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New Mountain Finance Corporation (NASDAQ:NMFC) (the "Company", "we", "us" or "our") today announced its financial results for the quarter ended March 31, 2021 and reported first quarter net investment income of $0.30 per weighted average share and adjusted net investment income1 of $0.30 per weighted average share. At March 31, 2021, net asset value (“NAV”) per share was $12.85, compared to $12.62 at December 31, 2020. The Company also announced that its board of directors declared a second quarter distribution of $0.30 per share, which will be payable on June 30, 2021 to holders of record as of June 16, 2021. For additional details related to the quarter ended March 31, 2021, please refer to the New Mountain Finance Corporation Form 10-Q filed with the SEC and the supplemental investor presentation which can be found on the Company's website at http://www.newmountainfinance.com.
Selected Financial Highlights
(in thousands, except per share data)
March 31, 2021
Investment Portfolio(1)
$
3,040,034
Total Assets
$
3,128,335
Total Statutory Debt(3)
$
1,471,157
NAV(2)
$
1,244,317
NAV per Share
$
12.85
Statutory Debt/Equity
1.18x
Investment Portfolio Composition
March 31, 2021
Percent of Total
First Lien
$
1,576,600
51.9%
Second Lien(1)
717,631
23.6%
Subordinated
37,295
1.2%
Preferred Equity
161,405
5.3%
Investment Fund
232,400
7.6%
Common Equity and Other(4)
314,703
10.4%
Total
$
3,040,034
100.0%
Supplemental Information Regarding Adjusted Net Investment Income1
Three Months Ended March 31, 2021
(in millions, except per share data)
GAAP(5)
Non-recurring Adjustments(6)
Adjusted(6)
Net investment income ("NII")(7)
$28.7
$0.8
$29.5
Net investment income per weighted average share
$0.30
$0.00
$0.30
_____________________________
(1) Includes collateral for securities purchased under collateralized agreements to resell.
(2) Excludes non-controlling interest in New Mountain Net Lease Corporation (“NMNLC”).
(3) Excludes the Company’s United States (“U.S.”) Small Business Administration (“SBA”)-guaranteed debentures. Includes premium received on additional convertible notes issued in June 2019.
(4) Includes investments held in NMNLC.
(5) Accounting principles generally accepted in the United States of America (“GAAP”).
(6) Adjusted NII excludes $0.8 million of accelerated deferred financing cost associated with the early repayment of unsecured notes.
(7) Excludes $0.3 million of NII related to non-controlling interest in NMNLC.
We believe that the strength of the Company’s unique investment strategy – which focuses on middle market defensive growth companies that are well researched by New Mountain Capital, L.L.C. (“New Mountain”), a leading alternative investment firm, is underscored by continued stable credit performance. The Company has had only ten portfolio companies, representing approximately $236 million of the cost of all investments made since inception in October 2008, or approximately 2.8% of $8.3 billion, go on non-accrual.
Robert A. Hamwee, CEO, commented: “Our portfolio continued to perform well through Q1, as evidenced by 85% of our companies maintaining the green rating, as well as ongoing book value recovery, which improved an additional $0.23 to $12.85. Additionally, Moody’s has assigned NMFC an investment grade rating of Baa3 in May, which reflects our successful track record, extensive firm resources, and experienced management team.”
John R. Kline, President and COO, commented: “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 believe New Mountain’s strategy of focusing on 'defensive growth' industries and on companies that we know well continues to prove to be a successful strategy,” added Steven B. Klinsky, NMFC Chairman. “We have had good news on a number of fronts this quarter, and we believe one of our keys to success is the strength of the team, which we continue to build over time, now at over 175 employees.”
Portfolio and Investment Activity2
As of March 31, 2021, the Company’s NAV was approximately $1,244.3 million and its portfolio had a fair value of approximately $3,040.0 million in 102 portfolio companies, with a weighted average YTM at Cost3 of approximately 8.8%. For the three months ended March 31, 2021, the Company generated approximately $96.6 million of originations in four new portfolio companies and approximately $122.8 million of originations, including commitments4 for follow-on investments in nine portfolio companies held as of December 31, 2020. For the three months ended March 31, 2021, the Company had $5.5 million of asset sales and cash repayments4 of approximately $190.7 million.
Consolidated Results of Operations5
The Company’s total investment income for the three months ended March 31, 2021 and 2020 was approximately $67.4 million and $74.1 million, respectively.
The Company’s total net expenses, after income tax expense, for the three months ended March 31, 2021 and 2020 were approximately $38.7 million and $42.8 million, respectively. Total net expenses, after income tax expense, for the three months ended March 31, 2021 and 2020 consisted of approximately $19.4 million and $22.2 million, respectively, of costs associated with the Company’s borrowings and approximately $17.0 million and $18.1 million, respectively, in net management and incentive fees. Since the Company’s initial public offering (“IPO”), the base management fee calculation has deducted the borrowings under the New Mountain Finance SPV Funding, L.L.C. credit facility (the “SLF Credit Facility”). The SLF Credit Facility had historically consisted of primarily lower yielding assets at higher advance rates. As part of an amendment to the Company’s existing credit facilities with Wells Fargo Bank, National Association, the SLF Credit Facility merged with and into the New Mountain Finance Holdings, L.L.C. credit facility (the “Holdings Credit Facility”) on December 18, 2014. Post credit facility merger and to be consistent with the methodology since the IPO, New Mountain Finance Advisers BDC, L.L.C. (the “Investment Adviser”) will continue to waive management fees on the leverage associated with those assets held under revolving credit facilities that share the same underlying yield characteristics with investments that were leveraged under the legacy SLF Credit Facility. Effective as of and for the quarter ended March 31, 2021 through the quarter ending December 31, 2022, the Investment Adviser has entered into a fee waiver agreement pursuant to which the Investment Adviser will waive base management fees in order to reach a target base management fee of 1.25% on gross assets (the “Reduced Base Management Fee”) as opposed to the Company’s current base management fee of 1.75% on gross assets less the borrowings under the SLF Credit Facility and less cash and cash equivalents (the “Base Management Fee”). If, for any quarterly period during the term of the fee waiver agreement, the Reduced Base Management Fee would be greater than the Base Management Fee calculated under the terms of the Investment Management Agreement, the Investment Adviser shall only be entitled to the lesser of those two amounts. The Investment Adviser cannot recoup management fees that the Investment Adviser has previously waived. For the three months ended March 31, 2021 and 2020 management fees waived were approximately $3.6 million and $3.5 million, respectively. The Company’s net direct and indirect professional, administrative, other general and administrative and income tax expenses for the three months ended March 31, 2021 and 2020 were approximately $2.3 million and $2.5 million, respectively.
For the three months ended March 31, 2021 and 2020, the Company recorded approximately $22.8 million and ($203.7) million, respectively, of net realized and unrealized gains (losses).
Liquidity and Capital Resources
As of March 31, 2021, the Company had cash and cash equivalents of approximately $47.3 million and total statutory debt outstanding of approximately $1,471.2 million6, which consisted of approximately $450.2 million of the $745.0 million of total availability on the Holdings Credit Facility, $107.0 million of the $188.5 million of total availability on the Company’s senior secured revolving credit facility (the “NMFC Credit Facility”), $201.0 million of the $280.0 million of total availability on the Company’s secured revolving credit facility (the “DB Credit Facility”), $0 of the $50.0 million of total availability on the uncommitted revolving loan agreement (the “Unsecured Management Company Revolver”), $0 of the $10.0 million of total availability on the senior secured revolving credit facility (the “NMNLC Credit Facility II”), $201.5 million7 of convertible notes outstanding and $511.5 million of unsecured notes outstanding. Additionally, the Company had $300.0 million of SBA-guaranteed debentures outstanding as of March 31, 2021.
Portfolio and Asset Quality2
The Company puts its largest emphasis on risk control and credit performance. On a quarterly basis, or more frequently if deemed necessary, the Company formally rates each portfolio investment on a scale of one to four. Each investment is assigned an initial rating of a “2” under the assumption that the investment is performing materially in-line with expectations. Any investment performing materially below our expectations, where the risk of loss has materially increased since the original investment, would be downgraded from the “2” rating to a “3” or a “4” rating, based on the deterioration of the investment. An investment rating of a “4” 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.
As of March 31, 2021, six portfolio companies had an investment rating of “3” and four portfolio companies had an investment rating of “4”. The Company’s investments in the portfolio companies with an investment rating of “3” had an aggregate cost basis of approximately $151.4 million and an aggregate fair value of approximately $112.0 million. The Company’s investment in portfolio companies with an investment rating of “4” had an aggregate cost basis of approximately $98.9 million and an aggregate fair value of approximately $36.5 million.
Recent Developments
On April 20, 2021, the Company entered into the Fifth Amendment to Loan and Security Agreement (the “Fifth Amendment”), which amended the Holdings Credit Facility. Pursuant to the Fifth Amendment, the revolving period was extended from September 30, 2021 to April 20, 2024. The Holdings Credit Facility continues to mature two years after the end of the revolving period. With the extension of the revolving period, the Holdings Credit Facility will now mature on April 20, 2026. As of the date of the Fifth Amendment, the aggregate commitments of the lenders to the Holding Credit Facility equaled $730.0 million.
The Fifth Amendment made a number of other modifications, including, but not limited to, the following. The applicable spread used to determine the per annum interest rate payable under the Holdings Credit Facility was modified to be the higher of (a) 1.85% (reduced from 2.25%) and (b) the pro rata portion of the facility secured by assets that are First Lien Loans that are also Broadly Syndicated Loans (as each such term is defined under the Holdings Credit Facility) multiplied by 1.60% (reduced from 2.00%), plus the pro rata portion of the facility secured by assets that are not First Lien Loans that are Broadly Syndicated Loans multiplied by 2.10% (reduced from 2.50%). The Fifth Amendment also modified the applicable spread that would be effective during an Event of Default or a Curable BDC Asset Coverage Event (as each such term is defined under the Holdings Credit Facility) by reducing such applicable spread from 3.75% to 3.25%.
On May 5, 2021, NMFC and SkyKnight Income Alpha, LLC ("SkyKnight Alpha") entered into a limited liability company agreement to establish a joint venture, NMFC Senior Loan Program IV LLC ("SLP IV"). NMFC and SkyKnight Alpha have transferred and contributed 100% of their membership interest in SLP I and SLP II to SLP IV, pursuant to contribution agreements. The purpose of the joint venture is to invest primarily in senior secured loans issued by portfolio companies within our core industry verticals. All investment decisions must be unanimously approved by the investment committee of SLP IV, which has equal representations from NMFC and SkyKnight Alpha. On May 5, 2021, SLP IV entered into a $370.0 million revolving credit facility with Wells Fargo Bank, National Association which matures on May 5, 2026 and bears interest at a rate of LIBOR plus 1.60% per annum.
On May 4, 2021, the Company and the Investment Adviser entered into a Fee Waiver Agreement (the “Fee Wavier Agreement”). Pursuant to the Fee Waiver Agreement, the Investment Adviser agreed to voluntarily reduce the base management fees payable to the Investment Adviser by the Company under the Investment Management Agreement. Effective as of and for the quarter ended March 31, 2021 thr
