New Mountain Finance (NMFC) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for New Mountain Finance Corporation as of September 30, 2022, and for the three and nine months then ended. It includes the Consolidated Statements of Assets and Liabilities, Operations, Changes in Net Assets, Cash Flows, a detailed Consolidated Schedule of Investments, and the accompanying Notes to the Financial Statements Consolidated Statements of Assets and Liabilities As of September 30, 2022, total assets were approximately $3.35 billion, a slight increase from $3.30 billion at year-end 2021. Total net assets increased marginally to $1.345 billion from $1.343 billion. However, Net Asset Value (NAV) per share decreased to $13.20 from $13.49 at the end of 2021, primarily due to an increase in shares outstanding Consolidated Statements of Assets and Liabilities Highlights (in thousands, except per share data) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total investments at fair value | $3,234,433 | $3,174,364 | | Total assets | $3,347,993 | $3,295,812 | | Net borrowings | $1,964,731 | $1,907,188 | | Total liabilities | $2,002,895 | $1,953,200 | | Total net assets | $1,345,098 | $1,342,612 | | Shares outstanding | 100,937,026 | 97,907,441 | | Net asset value per share | $13.20 | $13.49 | Consolidated Statements of Operations For the third quarter of 2022, total investment income rose to $78.4 million from $68.5 million year-over-year, driven by higher interest income. However, a significant net unrealized depreciation on investments led to a net increase in net assets of only $7.7 million, compared to $21.8 million in Q3 2021. Diluted EPS for the quarter was $0.08, down from $0.22 in the prior-year period Consolidated Statements of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $78,449 | $68,474 | $220,522 | $202,743 | | Net expenses | $45,653 | $37,837 | $126,106 | $113,899 | | Net investment income | $32,809 | $30,645 | $94,421 | $88,829 | | Net realized and unrealized (losses) gains | ($25,295) | ($7,740) | ($34,720) | $65,109 | | Net increase in net assets (NMFC) | $7,705 | $21,847 | $59,851 | $149,149 | | Basic earnings per share | $0.08 | $0.23 | $0.60 | $1.54 | | Diluted earnings per share | $0.08 | $0.22 | $0.59 | $1.42 | Consolidated Statements of Changes in Net Assets For the nine months ended September 30, 2022, net assets increased by $10.7 million, resulting from a $59.9 million increase from operations offset by a $49.1 million net decrease from capital transactions, primarily distributions to stockholders, contrasting with a $63.0 million increase in 2021 Changes in Net Assets (Nine Months Ended, in thousands) | Description | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Net assets at beginning of period | $1,321,245 | $1,221,875 | | Net increase in net assets from operations | $59,851 | $149,149 | | Net proceeds from shares sold | $40,006 | $0 | | Distributions declared to stockholders | ($90,085) | ($87,168) | | Net assets at end of period | $1,331,955 | $1,284,905 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash used in operating activities was $8.8 million, a significant shift from the $84.7 million provided in the prior-year period, primarily due to changes in unrealized depreciation and investment activities, leading to an overall $9.2 million decrease in cash and cash equivalents Consolidated Statements of Cash Flows (Nine Months Ended, in thousands) | Cash Flow Activity | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($8,849) | $84,690 | | Net cash provided by (used in) financing activities | $45 | ($80,405) | | Net (decrease) increase in cash and cash equivalents | ($8,804) | $4,285 | | Cash and cash equivalents at beginning of period | $58,077 | $78,966 | | Cash and cash equivalents at end of period | $48,919 | $83,357 | Consolidated Schedule of Investments As of September 30, 2022, the company's investment portfolio had a total fair value of $3.23 billion, heavily weighted towards floating-rate, first-lien debt, with top industry concentrations in Software (27.4%), Business Services (15.3%), and Healthcare Services (14.9%), diversified across 107 companies - Total investments at fair value were $3,234.4 million as of September 30, 2022, with a cost basis of $3,258.9 million[75] Portfolio Composition by Investment Type (September 30, 2022) | Investment Type | Percent of Total Investments at Fair Value | | :--- | :--- | | First lien | 54.73% | | Second lien | 17.73% | | Subordinated | 2.28% | | Equity and other | 25.26% | Portfolio Composition by Industry Type (Top 5) (September 30, 2022) | Industry Type | Percent of Total Investments at Fair Value | | :--- | :--- | | Software | 27.38% | | Business Services | 15.30% | | Healthcare Services | 14.90% | | Investment Funds | 7.80% | | Education | 7.66% | Portfolio Composition by Interest Rate Type (September 30, 2022) | Interest Rate Type | Percent of Total Investments at Fair Value | | :--- | :--- | | Floating rates | 87.64% | | Fixed rates | 12.36% | Notes to the Consolidated Financial Statements This section provides detailed explanations of the accounting policies and methodologies used to prepare the financial statements, covering business purpose, investment valuation, specific investments, borrowings, related-party transactions, commitments, and subsequent events - The company operates as a Business Development Company (BDC) and has elected to be treated as a Regulated Investment Company (RIC) for tax purposes[160] - The Board of Directors is ultimately responsible for determining the fair value of portfolio investments quarterly, using a three-level hierarchy (Level I, II, III) for inputs[169] - As of September 30, 2022, the company had unfunded commitments of $97.9 million on revolving credit facilities and $156.5 million in other future funding commitments[217][364] - Subsequent to the quarter end, the company issued $200 million of 7.50% convertible notes due 2025, launched a tender offer for its existing 2018 convertible notes, and announced a CEO transition effective January 1, 2023[387][389][390] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations, highlighting increased total investment income driven by higher interest rates and larger invested balances, portfolio performance including a detailed risk rating system, liquidity, capital resources, borrowing facilities, and the impact of COVID-19 and rising interest rates - The company's investment objective is to generate current income and capital appreciation by sourcing and originating debt securities, with a primary focus on defensive growth companies[404][405] - As of September 30, 2022, the portfolio's weighted average yield to maturity at cost for income-producing investments was approximately 11.3%[406] - The company utilizes a four-tier risk rating system (Red, Orange, Yellow, Green). As of September 30, 2022, 93.0% of the portfolio by fair value was rated Green, indicating performance is in-line with or above expectations[461] Portfolio Risk Rating Summary (As of September 30, 2022) | Risk Rating | Cost (in millions) | Percent of Cost | Fair Value (in millions) | Percent of Fair Value | | :--- | :--- | :--- | :--- | :--- | | Red | $95.6 | 2.9% | $30.7 | 0.9% | | Orange | $46.0 | 1.4% | $32.9 | 1.0% | | Yellow | $195.1 | 5.9% | $166.5 | 5.1% | | Green | $2,952.3 | 89.8% | $3,023.7 | 93.0% | Quantitative and Qualitative Disclosures About Market Risk The company is subject to market risk, primarily from interest rate fluctuations, as its net investment income is affected by the spread between the rates on its investments and borrowings. As of September 30, 2022, approximately 85.6% of its investments at fair value were floating-rate. A sensitivity analysis indicates that a 100 basis point increase in interest rates would increase net interest income by an estimated 6.31% Interest Rate Sensitivity Analysis | Change in Interest Rates | Estimated Percentage Change in Interest Income Net of Interest Expense | | :--- | :--- | | -25 Basis Points | (1.58)% | | +100 Basis Points | 6.31% | | +200 Basis Points | 12.68% | | +300 Basis Points | 19.04% | Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of September 30, 2022, and concluded they were effective, with no material changes to internal controls over financial reporting identified during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[558] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[559] PART II. OTHER INFORMATION Legal Proceedings As of September 30, 2022, the company and its subsidiaries are not subject to any material pending legal proceedings outside the normal course of business - The Company is not currently subject to any material pending legal proceedings[563] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021, were reported for the nine months ended September 30, 2022[564] Unregistered Sales of Equity Securities and Use of Proceeds The company did not engage in any unregistered sales of equity securities during the third quarter of 2022, and no shares were repurchased under its stock repurchase program during the nine months ended September 30, 2022 - The company did not engage in unregistered sales of its equity securities during the three months ended September 30, 2022[566] - The company's stock repurchase program, authorized for up to $50 million, was extended until December 31, 2022. No shares were repurchased under this program during the nine months ended September 30, 2022[569] Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - None[570] Mine Safety Disclosures This section is not applicable to the company - Not applicable[571] Other Information No other information was reported for the period - None[572] Exhibits This section lists the exhibits filed as part of the quarterly report, including certifications from the CEO and CFO as required by the Sarbanes-Oxley Act