recurring sources (including its SLPs) continues to increase and accounted for 97% of total income in Q2 2019. However, there was a decline in the amount of income from its fully ramped its NMFC Senior Loan Program III LLC (“SLP III”):

First-lien debt increased slightly to 52.3% (previously 50.2%) of the portfolio as the company “shifted originations towards senior investments as we have accessed incremental leverage”.

On April 30, 2019, NMFC issued $116.5 million of 5.494% unsecured notes due April 30, 2024. As of June 30, 2019, the company had cash equivalents of almost $87 million and over $280 million of available borrowing capacity under its credit facility and SBA debentures.

For the fourth quarter in a row, and for 9 out of the last 10 quarters, there were no new non-accruals in the portfolio. Previously, its first-lien positions in Education Management (“EDMC”) were placed on non-accrual status as the company announced its intention to wind down and liquidate the business. As of June 30, 2019, the company’s investments in EDMC had a cost basis of $1.0 million and fair value of $0.0 million. Portfolio credit quality remained stable with only EDMC (0% of the portfolio) with an investment rating of “4”. An investment rating of a “4” includes non-accruals or investments that could be moved to non-accrual status, and the final development could be an actual realization of a loss through a restructuring or impaired sale.

Steven B. Klinsky, Chairman: “As managers and as significant stockholders personally, we are pleased with the completion of another successful quarter. We believe New Mountain’s focus on acyclical “defensive growth” industries and on companies that we know well continues to be a successful strategy to preserve asset value”

NAV per share decreased by $0.04 or 0.3% from ($13.45 to $13.41) mostly due to markdowns during the quarter that will be discussed in the updated NMFC Deep Dive report.

This information was previously made available to subscribers of Premium BDC Reports, along with:

  • NMFC target prices and buying points
  • NMFC risk profile, potential credit issues, and overall rankings
  • NMFC dividend coverage projections and worst-case scenarios
  • Real-time changes to my personal portfolio

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.