NEW MOUNTAIN FINANCE CORP NMFC
March 23, 2015 - 9:42am EST by
goob392
2015 2016
Price: 14.50 EPS 0 0
Shares Out. (in M): 58 P/E 0 0
Market Cap (in $M): 841 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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  • BDC
  • Dividend yield

Description

NMFC $14.50.
 
This is an income idea. Current yield at $14.50 is 9.4% on a $1.36 regular dividend.
 
In looking for higher, but relatively-protected income, i have been relooking at several BDCs.
 
Simply put, I expect NMFC’s regular dividend to be sustainable and the NAV to be stable due to the strength of
the management team and the conservative investment strategy. I do not expect any material appreciation in
NAV although small periodic special dividends from capital gains may continue to add 1-2% to the realized
yield. NMFC’s NII and div would go up given a large, sustainable more in rates…not that I am counting on that
anytime soon.
 
 
Excellent, Committed Management Team
 
Founded in 2008, New Mountain Finance (NMFC) is a lesser known but very high quality BDC focused on
senior middle market lending. NMFC is managed by New Mountain Capital, a premier middle market PE firm
led by Steve Klinsky, whom i have known for 20 years. New Mountain, the PE firm has $15B of Assets and
over 100 professionals. At $1.5B and less than $1B mkt cap , NMFC is still well within the sweet spot of
primary focus on middle market lending and sufficient diversification and inefficient pricing.
 
Management personally owns $60M of NMFC stock.
 
Conservative Strategy and Underwriting
 
Historical focus on recession resistant, acyclical industries. At launch in 2008 NMFC was housed inside of
New Mountains PE fund and was primarily focused on the same companies and industries that New Mountain
had evaluated for buyouts. NMFC targets a $50M hold size in the senior secured debt, mezzanine or other
subordinated securities of companies with $20-$200M in EBITDA. Over time warrants and small equity
exposure has yield ed small but positive additions to NAV which are paid out as special dividends. Target loan
to value of less than 50% of sponsor purchase price and independent NMC valuation.
 
Current mix is 48% 1st Lien, 44% 2nd Lien, 4% sub debt, 3% pref, 1% equity/warrants.
 
A recent credit hiccup with a couple of portfolio companies is not indicative of bad underwriting and should not
materially or permanently impact dividend paying ability. (happy to give more detail if anyone interested, or see
the Q4 slide deck)
 
NMFC’s largest portfolio company was acquired in Jan 2015 and will generate a realized gain in Q1.
 
Energy is 8% of the book at 12/31/14.
 
NAV as of 12/31/14 (after a 4% cumulative write-down) is $13.83 so P/NAV is only a 5% premium and implied
return of NII/NAV is a reasonable 9.8%.
 
Strategies to Add Value
 
Recent Award of SBIC license will add fee income financed off balance sheet.
Recently struck alliance with industry expert Five States to look for defensive lower middle market opportunities
in the energy space.
 
Shareholder Friendly
 
 
NMFC has been a controlled growth model. The current portfolio is about $1.5B in 72 portfolio companies.
While the externally managed model and the basic BDC fee structure has certainly yielded some overly
aggressive or just plain piggy managements, NMFC has capped the management fees at an effective 1.4%
since inception in order to allow the company to grow into a more reasonably cost structure. New Mountain
absorbed the $9M difference. Incentive fees are calculated on since inception net realized gains adjusted for
realized and unrealized losses. Seems obvious but not all BDC’s feel the same way.
Management is very transparent; the quarterly slide decks and periodic presentations have considerable detail
on the meaningful credits in the book.
 
 
Expect continued smallish equity offerings to reload lending power, but company has not and will not issue
equity below NAV.
 
 
Protected in Rising Rate Environment
 
Given the mix of floating versus fixed assets and liabilities, NMFC's net interest income is positively skewed to
sustained higher interest rates. 200bps =+2.6% NII, while +300bps =+8.8% to NII. Note: because of floors, the
first 100 bps move in rate is actually 3% dilutive to NII.
 
 
 
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalyst:   Does continued payment of a 9.4% dividend count as a catalyst?  That is what i expect; over time that $1.36 may trade at tighter than a 9.4% yield, but if not i'll take the 9.4% plus maybe a kiss or two from net realized capital gains over time.

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