The following information was previously provided to subscribers of Premium BDC Reports along with:
- NMFC target prices/buying points
- NMFC risk profile, potential credit issues, and overall rankings
- NMFC dividend coverage projections and worst-case scenarios
New Mountain Finance (NMFC) has a relatively higher dividend yield consistently covered, with a defensively positioned portfolio and management that exhibits higher quality indicators including responsiveness to personal requests for information, waived management fees, look-back feature for the capital gains portion of the incentive fee. However, NMFC does not have a ‘best-of-breed’ fee structure due to income incentive fees not taking into account realized or unrealized losses. Management has “committed to paying quarterly dividends of at least $0.30 over the next seven quarters” through fee waivers.
“New Mountain was built with defensive growth industries and risk control in mind long before COVID hit. The great bulk of NMFC’s loans are in areas that might best be described as repetitive, tech-enabled business services such as enterprise software. Our companies often have large installed client bases of repeat users who depend on their service day-in and day-out. These are the types of defensive growth industries that we think are the right ones at all times, and particularly attractive in difficult times.”
NMFC Dividend Coverage Update
On May 4, 2021, NMFC entered into a fee waiver agreement and the Investment Adviser agreed to reduce the base management fees not exceed 1.25% of gross assets through December 31, 2022. Also, management has “committed to paying quarterly dividends of at least $0.30 over the next seven quarters” through additional fee waivers:
“We are pleased to announce again a second quarter distribution of $0.30 per share payable on June 30, 2021 to holders of record as of June 16, 2021. With the continued support of our Investment Adviser, we are committed to paying quarterly dividends of at least $0.30 over the next seven quarters as we expect our positive performance will continue.”
“We’re implementing a dividend support program for at least the next two-years by pledging to charge no more than a 1.25% management fee on all assets. For the next two years, we also pledged to reduce our incentive fee, if needed to support the $0.30 dividend. We do not anticipate needing to use this pledge, but want shareholders to have greater confidence in the current dividend. While we believe our ability to earn our $0.30 quarterly dividend remains intact as we come out of the COVID crisis, given the twin headwinds of a very low base interest rates and what we believe is a temporarily increased non-interest earning equity portfolio, we want to assure our shareholders that the dividend and the earnings base that supports it are secure. To that end, we are implementing a program whereby for at least the next two calendar years, we will effectively guarantee to reduce our incentive fee if needed to make sure earnings support the $0.30 dividend. Further in order to simplify our fee structure instead of waiving fees on a portion of certain managed assets as we historically have done for at least the next two years, we will simply charge a 1.25% management fee on all assets. We believe these two important changes even further align management’s interest with those of our shareholders, an approach that has always informed our actions.”
Over the next seven quarters management is working to improve earnings through lowering its borrowing expenses and increasing returns including from its Senior Loan Programs and rotating the portfolio out of equity positions and non-income-producing assets:
“Equity portfolio with things like Edmentum, Benevis and UniTek and we actually believe there is tremendous potential in those names to create real economic value, but of course for every dollar that’s in a non-yielding piece of equity at non-cash and non-income yielding piece of equity that obviously is a dollar that’s not earning NII in the quarter. So, nothing has changed, and in fact, our outlook continues to brighten for those names, and from a timing perspective, it’s not the case that we think we’re going to own them any longer than we would have thought last quarter. It’s just the timing of those uncertain right like will you because it’s a lumpy will you exit one of those and convert that into cash, that’s redeployed in NII generative traditional debt securities we just don’t know. So, we want to just make sure that the new explicit NII per action program has enough runway to make sure we can recycle those proceeds.”
It should be noted that there will likely be less dividend income paid in Q2 2021 due to Edmentum Inc. and is taken into account with the updated projections:
Q. “Edmentum looks like they paid a dividend here in the first quarter and was curious if you expect that dividend to be stable on a going-forward basis or how should we think about just the level of that dividend coming in from Edmentum?”
A. “Yes, that’s really more a truing up of some elements from the fourth quarter transaction. So we do not expect Edmentum to be a regular payer of dividends. So it was more of a one-time post transaction settling than it was a policy of paying dividends, I think Edmentum is going to be more of a growth entity than a dividend payer.”
There is a good chance that management would extend the fee waivers if the company was not covering its dividend but management seems confident that would not be needed:
“So we’re not saying it’s two years for sure and then we said at least two years and that’s important. We feel pretty good about just naturally earning the $0.30, but we recognize there are some post COVID headwinds and we want to make sort of explicit what’s been frankly implicit, and we just don’t want anyone to be worrying about the $0.30 dividend and the sustainability and the coverage it through NII and I think in a listen two years as we’ve all seen in the world is a very long time and we’ll be readdressing if and as needed, but I think our hope and expectation is that two years from now the things that have hurt the dividend, the base rate going down and the larger equity portfolio. We’ll have made progress and there’ll be just much more fulsome coverage to give people that more traditional confidence in the dividend. And of course, if there is not, we are going to be, I think you’ve seen as we’ve always been very supportive. I would be shocked if we weren’t, we needed to extend it, we will likely extend it.”
As discussed in the previous report, management is working to improve its net interest margins by reducing borrowing expenses. In March and April 2021, the company extended and reduced the borrowing rates on its Deutsche Bank and Wells Fargo credit facilities. On February 5, 2021, NMFC announced the redemption of its 5.75% notes due 2023 (CUSIP 647551209; “NMFCL”) on March 8, 2021, using the proceeds from its recent private placement of $200 million of 3.875% notes due 2026. These notes were also used to redeem its 5.31% unsecured notes due May 2021. Moody’s and Kroll recently assigned/affirmed their investment-grade credit ratings:
“We have made material progress decreasing the cost and increasing the duration and flexibility of our liabilities. Specifically, we have extended our two main asset-backed secured credit facilities to $730 million Wells Fargo facility and the $280 million Deutsche Bank facility out to 2026. At the same time, we were able to lower applicable spreads on these two facilities by 40 basis points and 25 basis points respectively. On the unsecured side, we received an investment grade rating from Moody, which will allow us to access the institutional bond market, even more effectively than in the past, which should further reduce our cost of capital. We also received an upgraded outlook from Kroll Bond Rating Service.”
On May 5, 2021, NMFC and SkyKnight Alpha entered into an agreement to establish a joint venture, NMFC Senior Loan Program IV (“SLP IV”) transferring/contributing 100% of their membership interest in SLP I and SLP II to SLP IV. The purpose of the joint venture is to invest primarily in senior secured loans issued by portfolio companies within its “core industry verticals”. Also, the SLP IV entered into a $370 million revolving credit facility with Wells Fargo at a rate of LIBOR plus 1.60% per annum.
“Finally, we combined the SLP I and SLP II funds into a newly created SLP IV, the scale of which will allow for more simplified and efficient financing and execution going forward.”
On January 4, 2021, NMFC announced that its Board authorized an extension of its $50 million share repurchase program “to be implemented at the discretion of NMFC’s management team”. Unless further extended by NMFC’s board of directors, the Company expects the repurchase program to be in place until the earlier of December 31, 2021, or until $50 million worth of NMFC’s outstanding shares of common stock have been repurchased. To date, only $2.9 million worth of repurchases have been made.
For Q1 2021, NMFC reported between its base and best-case projections covering its dividend with slightly higher-than-expected dividend and other income during the quarter. Also, its portfolio yield remained stable and leverage (debt-to-equity) declined slightly.
Full BDC Reports
This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.