New Mountain Finance (US:NMFC)2023-08-02 20:29PART I. FINANCIAL INFORMATION Financial Statements This section presents New Mountain Finance Corporation's unaudited consolidated financial statements as of and for the periods ended June 30, 2023, including key financial statements and a detailed investment schedule Consolidated Statements of Assets and Liabilities As of June 30, 2023, total assets slightly decreased to $3.30 billion, while total net assets increased to $1.34 billion, raising NAV per share to $13.14 Consolidated Statements of Assets and Liabilities Highlights (in thousands, except per share data) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total investments at fair value | $3,179,465 | $3,221,247 | | Total assets | $3,296,981 | $3,354,927 | | Net borrowings | $1,908,300 | $1,980,661 | | Total liabilities | $1,959,019 | $2,028,736 | | Total net assets | $1,337,962 | $1,326,191 | | Net asset value per share | $13.14 | $13.02 | Consolidated Statements of Operations Total investment income significantly increased for the three and six months ended June 30, 2023, driven by higher interest income, leading to improved net investment income and basic earnings per share Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $95,492 | $73,110 | $187,445 | $142,073 | | Net expenses | $54,632 | $41,493 | $108,101 | $80,453 | | Net investment income | $39,928 | $31,704 | $78,316 | $61,612 | | Net increase in net assets | $34,830 | $15,954 | $79,403 | $52,146 | | Basic earnings per share | $0.35 | $0.16 | $0.79 | $0.52 | | Diluted earnings per share | $0.32 | $0.16 | $0.71 | $0.50 | Consolidated Statements of Changes in Net Assets For the six months ended June 30, 2023, net assets increased by $11.6 million, primarily due to operations, partially offset by capital transactions Changes in Net Assets for the Six Months Ended June 30 (in thousands) | Description | 2023 | 2022 | | :--- | :--- | :--- | | Net Increase from Operations | $79,403 | $52,146 | | Net Investment Income | $78,316 | $61,612 | | Net Realized/Unrealized Gains | $1,087 | $(7,247) | | Net Decrease from Capital Transactions | ($67,775) | ($21,781) | | Net Proceeds from Shares Sold | $0 | $37,051 | | Distributions Declared | ($67,628) | ($59,804) | | Net Increase in Net Assets | $11,628 | $30,365 | Consolidated Statements of Cash Flows Net cash provided by operating activities significantly reversed to $119.9 million for the six months ended June 30, 2023, primarily due to higher proceeds from investment sales and paydowns Consolidated Cash Flows Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $119,939 | ($79,100) | | Net cash (used in) provided by financing activities | ($145,251) | $61,868 | | Net decrease in cash and cash equivalents | ($25,312) | ($17,232) | | Cash and cash equivalents at end of period | $45,930 | $40,712 | Consolidated Schedule of Investments As of June 30, 2023, the $3.18 billion investment portfolio comprised 113 companies, primarily in first lien debt (53.6%) and equity (26.0%), with top concentrations in Software, Business Services, and Healthcare Total Investments by Control Type (June 30, 2023, in thousands) | Investment Category | Cost | Fair Value | | :--- | :--- | :--- | | Non-Controlled/Non-Affiliated | $2,486,589 | $2,364,179 | | Non-Controlled/Affiliated | $104,459 | $149,260 | | Controlled Investments | $627,156 | $666,026 | | Total Investments | $3,218,204 | $3,179,465 | Portfolio Composition by Investment Type (June 30, 2023) | Investment Type | Percent of Total Investments at Fair Value | | :--- | :--- | | First lien | 53.59% | | Second lien | 17.72% | | Subordinated | 2.66% | | Equity and other | 26.03% | | Total | 100.00% | Top 5 Industry Concentrations (June 30, 2023) | Industry Type | Percent of Total Investments at Fair Value | | :--- | :--- | | Software | 26.44% | | Business Services | 18.84% | | Healthcare | 16.65% | | Investment Funds | 7.94% | | Education | 7.65% | Notes to the Consolidated Financial Statements The notes detail accounting policies, investment valuation, debt facilities, and joint ventures, highlighting the company's BDC and RIC structure and fair value measurement methodologies - The company is a BDC and has elected to be treated as a RIC, requiring it to distribute at least 90% of its investment company taxable income to stockholders164195196 - The company's investment objective is to generate current income and capital appreciation by sourcing and originating senior secured loans and select junior capital positions in growing, defensive U.S. upper middle-market companies167 - Fair value of investments is determined by the board of directors quarterly. Level 3 investments, for which quotes are not readily available, are valued using a multi-step process involving internal analysis, and for material investments, review by an independent valuation firm176183 - The company has several investments on non-accrual status, including positions in Ansira Holdings, National HME, American Achievement Corporation, and Education Management II LLC216218219 - The company has two significant joint ventures, SLP III and SLP IV, with SkyKnight affiliates, which are capitalized with equity and invest primarily in broadly syndicated first lien senior secured loans228248 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 32% increase in total investment income for the first six months of 2023, driven by higher interest rates on floating-rate assets Portfolio and Investment Activity For the six months ended June 30, 2023, new investments totaled $124.6 million, with proceeds of $202.2 million from repayments and sales, resulting in a slight portfolio fair value decrease to $3.18 billion Portfolio and Investment Activity (in millions) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | New investments | $124.6 | $397.1 | | Debt repayments | $36.0 | $146.9 | | Sales of securities | $166.2 | $145.8 | | Change in unrealized appreciation | $59.6 | $49.9 | | Change in unrealized depreciation | ($61.1) | ($92.6) | Monitoring of Portfolio Investments As of June 30, 2023, 93.6% of the portfolio's fair value was rated Green, indicating strong performance, while a small portion was rated Yellow, Orange, or Red, with several investments on non-accrual status Portfolio Risk Rating (June 30, 2023, in millions) | Risk Rating | Fair Value | Percent | | :--- | :--- | :--- | | Red | $9.0 | 0.3% | | Orange | $51.1 | 1.6% | | Yellow | $142.8 | 4.5% | | Green | $2,993.1 | 93.6% | | Total | $3,196.0 | 100.0% | - As of June 30, 2023, investments on non-accrual status included positions in Ansira, National HME, American Achievement Corporation, UniTek, and Education Management II LLC460462463 Results of Operations For the six months ended June 30, 2023, total investment income increased 32% to $187.4 million due to higher interest rates, while net operating expenses rose to $109.1 million, primarily from increased interest and financing expenses - For Q2 2023, total investment income increased by 31% YoY to $95.5 million, mainly due to higher interest income from increased LIBOR and SOFR rates468 - For Q2 2023, interest and financing expenses rose by $11.0 million YoY, driven by higher rates on floating-rate borrowings and interest on the new 2022 Convertible Notes471 - For the six months ended June 30, 2023, the net gain of $1.6 million from investment activities was primarily driven by realized gains in Haven Midstream and unrealized gains in UniTek, partially offset by realized and unrealized losses in other portfolio companies like National HME and Ansira479480 Liquidity, Capital Resources, Off-Balance Sheet Arrangements, Borrowings and Contractual Obligations The company's liquidity is supported by credit facilities and operations, with an asset coverage ratio of 181.7% as of June 30, 2023, and total outstanding borrowings of $1.92 billion across various facilities - As of June 30, 2023, the company's asset coverage ratio was 181.7%, exceeding the regulatory minimum of 150%483484 - The company had cash and cash equivalents of $45.9 million as of June 30, 2023485 - As of June 30, 2023, the company had outstanding unfunded commitments of $197.4 million489 Contractual Obligations as of June 30, 2023 (in millions) | Obligation | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Holdings Credit Facility | $574.3 | $— | $574.3 | $— | $— | | Unsecured Notes | $391.5 | $116.5 | $200.0 | $75.0 | $— | | Convertible Notes | $376.8 | $116.8 | $260.0 | $— | $— | | SBA-guaranteed debentures | $300.0 | $— | $117.7 | $32.3 | $150.0 | | DB Credit Facility | $186.4 | $— | $186.4 | $— | $— | | NMFC Credit Facility | $91.3 | $— | $91.3 | $— | $— | | NMNLC Credit Facility II | $2.9 | $— | $2.9 | $— | $— | | Total | $1,923.2 | $233.3 | $1,432.6 | $107.3 | $150.0 | Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk, with 87.4% of its investment portfolio in floating-rate assets, and a 100 basis point interest rate increase would boost net interest income by an estimated 7.77% - As of June 30, 2023, approximately 87.4% of the company's investments at fair value (excluding non-accrual and non-interest bearing equity) are floating-rate, while its credit facilities are also subject to floating rates557 Interest Rate Sensitivity Analysis (as of June 30, 2023) | Change in Interest Rates | Estimated Percentage Change in Interest Income Net of Interest Expense | | :--- | :--- | | -25 Basis Points | (1.94)% | | Base Interest Rate | — % | | +100 Basis Points | 7.77% | | +200 Basis Points | 15.54% | | +300 Basis Points | 23.31% | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - Management concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level561 - No material changes in internal control over financial reporting were identified during the quarter ended June 30, 2023562 PART II. OTHER INFORMATION Legal Proceedings As of June 30, 2023, 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 proceedings566 Risk Factors This section highlights key risks, including potential adverse impacts from banking system strain, fewer protections from 'covenant-lite' loans, and uncertainties associated with the LIBOR to SOFR transition - Recent volatility and strain on the banking system could adversely impact the company's business, which is dependent on bank relationships568 - The company's portfolio includes 'covenant-lite' loans, which have less restrictive terms and may offer fewer protections, potentially making recovery more challenging in cases of distress569 - The transition from LIBOR to alternative reference rates like SOFR is substantially complete, but these new rates may not yield similar economic results, and the market for instruments referencing them is still developing570572573 Unregistered Sales of Equity Securities and Use of Proceeds The company did not engage in any unregistered sales of equity securities during Q2 2023, and no shares were repurchased under its stock repurchase program, though 194,942 shares were purchased for the dividend reinvestment plan - No unregistered sales of equity securities occurred in the three months ended June 30, 2023576 - During the six months ended June 30, 2023, 194,942 shares were purchased in the open market for the dividend reinvestment plan577 - The company did not repurchase any shares under its $50 million stock repurchase program during the six months ended June 30, 2023. Approximately $47.1 million remains available under the program, which extends until December 31, 2023579 Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - None580 Other Information On June 27, 2023, Barbara Daniel was appointed as a new independent director to the company's board, effective July 1, 2023, and assigned to several key committees - Barbara Daniel was appointed as an independent director to the Board of Directors, effective July 1, 2023583 Exhibits This section lists all exhibits filed with the report, including amendments to credit agreements and required certifications by the CEO and CFO