Holdings’ existing credit facility, and NMFC assumed all other operating activities previously undertaken by NMF Holdings under the management of the Investment Adviser (collectively, the “Restructuring”). After the Restructuring, all wholly-owned subsidiaries of NMFC are consolidated with NMFC for both 1940 Act and financial statement reporting purposes, subject to any financial statement adjustments required in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Also,onMay8,2014,NMFHoldingsfiledForm15withtheSECtoterminateNMFHoldings’registrationunderSection12(g)oftheExchangeAct.Asaspecialpurposeentity,NMFHoldingsisbankruptcy-remoteandnon-recoursetoNMFC.Inaddition,theassetsremainingatNMFHoldingswillcontinuetobeusedtosecureNMFHoldings’ current existingcreditfacility.
Current Organization
New Mountain Finance SPV Funding, L.L.C. (“NMF SLF”) is a Delaware limited liability company. NMF SLF is a wholly ownedwholly-owned subsidiary of the Company and is bankruptcy-remote and non-recourse to NMFC. During nine months ended September 30, 2014, the Company has established wholly ownedwholly-owned subsidiaries, NMF Ancora Holdings Inc. (“NMF Ancora”) and NMF YP Holdings Inc. (“NMF YP”), which are structured as Delaware entities that serve as tax blockers thatblocker corporations which hold equity or equity-like investments in portfolio companies organized as limited liability companies (or other forms of pass-through entities). Tax blockersblocker corporations are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of portfolio companies. TheAdditionally, the Company has a wholly ownedwholly-owned subsidiary, New Mountain Finance Servicing, L.L.C. ("NMF Servicing") that serves as the administrative agent on certain investment transactions. New Mountain Finance SBIC, L.P. (“SBIC LP”), and its general partner, New Mountain Finance SBIC G.P., L.L.C. (“SBIC GP”), were organized in Delaware as a limited partnership and limited liability company, respectively. SBIC LP and SBIC GP are consolidated wholly ownedwholly-owned subsidiaries of the Company.
The diagram below depicts the Company’s organizational structure as of JuneSeptember 30, 2014.
* Includes partners of New Mountain Guardian Partners, L.P.
** NMFC owns 100.0% of SBIC GP which owns 1.0% of SBIC LP.
The Company’s investment objective is to generate current income and capital appreciation through the sourcing and origination of debt securities at all levels of the capital structure, including first and second lien debt, notes, bonds and mezzanine securities. In some cases, the Company’s investments may also include equity interests. The primary focus is in the debt of defensive growth companies, which are defined as generally exhibiting the following characteristics: (i) sustainable secular growth drivers, (ii) high barriers to competitive entry, (iii) high free cash flow after capital expenditure and working capital needs, (iv) high returns on assets and (v) niche market dominance. The Company’s portfolio may be concentrated in a limited number of industries. As of JuneSeptember 30, 2014, the Company’s top five industry concentrations were education, software, business services, software, healthcare services and distribution & logistics and energy.logistics.
Note 2. Summary of Significant Accounting Policies
Basis of accounting—The Company’s financial statements have been prepared in conformity with GAAP. NMFC consolidates its wholly-owned subsidiaries,subsidiaries: NMF Holdings, NMF SLF, NMF Servicing, SBIC LP, SBIC GP, NMF Ancora and NMF YP. Prior to the Restructuring, the Predecessor Operating Company consolidated its wholly-owned subsidiary, NMF SLF. NMFC and AIV Holdings did not consolidate the Predecessor Operating Company. Prior to the Restructuring, NMFC and AIV Holdings applied investment company master-feeder financial statement presentation, as described in Accounting Standards Codification 946, Financial Services—Investment Companies, (“ASC 946”) to their interest in the Predecessor Operating Company. NMFC and AIV Holdings observed that it was also industry practice to follow the presentation prescribed for a master fund-feeder fund structure in ASC 946 in instances in which a master fund was owned by more than one feeder fund and that such presentation provided stockholders of NMFC and AIV Holdings with a clearer depiction of their investment in the master fund.
The Company’s financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of operations and financial condition for all periods presented. All intercompany transactions have been eliminated. Revenues are recognized when earned and expenses when incurred. The financial results of the Company’s portfolio investments are not consolidated in the financial statements. Prior to the IPO, an affiliate of the Predecessor Entities paid a majority of the management and incentive fees. Historical operating expenses do not reflect the allocation of certain professional fees, administrative and other expenses that have been incurred following the completion of the IPO. Accordingly, the Predecessor Operating Company’s historical operating expenses are not comparable to its operating expenses after the completion of the IPO.
The Company’s interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. Accordingly, the Company’s interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of
financial statements for the interim period, have been included. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2014.
Investments—The Company applies fair value accounting in accordance with GAAP. Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Investments are reflected on the Company’s Consolidated Statements of Assets and Liabilities at fair value, with changes in unrealized gains and losses resulting from changes in fair value reflected in the Company’s Consolidated Statements of Operations as “Net change in unrealized appreciation (depreciation) of investments” and realizations on portfolio investments reflected in the Company’s Consolidated Statements of Operations as “Net realized gains (losses) on investments”.
The Company values its assets on a quarterly basis, or more frequently if required under the 1940 Act. In all cases, the Company’s board of directors is ultimately and solely responsible for determining the fair value of the portfolio investments on a quarterly basis in good faith, including investments that are not publicly traded, those whose market prices are not readily available and any other situation where its portfolio investments require a fair value determination. Security transactions are accounted for on a trade date basis. The Company’s quarterly valuation procedures are set forth in more detail below:
(1) Investments for which market quotations are readily available on an exchange are valued at such market quotations based on the closing price indicated from independent pricing services.
(2) Investments for which indicative prices are obtained from various pricing services and/or brokers or dealers are valued through a multi-step valuation process, as described below, to determine whether the quote(s) obtained is representative of fair value in accordance with GAAP.
a. Bond quotes are obtained through independent pricing services. Internal reviews are performed by the investment professionals of the Investment Adviser to ensure that the quote obtained is representative of fair value in accordance with GAAP and if so, the quote is used. If the Investment Adviser is unable to sufficiently validate the quote(s) internally and if the investment’s par value or its fair value exceeds the materiality threshold, the investment is valued similarly to those assets with no readily available quotes (see (3) below); and
b. For investments other than bonds, the Company looks at the number of quotes readily available and performs the following:
i. Investments for which two or more quotes are received from a pricing service are valued using the mean of the mean of the bid and ask of the quotes obtained.
ii. Investments for which one quote is received from a pricing service are validated internally. The investment professionals of the Investment Adviser analyze the market quotes obtained using an array of valuation methods (further described below) to validate the fair value. If the Investment Adviser is unable to sufficiently validate the quote internally and if the investment’s par value or its fair value exceeds the materiality threshold, the investment is valued similarly to those assets with no readily available quotes (see (3) below).
(3) Investments for which quotations are not readily available through exchanges, pricing services, brokers, or dealers are valued through a multi-step valuation process:
a. Each portfolio company or investment is initially valued by the investment professionals of the Investment Adviser responsible for the credit monitoring;
b. Preliminary valuation conclusions will then be documented and discussed with the Company’s senior management;
c. If an investment falls into (3) above for four consecutive quarters and if the investment’s par value or its fair value exceeds the materiality threshold, then at least once each fiscal year, the valuation for each portfolio investment for which the Company does not have a readily available market quotation will be reviewed by an independent valuation firm engaged by the Company’s board of directors; and
d. When deemed appropriate by the Company’s management, an independent valuation firm may be engaged to review and value investment(s) of a portfolio company, without any preliminary valuation being performed by the Investment Adviser. The investment professionals of the Investment Adviser will review and validate the value provided.
For investments in revolving credit facilities and delayed draw commitments, the cost basis of the funded investments purchased is offset by any costs/netbacks received for any unfunded portion on the total balance committed. The fair value is also
adjusted for the price appreciation or depreciation on the unfunded portion. As a result, the purchase of commitments not completely funded may result in a negative fair value until it is called and funded.
The values assigned to investments are based upon available information and do not necessarily represent amounts which might ultimately be realized, since such amounts depend on future circumstances and cannot be reasonably determined until the individual positions are liquidated. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period and the fluctuations could be material.
Prior to the Restructuring, NMFC was a holding company with no direct operations of its own, and its sole asset was its ownership in the Predecessor Operating Company. Prior to the completion of the underwritten secondary public offering on February 3, 2014, AIV Holdings was a holding company with no direct operations of its own, and its sole asset was its ownership in the Predecessor Operating Company. NMFC’s and AIV Holdings’ investments in the Predecessor Operating Company were carried at fair value and represented the respective pro-rata interest in the net assets of the Predecessor Operating Company as of the applicable reporting date. NMFC and AIV Holdings valued their ownership interest on a quarterly basis, or more frequently if required under the 1940 Act.
See Note 3, Investments, for further discussion relating to investments.
Cash and cash equivalents—Cash and cash equivalents include cash and short-term, highly liquid investments. The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near maturity that there is insignificant risk of changes in value. Generally, these securities have original maturities of three months or less. At September 30, 2014, the Company held restricted cash in connection with certain investment transactions in which the Company acts as the administrative agent. As of September 30, 2014, restricted cash of $1,784 was held in segregated accounts.
Revenue recognition
The Company’s revenue recognition policies are as follows:
Sales and paydowns of investments: Realized gains and losses on investments are determined on the specific identification method.
Interest income: Interest income, including amortization of premium and discount using the effective interest method, is recorded on the accrual basis and periodically assessed for collectability. Interest income also includes interest earned from cash on hand. Upon the prepayment of a loan or debt security, any prepayment penalties are recorded as part of interest income. The Company has loans in the portfolio that contain a payment-in-kind (“PIK”) provision. PIK represents interest that is accrued and recorded as interest income at the contractual rates, if deemed collectible, added to the loan principal on the respective capitalization dates, and generally due at maturity.
Non-accrual income: Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and when there is reasonable doubt that principal or interest will be collected. Accrued cash and un-capitalized PIK interest is reversed when a loan is placed on non-accrual status. Previously capitalized PIK interest is not reversed when an investment is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment of the ultimate outcome. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.
Dividend income: Dividend income is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.
Other income: Other income represents delayed compensation, consent or amendment fees, revolver fees, structuring fees and other miscellaneous fees received. Delayed compensation is income earned from counterparties on trades that do not settle within a set number of business days after trade date. Other income may also include fees from bridge loans. The Company may from time to time enter into bridge financing commitments, an obligation to provide interim financing to a counterparty until permanent credit can be obtained. These commitments are short-term in nature and may expire unfunded. A fee is received by the Company for providing such commitments. Structuring fees are recognized as income when earned, usually when paid at the closing of the investment.
Prior to the Restructuring, NMFC’s revenue recognition policies were as follows:
Revenue, expenses, and capital gains (losses): At each quarterly valuation date, the Predecessor Operating Company’s investment income, expenses, net realized gains (losses), and net increase (decrease) in unrealized appreciation (depreciation) were allocated to NMFC based on its pro-rata interest in the net assets of the Predecessor Operating Company. This was recorded on NMFC’s Statements of Operations. Realized gains and losses were recorded upon sales of NMFC’s
investments in the Predecessor Operating Company. Net change in unrealized appreciation (depreciation) of investment in New Mountain Finance Holdings, L.L.C. was the difference between the net asset value per share and the closing price per share for shares issued as part of the dividend reinvestment plan on the dividend payment date. This net change in unrealized appreciation (depreciation) of investment in New Mountain Finance Holdings, L.L.C. included the unrealized appreciation (depreciation) from the IPO. NMFC used the proceeds from its IPO and Concurrent Private Placement to purchase units in the Predecessor Operating Company at $13.75 per unit (its IPO price per share). At the IPO date, $13.75 per unit represented a discount to the actual net asset value per unit of the Predecessor Operating Company. As a result, NMFC experienced immediate unrealized appreciation on its investment.
All expenses, including those of NMFC, were paid and recorded by the Predecessor Operating Company. Expenses were allocated to NMFC based on its pro-rata ownership interest. In addition, the Predecessor Operating Company paid all of the offering costs related to the IPO and subsequent offerings. NMFC recorded its portion of the offering costs as a direct reduction to net assets and the cost of its investment in the Predecessor Operating Company.
Interest and other financing expenses—Interest and other financing fees are recorded on an accrual basis by the Company. See Note 7, Borrowings, for details.
Deferred financing costs—The deferred financing costs of the Company consists of capitalized expenses related to the origination and amending of the Company’s borrowings. The Company amortizes these costs into expense using the straight-line method over the stated life of the related borrowing. See Note 7, Borrowings, for details.
Income taxes—The Company has elected to be treated, and intends to comply with the requirements to qualify annually, as a RIC under subchapter M of the Code. As a RIC, the Company is not subject to federal income tax on the portion of taxable income and gains timely distributed to its stockholders.
To continue to qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90.0% of its investment company taxable income, as defined by the Code. Since federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes.
Differences between taxable income and the results of operations for financial reporting purposes may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
For federal income tax purposes, distributions paid to stockholders of the Company are reported as ordinary income, return of capital, long term capital gains or a combination thereof.
The Company will be subject to a 4.0% nondeductible federal excise tax on certain undistributed income unless the Company distributes, in a timely manner as required by the Code, an amount at least equal to the sum of (1) 98.0% of its respective net ordinary income earned for the calendar year and (2) 98.2% of its respective capital gain net income for the one-year period ending October 31 in the calendar year.
Certain consolidated subsidiaries of the Company are subject to U.S. federal and state income taxes. These taxable entities are not consolidated for income tax purposes and may generate income tax liabilities or assets from permanent and temporary differences in the recognition of items for financial reporting and income tax purposes.
For the three and sixnine months ended JuneSeptember 30, 2014, the Company recognized a provisionbenefit (provision) for income tax on unrealized appreciationtaxes of investments of $386$115 and $386,$(271), respectively, for the Company’s consolidated subsidiaries in the Consolidated Statements of Operations.subsidiaries. The Company did not recognize a benefit or provision for tax on unrealized appreciationtaxes during the three and sixnine months ended JuneSeptember 30, 2013. As of JuneSeptember 30, 2014 and December 31, 2013, $386the Company had $271 and $0, respectively, were included inof deferred tax liability on the Consolidated Statements of Assets and Liabilitiesliabilities primarily relating to deferred taxes on unrealized appreciationattributable to certain differences between the computation of investments held inincome for federal income tax blocker corporations.purposes as compared to GAAP. For the three and nine months ended September 30, 2014, the Company recorded an income tax expense of approximately $230 and $230, respectively. The Company did not recognize any income tax expense for the three and nine months ended September 30, 2013.
The Company has adopted the Income Taxes topic of the Codification (“ASC 740”). ASC 740 provides guidance for income taxes, including how uncertain income tax positions should be recognized, measured, and disclosed in the financial statements. Based on its analysis, the Company has determined that there were no material uncertain income tax positions through December 31, 2013. The 2011, 2012 and 2013 tax years remain subject to examination by the U.S. federal, state, and local tax authorities.
Dividends—Distributions to common stockholders of the Company are recorded on the record date as set by the board of directors. The Company intends to make distributions to its stockholders that will be sufficient to enable the Company to maintain its
status as a RIC. The Company intends to distribute approximately all of its adjusted net investment income (see Note 5, Agreements) on a quarterly basis and substantially all of its taxable income on an annual basis, except that the Company may retain certain net capital gains for reinvestment.
The Company has adopted a dividend reinvestment plan that provides on behalf of its stockholders for reinvestment of any distributions declared, unless a stockholder elects to receive cash.
The Company applies the following in implementing the dividend reinvestment plan. If the price at which newly issued shares are to be credited to stockholders’ accounts is greater than 110.0% of the last determined net asset value of the shares, the Company will use only newly issued shares to implement its dividend reinvestment plan. Under such circumstances, the number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by the market price per share of the Company’s common stock on the New York Stock Exchange (“NYSE”) on the distribution payment
date. Market price per share on that date will be the closing price for such shares on the NYSE or, if no sale is reported for such day, the average of their electronically reported bid and asked prices.
If the price at which newly issued shares are to be credited to stockholders’ accounts is less than 110.0% of the last determined net asset value of the shares, the Company will either issue new shares or instruct the plan administrator to purchase shares in the open market to satisfy the additional shares required. Shares purchased in open market transactions by the plan administrator will be allocated to a stockholder based on the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased in the open market. The number of shares of the Company’s common stock to be outstanding after giving effect to payment of the distribution cannot be established until the value per share at which additional shares will be issued has been determined and elections of the Company’s stockholders have been tabulated.
Earnings per share—The Company’s earnings per share (“EPS”) amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Basic earnings per share is computed by dividing net increase (decrease) in net assets resulting from operations by the weighted average number of shares of common stock assumed to be outstanding during the period of computation. Diluted earnings per share is computed similar to basic earnings per share except thatby dividing net increase (decrease) in net assets resulting from operations by the denominator is increased to include theweighted average number of additional shares of common stock that would have been outstanding if theassuming all potential shares had been issued, and ifits related net impact to net assets accounted for, and the additional shares of common stock were dilutive. The Company’s earnings per share (“EPS”) amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution, using the as-if-converted method for convertible debt, which could occur if all potentially dilutive securities were exercised.
Foreign securities—The accounting records of the Company are maintained in U.S. dollars. Investment securities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies on the respective dates of the transactions. The Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with “Net change in unrealized appreciation (depreciation) of investments” and “Net realized gains (losses) on investments” in the Company’s Consolidated Statements of Operations.
Investments denominated in foreign currencies may be negatively affected by movements in the rate of exchange between the U.S. dollar and such foreign currencies. This movement is beyond the control of the Company and cannot be predicted.
Use of estimates—The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Company’s financial statements and the reported amounts of revenues and expenses during the reporting periods. Changes in the economic environment, financial markets, and other metrics used in determining these estimates could cause actual results to differ from the estimates used, and the differences could be material.
Dividend income recorded related to distributions received from flow-through investments is an accounting estimate based on the most recent estimate of the tax treatment of the distribution. During the three months ended March 31, 2014, the Predecessor Operating Company adjusted an accounting estimate related to the classification of dividend income for a distribution received from one of the Predecessor Operating Company’s warrant investments. Based on updated tax projections received during the quarter ended March 31, 2014, the Predecessor Operating Company increased dividend income by $214 and reduced the realized gain by $214 to agree to the tax treatment on the investment. This resulted in a reclass from capital gains incentive fee to incentive fee of $43 for the quarter ended March 31, 2014. Based on updated tax projections received during the three months ended June 30, 2014, the Company increased dividend income by $472 and reduced the realized gain by $472 to agree to the tax treatment of a distribution received in the first quarter of 2014 from one of the Company’s warrant investments. This resulted in a reclass from capital gains incentive fee to incentive fee of $94 for the quarter ended June 30, 2014.
Note 3. Investments
At JuneSeptember 30, 2014, the Company’s investments consisted of the following:
Investment Cost and Fair Value by Type
|
| Cost |
| Fair Value |
| ||
First lien |
| $ | 631,717 |
| $ | 639,882 |
|
Second lien |
| 555,499 |
| 568,723 |
| ||
Subordinated |
| 23,305 |
| 24,108 |
| ||
Equity and other |
| 72,000 |
| 78,159 |
| ||
Total investments |
| $ | 1,282,521 |
| $ | 1,310,872 |
|
|
| Cost |
| Fair Value |
| ||
First lien |
| $ | 648,154 |
| $ | 641,115 |
|
Second lien |
| 590,013 |
| 598,937 |
| ||
Subordinated |
| 45,536 |
| 45,963 |
| ||
Equity and other |
| 55,887 |
| 67,654 |
| ||
Total investments |
| $ | 1,339,590 |
| $ | 1,353,669 |
|
Investment Cost and Fair Value by Industry
|
| Cost |
| Fair Value |
|
| Cost |
| Fair Value |
| ||||
Education |
| $ | 257,630 |
| $ | 267,825 |
|
| $ | 265,825 |
| $ | 278,455 |
|
Business Services |
| 263,814 |
| 253,059 |
| |||||||||
Software |
| 242,928 |
| 249,717 |
|
| 241,064 |
| 245,455 |
| ||||
Business Services |
| 181,773 |
| 184,052 |
| |||||||||
Healthcare Services |
| 110,104 |
| 111,857 |
| |||||||||
Distribution & Logistics |
| 122,700 |
| 124,330 |
|
| 94,669 |
| 95,325 |
| ||||
Energy |
| 111,952 |
| 113,798 |
|
| 91,945 |
| 93,583 |
| ||||
Healthcare Services |
| 98,854 |
| 101,115 |
| |||||||||
Federal Services |
| 92,784 |
| 93,411 |
|
| 89,709 |
| 89,715 |
| ||||
Media |
| 57,851 |
| 60,006 |
|
| 65,837 |
| 68,250 |
| ||||
Business Products |
| 25,659 |
| 25,739 |
| |||||||||
Consumer Services |
| 18,947 |
| 20,773 |
| |||||||||
Specialty Chemicals and Materials |
| 19,765 |
| 20,024 |
| |||||||||
Investment in Fund |
| 15,210 |
| 15,157 |
| |||||||||
Healthcare Products |
| 39,992 |
| 41,711 |
|
| 12,237 |
| 13,454 |
| ||||
Specialty Chemicals and Materials |
| 19,808 |
| 20,249 |
| |||||||||
Consumer Services |
| 14,927 |
| 15,767 |
| |||||||||
Industrial Services |
| 13,852 |
| 14,143 |
|
| 8,910 |
| 8,972 |
| ||||
Investment in Fund |
| 11,500 |
| 11,500 |
| |||||||||
Retail |
| 7,388 |
| 7,471 |
| |||||||||
Healthcare Information Technology |
| 10,430 |
| 7,665 |
|
| 8,427 |
| 6,380 |
| ||||
Business Products |
| 5,460 |
| 5,583 |
| |||||||||
Information Technology |
| 80 |
| — |
|
| 80 |
| — |
| ||||
Total investments |
| $ | 1,282,521 |
| $ | 1,310,872 |
|
| $ | 1,339,590 |
| $ | 1,353,669 |
|
At December 31, 2013, NMFC’s only investment was its investment in the Predecessor Operating Company. At December 31, 2013, the Predecessor Operating Company’s investments consisted of the following:
Investment Cost and Fair Value by Type
|
| Cost |
| Fair Value |
| ||
First lien |
| $ | 550,534 |
| $ | 553,549 |
|
Second lien |
| 460,078 |
| 468,945 |
| ||
Subordinated |
| 25,152 |
| 26,863 |
| ||
Equity and other |
| 58,316 |
| 66,294 |
| ||
Total investments |
| $ | 1,094,080 |
| $ | 1,115,651 |
|
Investment Cost and Fair Value by Industry
|
| Cost |
| Fair Value |
| ||
Software |
| $ | 243,158 |
| $ | 249,174 |
|
Education |
| 225,214 |
| 235,787 |
| ||
Business Services |
| 140,797 |
| 145,465 |
| ||
Distribution & Logistics |
| 120,156 |
| 120,247 |
| ||
Federal Services |
| 84,965 |
| 83,888 |
| ||
Healthcare Services |
| 78,295 |
| 80,331 |
| ||
Energy |
| 69,757 |
| 69,255 |
| ||
Media |
| 42,808 |
| 45,932 |
| ||
Healthcare Products |
| 40,285 |
| 41,772 |
| ||
Consumer Services |
| 14,918 |
| 15,628 |
| ||
Industrial Services |
| 13,858 |
| 14,263 |
| ||
Healthcare Information Technology |
| 13,454 |
| 7,324 |
| ||
Information Technology |
| 6,415 |
| 6,585 |
| ||
Total investments |
| $ | 1,094,080 |
| $ | 1,115,651 |
|
As of JuneSeptember 30, 2014, the Company’s two super priority first lien positions in ATI Acquisition Company remained on non-accrual status due to the inability of the portfolio company to service its interest payment for the quarter then ended and uncertainty about its ability to pay such amounts in the future. During the third quarter of 2013, the Predecessor Operating Company received
preferred shares and warrants in Ancora Acquisition LLC, in relation to the two super priority first lien positions in ATI Acquisition Company. As of JuneSeptember 30, 2014, the Company’s investment had an aggregate cost basis of $1,611, an aggregate fair value of $402 and total unearned interest income of $81$84 and $161,$245, respectively for the three and sixnine months then ended. As of December 31, 2013, the Predecessor Operating Company’s total investment in ATI Acquisition Company and Ancora Acquisition LLC had an aggregate cost basis of $1,611 and an aggregate fair value of $419. As of JuneSeptember 30, 2014 and December 31, 2013, unrealized gains (losses) include a fee that the Company would receive upon maturity of the two super priority first lien debt investments.
As of JuneSeptember 30, 2014, the Company placed a portion of its first lien position in UniTek Global Services, Inc. (“UniTek”) on non-accrual status in anticipation of a voluntary petition for a “Pre-Packaged” Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the District of Delaware which was filed on November 3, 2014. As of September 30, 2014, the portion of the UniTek first lien position placed on non-accrual status represented an aggregate cost basis of $11,241, an aggregate fair value of $8,155 and total unearned interest income of $479 and $479, respectively for the three and nine months then ended.
As of September 30, 2014, the Company had unfunded commitments on revolving credit facilities and bridge facilities of $6,900 and $0, respectively. The Company had unfunded commitments in the form of a delayed draw or other future funding commitments of $39,325$17,245 as of JuneSeptember 30, 2014. The unfunded commitments on revolving credit facilities and a delayed draw are disclosed on the Company’s Consolidated Schedule of Investments as of JuneSeptember 30, 2014.
At December 31, 2013, NMFC’s only investment was its investment in the Predecessor Operating Company. As of December 31, 2013, the Predecessor Operating Company had unfunded commitments on revolving credit facilities and bridge facilities of $15,500 and $0, respectively. The Predecessor Operating Company did not have any unfunded commitments in the form of a delayed draw or other future funding commitments as of December 31, 2013. The unfunded commitments on revolving credit facilities are disclosed on the Predecessor Operating Company’s Consolidated Schedule of Investments as of December 31, 2013.
NMFC Senior Loan Program I, LLC
On June 10, 2014, NMFC Senior Loan Program I, LLC (“SLP I”) was formed as a Delaware limited liability company. SLP I is a portfolio company ofheld by the Company. SLP I is structured as a private investment fund, in which all of the investors in which are qualified purchasers, as such term is defined under the 1940 Act. Transfer of interests in SLP I is subject to restrictions, and as a result, such interests are not readily marketable. SLP I operates under a limited liability company agreement (the “Agreement”) and will continue in existence until June 10, 2019, subject to earlier termination pursuant to certain terms of the Agreement. The term may be extended for up to one year pursuant to certain terms of the Agreement. SLP I has a three year re-investment period.
SLP I is capitalized with $93,000 of capital commitments, $275,000 of debt from a revolving credit facility and is managed by the Company. The Company’s capital commitment is $23,000, representing less than 25%25.0% ownership, with third party investors representing the remaining capital commitment. As of JuneSeptember 30, 2014, $46,500SLP I had total investments with an aggregate fair value of theapproximately $302,020, debt outstanding of $165,306 and capital that had been called and funded and there was no debt outstanding.of $61,500. The Company’s investment in SLP I is reflected indisclosed on the JuneSeptember 30, 2014 Consolidated Schedule of Investments.
The Company, as an investment adviser registered under the Advisers Act, acts as the collateral manager to SLP I and is entitled to receive a management fee for its investment management services provided.provided to SLP I. As a result, SLP I is classified as an affiliate of the Company. For the three and nine months ended JuneSeptember 30, 2014, the Company earned approximately $4$175 and $179, respectively, in management fees related to SLP I which are included in total other income from non-controlled, affiliated investment in the Consolidated Statements of Operations.income. As of JuneSeptember 30, 2014, approximately $4$179 of management fees related to SLP I werewas included in total receivable from affiliates onaffiliates. For the Consolidated Statementsthree and nine months ended September 30, 2014, the Company earned approximately $297 and $297, respectively, of Assetsdividend income related to SLP I, which is included in total dividend income. As of September 30, 2014, approximately $279 of dividend income related to SLP I was included in total interest and Liabilities.dividend receivable.
SLP I invests in senior secured loans issued by companies within the Company’s core industry verticals. These investments are typically broadly syndicated first lien loans.
Investment risk factors—First and second lien debt that the Company invests in is entirely, or almost entirely, rated below investment grade or may be unrated. Debt investments rated below investment grade are often referred to as “leveraged loans,” “high yield” or “junk” debt investments, and may be considered “high risk” compared to debt investments that are rated investment grade. These debt investments are considered speculative because of the credit risk of the issuers. Such issuers are considered more likely than investment grade issuers to default on their payments of interest and principal and such risk of default could reduce the net asset value and income distributions of the Company. In addition, some of the Company’s debt investments will not fully amortize during their lifetime, which could result in a loss or a substantial amount of unpaid principal and interest due upon maturity. First and second lien debt may also lose significant market value before a default occurs. Furthermore, an active trading market may not exist for these first and second lien debt investments. This illiquidity may make it more difficult to value the debt.
Subordinated debt is generally subject to similar risks as those associated with first and second lien debt, except that such debt is subordinated in payment and /or lower in lien priority. Subordinated debt is subject to the additional risk that the cash flow of the borrower and the property securing the debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior secured and unsecured obligations of the borrower.
Note 4. Fair Value
Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a fair value hierarchy that prioritizes and ranks the inputs to valuation techniques used in measuring investments at fair value. The hierarchy classifies the inputs used in measuring fair value into three levels as follows:
Level I—Quoted prices (unadjusted) are available in active markets for identical investments and the Company has the ability to access such quotes as of the reporting date. The type of investments which would generally be included in Level I include active exchange-traded equity securities and exchange-traded derivatives. As required by ASC 820, the Company, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Level II—Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level I. Level II inputs include the following:
· Quoted prices for similar assets or liabilities in active markets;
· Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
· Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including foreign exchange forward contracts); and
· Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
Level III—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment.
The inputs used to measure fair value may fall into different levels. In all instances when the inputs fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level of input that is significant to the fair value measurement in its entirety. As such, a Level III fair value measurement may include inputs that are both observable (Levels I and II) and unobservable (Level III). Gains and losses for such assets categorized within the Level III table below may include changes in fair value that are attributable to both observable inputs (Levels II and III) and unobservable inputs (Level III).
The inputs into the determination of fair value require significant judgment or estimation by management and consideration of factors specific to each investment. A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in
the observability of valuation inputs may result in the transfer of certain investments within the fair value hierarchy from period to period. Reclassifications impacting the fair value hierarchy are reported as transfers in/out of the respective leveling categories as of the beginning of the quarter in which the reclassifications occur.
The following table summarizes the levels in the fair value hierarchy that the Company’s portfolio investments fall into as of JuneSeptember 30, 2014:
|
| Total |
| Level I |
| Level II |
| Level III |
|
| Total |
| Level I |
| Level II |
| Level III |
| ||||||||
First lien |
| $ | 639,882 |
| $ | — |
| $ | 533,375 |
| $ | 106,507 |
|
| $ | 641,115 |
| $ | — |
| $ | 497,176 |
| $ | 143,939 |
|
Second lien |
| 568,723 |
| — |
| 455,562 |
| 113,161 |
|
| 598,937 |
| — |
| 508,314 |
| 90,623 |
| ||||||||
Subordinated |
| 24,108 |
| — |
| 9,258 |
| 14,850 |
|
| 45,963 |
| — |
| 10,977 |
| 34,986 |
| ||||||||
Equity and other |
| 78,159 |
| 416 |
| — |
| 77,743 |
|
| 67,654 |
| — |
| — |
| 67,654 |
| ||||||||
Total investments |
| $ | 1,310,872 |
| $ | 416 |
| $ | 998,195 |
| $ | 312,261 |
|
| $ | 1,353,669 |
| $ | — |
| $ | 1,016,467 |
| $ | 337,202 |
|
At December 31, 2013, NMFC’s only investment was its investment in the Predecessor Operating Company. The following table summarizes the levels in the fair value hierarchy that the Predecessor Operating Company’s portfolio investments fall into as of December 31, 2013:
|
| Total |
| Level I |
| Level II |
| Level III |
| ||||
First lien |
| $ | 553,549 |
| $ | — |
| $ | 525,138 |
| $ | 28,411 |
|
Second lien |
| 468,945 |
| — |
| 413,407 |
| 55,538 |
| ||||
Subordinated |
| 26,863 |
| — |
| 21,692 |
| 5,171 |
| ||||
Equity and other |
| 66,294 |
| 1,694 |
| — |
| 64,600 |
| ||||
Total investments |
| $ | 1,115,651 |
| $ | 1,694 |
| $ | 960,237 |
| $ | 153,720 |
|
The following table summarizes the changes in fair value of Level III portfolio investments for the three months ended JuneSeptember 30, 2014, as well as the portion of appreciation (depreciation) included in income attributable to unrealized appreciation (depreciation) related to those assets and liabilities still held by the Company at JuneSeptember 30, 2014:
|
| Total |
| First Lien |
| Second Lien |
| Subordinated |
| Equity and |
|
| Total |
| First Lien |
| Second Lien |
| Subordinated |
| Equity and |
| ||||||||||
Fair value, March 31, 2014 |
| $ | 202,948 |
| $ | 58,973 |
| $ | 73,248 |
| $ | 5,171 |
| $ | 65,556 |
| ||||||||||||||||
Fair value, June 30, 2014 |
| $ | 312,261 |
| $ | 106,507 |
| $ | 113,161 |
| $ | 14,850 |
| $ | 77,743 |
| ||||||||||||||||
Total gains or losses included in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net realized gains on investments |
| 5,306 |
| — |
| — |
| 196 |
| 5,110 |
|
| 585 |
| — |
| 581 |
| — |
| 4 |
| ||||||||||
Net change in unrealized (depreciation) appreciation |
| (1,245 | ) | 188 |
| 433 |
| (196 | ) | (1,670 | ) |
| (6,614 | ) | (11,586 | ) | (547 | ) | (89 | ) | 5,608 |
| ||||||||||
Purchases, including capitalized PIK and revolver fundings |
| 77,151 |
| 47,801 |
| — |
| 15,238 |
| 14,112 |
|
| 65,909 |
| 10,859 |
| 30,938 |
| 20,225 |
| 3,887 |
| ||||||||||
Proceeds from sales and paydowns of investments |
| (11,379 | ) | (455 | ) | — |
| (5,559 | ) | (5,365 | ) |
| (53,408 | ) | (94 | ) | (33,310 | ) | — |
| (20,004 | ) | ||||||||||
Transfers into Level III (1) |
| 39,480 |
| — |
| 39,480 |
| — |
| — |
|
| 38,669 |
| 38,253 |
| — |
| — |
| 416 |
| ||||||||||
Fair value, June 30, 2014 |
| $ | 312,261 |
| $ | 106,507 |
| $ | 113,161 |
| $ | 14,850 |
| $ | 77,743 |
| ||||||||||||||||
Transfers out of Level III (1) |
| (20,200 | ) | — |
| (20,200 | ) | — |
| — |
| |||||||||||||||||||||
Fair value, September 30, 2014 |
| $ | 337,202 |
| $ | 143,939 |
| $ | 90,623 |
| $ | 34,986 |
| $ | 67,654 |
| ||||||||||||||||
Unrealized appreciation (depreciation) for the period relating to those Level III assets that were still held by the Company at the end of the period: |
| $ | 1,641 |
| $ | 188 |
| $ | 433 |
| $ | — |
| $ | 1,020 |
|
| $ | (5,868 | ) | $ | (11,586 | ) | $ | 199 |
| $ | (89 | ) | $ | 5,608 |
|
(1) As of JuneSeptember 30, 2014, the portfolio investments were transferred into Level III from Level II or Level I and out of Level III into Level II at fair value as of the beginning of the quarter in which the reclassifications occurred.
At JuneSeptember 30, 2013, NMFC’s only investment was its investment in the Predecessor Operating Company. The following table summarizes the changes in fair value of Level III portfolio investments for the three months ended JuneSeptember 30, 2013, as well as the portion of appreciation (depreciation) included in income attributable to unrealized appreciation (depreciation) related to those assets and liabilities still held by the Predecessor Operating Company at JuneSeptember 30, 2013:
|
| Total |
| First Lien |
| Second Lien |
| Subordinated |
| Equity and |
|
| Total |
| First Lien |
| Second Lien |
| Subordinated |
| Equity and |
| ||||||||||
Fair value, March 31, 2013 |
| $ | 110,619 |
| $ | 31,934 |
| $ | 44,103 |
| $ | 23,780 |
| $ | 10,802 |
| ||||||||||||||||
Fair value, June 30, 2013 |
| $ | 113,201 |
| $ | 21,312 |
| $ | 38,527 |
| $ | 24,681 |
| $ | 28,681 |
| ||||||||||||||||
Total gains or losses included in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net realized gains on investments |
| 556 |
| 176 |
| 380 |
| — |
| — |
|
| 1,398 |
| 66 |
| — |
| — |
| 1,332 |
| ||||||||||
Net change in unrealized (depreciation) appreciation |
| (2,380 | ) | 186 |
| 184 |
| 371 |
| (3,121 | ) | |||||||||||||||||||||
Net change in unrealized appreciation (depreciation) |
| 633 |
| (41 | ) | 116 |
| 110 |
| 448 |
| |||||||||||||||||||||
Purchases, including capitalized PIK and revolver fundings |
| 35,485 |
| 95 |
| 13,860 |
| 530 |
| 21,000 |
|
| 1,503 |
| (84 | ) | — |
| 55 |
| 1,532 |
| ||||||||||
Proceeds from sales and paydowns of investments |
| (37,653 | ) | (17,653 | ) | (20,000 | ) | — |
| — |
|
| (8,881 | ) | (7,083 | ) | — |
| — |
| (1,798 | ) | ||||||||||
Transfers into Level III (1) |
| 6,574 |
| 6,574 |
| — |
| — |
| — |
| |||||||||||||||||||||
Fair value, June 30, 2013 |
| $ | 113,201 |
| $ | 21,312 |
| $ | 38,527 |
| $ | 24,681 |
| $ | 28,681 |
| ||||||||||||||||
Unrealized (depreciation) appreciation for the period relating to those Level III assets that were still held by the Predecessor Operating Company at the end of the period: |
| $ | (2,620 | ) | $ | (312 | ) | $ | 442 |
| $ | 371 |
| $ | (3,121 | ) | ||||||||||||||||
Fair value, September 30, 2013 |
| $ | 107,854 |
| $ | 14,170 |
| $ | 38,643 |
| $ | 24,846 |
| $ | 30,195 |
| ||||||||||||||||
Unrealized appreciation (depreciation) for the period relating to those Level III assets that were still held by the Predecessor Operating Company at the end of the period: |
| $ | 697 |
| $ | 23 |
| $ | 116 |
| $ | 110 |
| $ | 448 |
| ||||||||||||||||
The following table summarizes the changes in fair value of Level III portfolio investments for the nine months ended September 30, 2014, as well as the portion of appreciation (depreciation) included in income attributable to unrealized appreciation (depreciation) related to those assets and liabilities still held by the Company at September 30, 2014:
|
| Total |
| First Lien |
| Second Lien |
| Subordinated |
| Equity and |
| |||||
Fair value, December 31, 2013 |
| $ | 153,720 |
| $ | 28,411 |
| $ | 55,538 |
| $ | 5,171 |
| $ | 64,600 |
|
Total gains or losses included in earnings: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net realized gains on investments |
| 7,409 |
| 1,260 |
| 581 |
| 196 |
| 5,372 |
| |||||
Net change in unrealized (depreciation) appreciation |
| (7,035 | ) | (11,915 | ) | 98 |
| (285 | ) | 5,067 |
| |||||
Purchases, including capitalized PIK and revolver fundings |
| 191,138 |
| 89,049 |
| 48,436 |
| 35,463 |
| 18,190 |
| |||||
Proceeds from sales and paydowns of investments |
| (65,979 | ) | (1,119 | ) | (33,310 | ) | (5,559 | ) | (25,991 | ) | |||||
Transfers into Level III (1) |
| 78,149 |
| 38,253 |
| 39,480 |
| — |
| 416 |
| |||||
Transfers out of Level III (1) |
| (20,200 | ) | — |
| (20,200 | ) | — |
| — |
| |||||
Fair value, September 30, 2014 |
| $ | 337,202 |
| $ | 143,939 |
| $ | 90,623 |
| $ | 34,986 |
| $ | 67,654 |
|
Unrealized appreciation (depreciation) for the period relating to those Level III assets that were still held by the Companies at the end of the period: |
| $ | (3,343 | ) | $ | (11,443 | ) | $ | 738 |
| $ | (89 | ) | $ | 7,451 |
|
(1)As of September 30, 2014, the portfolio investments were transferred into Level III from Level II or Level I and out of Level III into Level II at fair value as of the beginning of the quarter in which the reclassifications occurred.
At September 30, 2013, NMFC’s only investment was its investment in the Predecessor Operating Company. The following table summarizes the changes in fair value of Level III portfolio investments for the nine months ended September 30, 2013, as well as the portion of appreciation (depreciation) included in income attributable to unrealized appreciation (depreciation) related to those assets and liabilities still held by the Predecessor Operating Company at September 30, 2013:
|
| Total |
| First Lien |
| Second Lien |
| Subordinated |
| Equity and |
| |||||
Fair value, December 31, 2012 |
| $ | 119,128 |
| $ | 42,885 |
| $ | 43,255 |
| $ | 22,891 |
| $ | 10,097 |
|
Total gains or losses included in earnings: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net realized gains on investments |
| 1,975 |
| 263 |
| 380 |
| — |
| 1,332 |
| |||||
Net change in unrealized (depreciation) appreciation |
| (150 | ) | 70 |
| 1,148 |
| 658 |
| (2,026 | ) | |||||
Purchases, including capitalized PIK and revolver fundings |
| 37,761 |
| 11 |
| 13,860 |
| 1,297 |
| 22,593 |
| |||||
Proceeds from sales and paydowns of investments |
| (57,434 | ) | (35,633 | ) | (20,000 | ) | — |
| (1,801 | ) | |||||
Transfers into Level III (1) |
| 6,574 |
| 6,574 |
| — |
| — |
| — |
| |||||
Fair value, September 30, 2013 |
| $ | 107,854 |
| $ | 14,170 |
| $ | 38,643 |
| $ | 24,846 |
| $ | 30,195 |
|
Unrealized (depreciation) appreciation for the period relating to those Level III assets that were still held by the Predecessor Operating Company at the end of the period: |
| $ | (945 | ) | $ | (605 | ) | $ | 1,027 |
| $ | 658 |
| $ | (2,025 | ) |
(1) As of JuneSeptember 30, 2013, the portfolio investments were transferred into Level III from Level II at fair value as of the beginning of the quarter in which the reclassifications occurred.
(2) During the threenine months ended JuneSeptember 30, 2013, the Predecessor Operating Company received dividends of $6,436 from its equity and other investments, which were recorded as dividend income.
The following table summarizes the changes in fair value of Level III portfolio investments for the six months ended June 30, 2014, as well as the portion of appreciation (depreciation) included in income attributable to unrealized appreciation (depreciation) related to those assets and liabilities still held by the Company at June 30, 2014:
|
| Total |
| First Lien |
| Second Lien |
| Subordinated |
| Equity and |
| |||||
Fair value, December 31, 2013 |
| $ | 153,720 |
| $ | 28,411 |
| $ | 55,538 |
| $ | 5,171 |
| $ | 64,600 |
|
Total gains or losses included in earnings: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net realized gains on investments |
| 6,824 |
| 1,260 |
| — |
| 196 |
| 5,368 |
| |||||
Net change in unrealized (depreciation) appreciation |
| (421 | ) | (329 | ) | 645 |
| (196 | ) | (541 | ) | |||||
Purchases, including capitalized PIK and revolver fundings |
| 125,229 |
| 78,190 |
| 17,498 |
| 15,238 |
| 14,303 |
| |||||
Proceeds from sales and paydowns of investments |
| (12,571 | ) | (1,025 | ) | — |
| (5,559 | ) | (5,987 | ) | |||||
Transfers into Level III (1) |
| 39,480 |
| — |
| 39,480 |
| — |
| — |
| |||||
Fair value, June 30, 2014 |
| $ | 312,261 |
| $ | 106,507 |
| $ | 113,161 |
| $ | 14,850 |
| $ | 77,743 |
|
Unrealized appreciation (depreciation) for the period relating to those Level III assets that were still held by the Companies at the end of the period: |
| $ | 2,632 |
| $ | 144 |
| $ | 645 |
| $ | — |
| $ | 1,843 |
|
(1)As of June 30, 2014, the portfolio investments were transferred into Level III from Level II at fair value as of the beginning of the quarter in which the reclassifications occurred.
At June 30, 2013, NMFC’s only investment was its investment in the Predecessor Operating Company. The following table summarizes the changes in fair value of Level III portfolio investments for the six months ended June 30, 2013, as well as the portion of appreciation (depreciation) included in income attributable to unrealized appreciation (depreciation) related to those assets and liabilities still held by the Predecessor Operating Company at June 30, 2013:
|
| Total |
| First Lien |
| Second Lien |
| Subordinated |
| Equity and |
| |||||
Fair value, December 31, 2012 |
| $ | 119,128 |
| $ | 42,885 |
| $ | 43,255 |
| $ | 22,891 |
| $ | 10,097 |
|
Total gains or losses included in earnings: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net realized gains on investments |
| 577 |
| 197 |
| 380 |
| — |
| — |
| |||||
Net change in unrealized (depreciation) appreciation |
| (783 | ) | 111 |
| 1,032 |
| 548 |
| (2,474 | ) | |||||
Purchases, including capitalized PIK and revolver fundings |
| 36,258 |
| 95 |
| 13,860 |
| 1,242 |
| 21,061 |
| |||||
Proceeds from sales and paydowns of investments |
| (48,553 | ) | (28,550 | ) | (20,000 | ) | — |
| (3 | ) | |||||
Transfers into Level III (1) |
| 6,574 |
| 6,574 |
| — |
| — |
| — |
| |||||
Fair value, June 30, 2013 |
| $ | 113,201 |
| $ | 21,312 |
| $ | 38,527 |
| $ | 24,681 |
| $ | 28,681 |
|
Unrealized (depreciation) appreciation for the period relating to those Level III assets that were still held by the Predecessor Operating Company at the end of the period: |
| $ | (1,186 | ) | $ | (172 | ) | $ | 912 |
| $ | 548 |
| $ | (2,474 | ) |
(1)As of June 30, 2013, the portfolio investments were transferred into Level III from Level II at fair value as of the beginning of the quarter in which the reclassifications occurred.
(2)During the six months ended June 30, 2013, the Predecessor Operating Company received dividends of $6,433$4,802 from its equity and other investments, which were recorded as dividend income.
Except as noted in the tables above, there were no other transfers in or out of Level I, II, or III during the three and sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013. Transfers into Level III occurred as quotations obtained through pricing services were not deemed representative of fair value as of the balance sheet date and such assets were internally valued. As quotations obtained through pricing services were substantiated through additional market sources, investments were transferred out of Level III. The Company invests in revolving credit facilities. These investments are categorized as Level III investments as these assets are not actively traded and their fair values are often implied by the term loans of the respective portfolio companies.
The Company generally uses the following framework when determining the fair value of investments where there are little, if any, market activity or observable pricing inputs.
Company Performance, Financial Review, and Analysis: Prior to investment, as part of its due diligence process, the Company evaluates the overall performance and financial stability of the portfolio company. Post investment, the Company analyzes each portfolio company’s current operating performance and relevant financial trends versus prior year and budgeted results, including, but not limited to, factors affecting its revenue and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) growth, margin trends, liquidity position, covenant compliance and changes to its capital structure. The Company also attempts to identify and subsequently track any developments at the portfolio company, within its customer or vendor base or within the industry or the macroeconomic environment, generally, that may alter any material element of its original investment thesis. This analysis is specific to each portfolio company. The Company leverages the knowledge gained from its original due diligence process, augmented by this subsequent monitoring, to continually refine its outlook for each of its portfolio companies and ultimately form the valuation of its investment in each portfolio company. When an external event such as a purchase transaction, public offering or subsequent sale occurs, the Company will consider the pricing indicated by the external event to corroborate the private valuation.
Market Based Approach: The Company may estimate the total enterprise value of each portfolio company by utilizing market value cash flow (EBITDA) multiples of publicly traded comparable companies. The Company considers numerous factors when selecting the appropriate companies whose trading multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. The Company may apply an average of various relevant comparable company EBITDA multiples to the portfolio company’s latest twelve month (“LTM”) EBITDA or projected EBITDA to calculate portfolio company enterprise value. Significant increases or decreases in the multiple will result in an increase or decrease in enterprise value, resulting in an increase or decrease in the fair value estimate of the investment. In applying the market based approach as of JuneSeptember 30, 2014, the Company used the relevant EBITDA ranges set forth in the table below to determine the enterprise value of investments in eighteleven of its portfolio companies. The Company believes this was a reasonable range in light of current comparable company trading levels and the specific companies involved.
Income Based Approach: The Company also may use a discounted cash flow analysis to estimate the fair value of the investment. Projected cash flows represent the relevant security’s contractual interest, fee and principal payments plus the assumption of full principal recovery at the investment’s expected maturity date. These cash flows are discounted at a rate established utilizing a yield calibration approach, which incorporates changes in the credit quality (as measured by relevant statistics) of the portfolio company, as compared to changes in the yield associated with comparable credit quality market indices, between the date of origination and the valuation date. Significant increases or decreases in the discount rate would result in a decrease or increase in the fair value measurement. In applying the income based approach as of JuneSeptember 30, 2014, the Company used the discount ranges set forth in the table below to value investments in ninefourteen of its portfolio companies.
|
|
|
|
|
|
|
| Range |
| |||||
Type |
| Fair Value |
| Approach |
| Unobservable Input |
| Low |
| High |
| Weighted |
| |
First lien |
| $ | 106,507 |
| Market approach |
| EBITDA multiple |
| 7.5 | x | 10.0 | x | 8.8 | x |
|
|
|
| Income approach |
| Discount rate |
| 7.7 | % | 13.1 | % | 10.0 | % | |
Second lien |
| 113,161 |
| Market approach |
| EBITDA multiple |
| 6.0 | x | 10.5 | x | 7.6 | x | |
|
|
|
| Income approach |
| Discount rate |
| 10.4 | % | 13.4 | % | 11.6 | % | |
Subordinated |
| 14,850 |
| Other |
| N/A(1) |
| N/A | (1) | N/A | (1) | N/A | (1) | |
Equity and other |
| 77,743 |
| Market approach |
| EBITDA multiple |
| 1.6 | x | 9.5 | x | 7.6 | x | |
|
|
|
| Income approach |
| Discount rate |
| 8.0 | % | 18.0 | % | 14.0 | % | |
|
| $ | 312,261 |
| Black Scholes analysis |
| Expected life in years |
| 2.0 |
| 11.9 |
| 5.8 |
|
|
|
|
|
|
| Volatility |
| 27.3 | % | 41.0 | % | 31.7 | % | |
|
|
|
|
|
| Discount rate |
| 1.7 | % | 4.1 | % | 3.0 | % | |
(1)Fair value was determined based on transaction pricing or recent acquisition as the best measure of fair value with no material changes in operations of the related portfolio company since the transaction date.
|
|
|
|
|
|
|
| Range |
| |||||
Type |
| Fair Value |
| Approach |
| Unobservable Input |
| Low |
| High |
| Weighted |
| |
First lien |
| $ | 143,939 |
| Market approach |
| EBITDA multiple |
| 7.0 | x | 10.0 | x | 8.3 | x |
|
|
|
| Income approach |
| Discount rate |
| 8.1 | % | 16.0 | % | 11.7 | % | |
Second lien |
| 90,623 |
| Market approach |
| EBITDA multiple |
| 6.0 | x | 13.0 | x | 8.8 | x | |
|
|
|
| Income approach |
| Discount rate |
| 10.6 | % | 13.6 | % | 11.9 | % | |
Subordinated |
| 34,986 |
| Market approach |
| EBITDA multiple |
| 7.5 | x | 9.0 | x | 8.3 | x | |
|
|
|
| Income approach |
| Discount rate |
| 10.4 | % | 16.0 | % | 13.3 | % | |
Equity and other |
| 67,654 |
| Market approach |
| EBITDA multiple |
| 1.5 | x | 10.0 | x | 8.0 | x | |
|
|
|
| Income approach |
| Discount rate |
| 8.0 | % | 13.2 | % | 12.5 | % | |
|
| $ | 337,202 |
| Black Scholes analysis |
| Expected life in years |
| 0.5 |
| 11.7 |
| 3.2 |
|
|
|
|
|
|
| Volatility |
| 26.8 | % | 41.0 | % | 29.4 | % | |
|
|
|
|
|
| Discount rate |
| 2.5 | % | 4.1 | % | 2.8 | % | |
Based on a comparison to similar BDC credit facilities, the terms and conditions of the Holdings Credit Facility, SLF Credit Facility and the SLFNMFC Credit Facility (as defined in Note 7, Borrowings) are representative of market. The carrying values of the Holdings Credit Facility, SLF Credit Facility and SLFNMFC Credit Facility approximate fair value as of JuneSeptember 30, 2014, as boththe facilities are continually monitored and examined by both the borrower and the lender. For the year ended December 31, 2013, the Holdings Credit Facility was amended and restated to further increase the maximum amount of revolving borrowings available. The fair value of the Holdings Credit Facility, SLF Credit Facility and SLFNMFC Credit Facility are considered Level III. The fair value of the Convertible Notes (as defined in Note 7, Borrowings) as of JuneSeptember 30, 2014 was $117,588,$117,084, which was based on quoted prices and considered Level II. See Note 7, Borrowings, for details. The fair value of other financial assets and liabilities approximates their carrying value based on the short term nature of these items.
Fair value risk factors—The Company seeks investment opportunities that offer the possibility of attaining substantial capital appreciation. Certain events particular to each industry in which the Company’s portfolio companies conduct their operations, as well as general economic and political conditions, may have a significant negative impact on the operations and profitability of the
Company’s investments and/or on the fair value of the Company’s investments. The Company’s investments are subject to the risk of non-payment of scheduled interest or principal, resulting in a reduction in income to the Company and their corresponding fair valuations. Also, there may be risk associated with the concentration of investments in one geographic region or in certain industries. These events are beyond the control of the Company and cannot be predicted. Furthermore, the ability to liquidate investments and realize value is subject to uncertainties.
Note 5. Agreements
NMF Holdings entered into an investment advisory and management agreement, as amended and restated with the Investment Adviser. Until May 8, 2014, under the investment advisory and management agreement, the Investment Adviser managed the day-to-day operations of, and providesprovided investment advisory services to, NMF Holdings. For providing these services, the Investment Adviser receivesreceived a fee from NMF Holdings, consisting of two components—a base management fee and an incentive fee.
On May 6, 2014, the stockholders of NMFC approved ana new investment advisory and management agreement (the “Investment Management Agreement”) with the Investment Adviser which became effective on May 8, 2014. Under the Investment Management Agreement, the Investment Adviser manages the day-to-day operations of, and provides investment advisory services to, the Company. For providing these services, the Investment Adviser receives a fee from the Company, consisting of two components—a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 1.75% of the Company’s gross assets, which equals the Company’s total assets on the Consolidated Statements of Assets and Liablities,Liabilities, less (i) the borrowings under the SLF Credit Facility (as defined in Note 7, Borrowings) and (ii) cash and cash equivalents. The base management fee is payable quarterly in arrears, and is calculated based on the average value of the Company’s gross assets, which equals the Company’s total assets, as determined in
accordance with GAAP, borrowings under the SLF Credit Facility, and cash and cash equivalents at the end of each of the two most recently completed calendar quarters, and appropriately adjusted on a pro rata basis for any equity capital raises or repurchases during the current calendar quarter.
The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20.0% of the Company’s “Pre-Incentive Fee Adjusted Net Investment Income” for the immediately preceding quarter, subject to a “preferred return”, or “hurdle”, and a “catch-up” feature. “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under an administration agreement, as amended and restated (the “Administration Agreement”), with the Administrator, and any interest expense and distributions paid on any issued and outstanding preferred membership units (of which there are none as of JuneSeptember 30, 2014), but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
Under GAAP, NMFC’s IPO did not step-up the cost basis of the Predecessor Operating Company’s existing investments to fair market value at the IPO date. Since the total value of the Predecessor Operating Company’s investments at the time of the IPO was greater than the investments’ cost basis, a larger amount of amortization of purchase or original issue discount, as well as different amounts in realized gain and unrealized appreciation, may be recognized under GAAP in each period than if the step-up had occurred. This will remain until such predecessor investments are sold, repaid or mature in the future. The Company tracks the transferred (or fair market) value of each of its investments as of the time of the IPO and, for purposes of the incentive fee calculation, adjusts Pre-Incentive Fee Net Investment Income to reflect the amortization of purchase or original issue discount on the Company’s investments as if each investment was purchased at the date of the IPO, or stepped up to fair market value. This is defined as “Pre-Incentive Fee Adjusted Net Investment Income”. The Company also uses the transferred (or fair market) value of each of its investments as of the time of the IPO to adjust capital gains (“Adjusted Realized Capital Gains”) or losses (“Adjusted Realized Capital Losses”) and unrealized capital appreciation (“Adjusted Unrealized Capital Appreciation”) and unrealized capital depreciation (“Adjusted Unrealized Capital Depreciation”).
Pre-Incentive Fee Adjusted Net Investment Income, expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding calendar quarter, will be compared to a “hurdle rate” of 2.0% per quarter (8.0% annualized), subject to a “catch-up” provision measured as of the end of each calendar quarter. The hurdle rate is appropriately pro-rated for any partial periods. The calculation of the Company’s incentive fee with respect to the Pre-Incentive Fee Adjusted Net Investment Income for each quarter is as follows:
· No incentive fee is payable to the Investment Adviser in any calendar quarter in which the Company’s Pre-Incentive Fee Adjusted Net Investment Income does not exceed the hurdle rate of 2.0% (the “preferred return” or “hurdle”).
· 100.0% of the Company’s Pre-Incentive Fee Adjusted Net Investment Income with respect to that portion of such Pre-Incentive Fee Adjusted Net Investment Income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any calendar quarter (10.0% annualized) is payable to the Investment Adviser. This portion of the Company’s Pre-Incentive Fee Adjusted Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) is referred to as the “catch-up”. The catch-up provision is intended to provide the Investment Adviser with an incentive fee of 20.0% on all of the Company’s Pre-Incentive Fee Adjusted Net Investment Income as if a hurdle rate did not apply when the Company’s Pre-Incentive Fee Adjusted Net Investment Income exceeds 2.5% in any calendar quarter.
· 20.0% of the amount of the Company’s Pre-Incentive Fee Adjusted Net Investment Income, if any, that exceeds 2.5% in any calendar quarter (10.0% annualized) is payable to the Investment Adviser once the hurdle is reached and the catch-up is achieved.
The second part will be determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement) and will equal 20.0% of the Company’s Adjusted Realized Capital Gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all Adjusted Realized Capital Losses and Adjusted Unrealized Capital Depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee.
In accordance with GAAP, the Company accrues a hypothetical capital gains incentive fee based upon the cumulative net Adjusted Realized Capital Gains and Adjusted Realized Capital Losses and the cumulative net Adjusted Unrealized Capital Appreciation and Adjusted Unrealized Capital Depreciation on investments held at the end of each period. Actual amounts paid to the
Investment Adviser are consistent with the Investment Management Agreement and are based only on actual Adjusted Realized Capital Gains computed net of all Adjusted Realized Capital Losses and Adjusted Unrealized Capital Depreciation on a cumulative basis from inception through the end of each calendar year as if the entire portfolio was sold at fair value.
The following table summarizes the management fees and incentive fees incurred by NMFC for the three and sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013.
|
| Three months ended |
| Six months ended |
|
| Three months ended |
| Nine months ended |
| ||||||||||||||||
|
| June 30, 2014 |
| June 30, 2013 |
| June 30, 2014 |
| June 30, 2013 |
|
| September 30, 2014 |
| September 30, 2013 |
| September 30, 2014 |
| September 30, 2013 |
| ||||||||
Management fee |
| $ | 2,742 |
| $ | — |
| $ | 2,742 |
| $ | — |
|
| $ | 5,021 |
| $ | — |
| $ | 7,763 |
| $ | — |
|
Management fee allocated from NMF Holdings(2) |
| 1,879 |
| 2,801 |
| 5,983 |
| 5,006 |
| |||||||||||||||||
Management fee allocated from NMF Holdings (2) |
| — |
| 3,204 |
| 5,983 |
| 8,210 |
| |||||||||||||||||
Total Management fee |
| 4,621 |
| 2,801 |
| 8,725 |
| 5,006 |
|
| 5,021 |
| 3,204 |
| 13,746 |
| 8,210 |
| ||||||||
Incentive fee, excluding accrued capital gains incentive fees |
| 2,747 |
| — |
| 2,747 |
| — |
|
| 4,520 |
| — |
| 7,267 |
| — |
| ||||||||
Incentive fee, excluding accrued capital gains incentive fees allocated from NMF Holdings(2) |
| 1,882 |
| 4,063 |
| 6,248 |
| 6,200 |
| |||||||||||||||||
Incentive fee, excluding accrued capital gains incentive fees allocated from NMF Holdings (2) |
| — |
| 3,016 |
| 6,248 |
| 9,216 |
| |||||||||||||||||
Total Incentive fee |
| 4,629 |
| 4,063 |
| 8,995 |
| 6,200 |
|
| 4,520 |
| 3,016 |
| 13,515 |
| 9,216 |
| ||||||||
Accrued capital gains incentive fees(1) |
| 763 |
| — |
| 763 |
| — |
| |||||||||||||||||
Accrued capital gains incentive fees allocated from NMF Holdings(1)(2) |
| 523 |
| (1,278 | ) | 2,024 |
| 380 |
| |||||||||||||||||
Accrued capital gains incentive fees (1) |
| (2,667 | ) | — |
| (1,904 | ) | — |
| |||||||||||||||||
Accrued capital gains incentive fees allocated from NMF Holdings (1)(2) |
| — |
| 1,353 |
| 2,024 |
| 1,733 |
| |||||||||||||||||
Total Accrued capital gains incentive fees |
| 1,286 |
| (1,278 | ) | 2,787 |
| 380 |
|
| (2,667 | ) | 1,353 |
| 120 |
| 1,733 |
| ||||||||
(1) The accrued capital gains incentive fees would be paid by the Company if the Company ceased operations on JuneSeptember 30, 2014 or JuneSeptember 30, 2013, respectively, and liquidated its investments at the valuations as of the respective quarter ends. Approximately $1,971 of capital gains incentive fees would be owed under the Investment Management Agreement if the Company had ceased operations as of June 30, 2014, as cumulative net Adjusted Realized Capital Gains exceeded cumulative Adjusted Unrealized Capital Depreciation. As of JuneSeptember 30, 2013,2014, no actual capital gains incentive fee was owed under the Investment Management Agreement, as cumulative net Adjusted Realized Capital Gains did not exceed cumulative Adjusted Unrealized Capital Depreciation. At September 30, 2013, the Company’s only investment was its investment in the Predecessor Operating Company. As of September 30, 2013, approximately $939 of capital gains incentive fees was owed to the Predecessor Operating Company under the Investment Management Agreement, as cumulative net Adjusted Realized Capital Gains exceed cumulative Adjusted Unrealized Capital Depreciation.
(2) For the three and sixnine months ended JuneSeptember 30, 2013, NMFC is reflecting its proportionate share of the Predecessor Operating Company’s management, incentive and capital gains incentive fees. For the three and sixnine months ended JuneSeptember 30, 2013, the management fees at NMF Holdings were $3,727$3,754 and $7,295,$11,049, respectively. For the three and sixnine months ended JuneSeptember 30, 2013, the incentive fee, excluding accrued capital gains incentive fees, at NMF Holdings was $5,407$3,533 and $8,865,$12,398, respectively. For the three and sixnine months ended JuneSeptember 30, 2013, the accrued capital gains incentive fees at NMF Holdings were $(1,701)$1,587 and $981,$2,568, respectively.
The Company’s Consolidated Statements of Operations below are adjusted as if the step-up in cost basis to fair market value had occurred at the IPO date, May 19, 2011.
The following StatementStatements of Operations for the three and sixnine months ended JuneSeptember 30, 2014 is adjusted to reflect this step-up to fair market value.
|
| Three months ended |
| Adjustments |
| Adjusted |
|
| Three months ended |
| Adjustments |
| Adjusted |
| ||||||
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest income (2) |
| $ | 18,788 |
| $ | (56 | ) | $ | 18,732 |
| ||||||||||
Interest income (1) |
| $ | 32,353 |
| $ | (53 | ) | $ | 32,300 |
| ||||||||||
Dividend income |
| 972 |
| — |
| 972 |
|
| 511 |
| — |
| 511 |
| ||||||
Other income |
| 709 |
| — |
| 709 |
|
| 1,842 |
| — |
| 1,842 |
| ||||||
Investment income allocated from NMF Holdings |
|
|
|
|
|
|
| |||||||||||||
Interest income (2) |
| 12,847 |
| — |
| 12,847 |
| |||||||||||||
Dividend income |
| 279 |
| — |
| 279 |
| |||||||||||||
Other income |
| 113 |
| — |
| 113 |
| |||||||||||||
Total investment income |
| 33,708 |
| (56 | ) | 33,652 |
| |||||||||||||
Total investment income (2) |
| 34,706 |
| (53 | ) | 34,653 |
| |||||||||||||
Total net expenses pre-incentive fee (3) |
| 10,504 |
| — |
| 10,504 |
|
| 12,053 |
| — |
| 12,053 |
| ||||||
Pre-Incentive Fee Net Investment Income |
| 23,204 |
| (56 | ) | 23,148 |
|
| 22,653 |
| (53 | ) | 22,600 |
| ||||||
Incentive fee (4) |
| 5,915 |
| — |
| 5,915 |
|
| 1,853 |
| — |
| 1,853 |
| ||||||
Post-Incentive Fee Net Investment Income |
| 17,289 |
| (56 | ) | 17,233 |
|
| 20,800 |
| (53 | ) | 20,747 |
| ||||||
Net realized losses on investments |
| (1,067 | ) | (46 | ) | (1,113 | ) | |||||||||||||
Net realized gains on investment allocated from NMF Holdings |
| 5,860 |
| — |
| 5,860 |
| |||||||||||||
Net change in unrealized appreciation (depreciation) of investments |
| 5,708 |
| 102 |
| 5,810 |
| |||||||||||||
Provision for taxes on unrealized appreciation (depreciation) of investments |
| (386 | ) | — |
| (386 | ) | |||||||||||||
Net change in unrealized (depreciation) appreciation of investments allocated from NMF Holdings |
| (3,742 | ) | — |
| (3,742 | ) | |||||||||||||
Net realized gains on investments |
| 768 |
| (201 | ) | 567 |
| |||||||||||||
Net change in unrealized (depreciation) appreciation of investments (5) |
| (14,272 | ) | 254 |
| (14,018 | ) | |||||||||||||
Benefit (provision) for taxes |
| 115 |
| — |
| 115 |
| |||||||||||||
Net increase in net assets resulting from operations |
| $ | 23,662 |
|
|
| $ | 23,662 |
|
| $ | 7,411 |
|
|
| $ | 7,411 |
| ||
(1) Includes investment$1,623 in payment-in-kind interest from investments.
(2)Includes income from non-controlled/non-affiliated investments and non-controlled/affiliated investments.
(2)Includes $642 in payment-in-kind interest from investments.
(3) Includes expense waivers and reimbursements of $58.$322.
(4) For the three months ended JuneSeptember 30, 2014, the Company incurred total incentive fees of $5,915,$1,853, of which $1,286$(2,667) related to capital gains incentive fees on a hypothetical liquidation basis.
|
| Six months ended |
| Adjustments |
| Adjusted |
| |||
Investment income (1) |
|
|
|
|
|
|
| |||
Interest income (2) |
| $ | 18,788 |
| $ | (98 | ) | $ | 18,690 |
|
Dividend income |
| 972 |
| — |
| 972 |
| |||
Other income |
| 709 |
| — |
| 709 |
| |||
Investment income allocated from NMF Holdings |
|
|
|
|
|
|
| |||
Interest income (2) |
| 40,515 |
| — |
| 40,515 |
| |||
Dividend income |
| 2,368 |
| — |
| 2,368 |
| |||
Other income |
| 795 |
| — |
| 795 |
| |||
Total investment income |
| 64,147 |
| (98 | ) | 64,049 |
| |||
Total net expenses pre-incentive fee (3) |
| 19,018 |
| — |
| 19,018 |
| |||
Pre-Incentive Fee Net Investment Income |
| 45,129 |
| (98 | ) | 45,031 |
| |||
Incentive fee (4) |
| 11,782 |
| — |
| 11,782 |
| |||
Post-Incentive Fee Net Investment Income |
| 33,347 |
| (98 | ) | 33,249 |
| |||
Net realized losses on investments |
| (1,067 | ) | (184 | ) | (1,251 | ) | |||
Net realized gains on investment allocated from NMF Holdings |
| 8,568 |
| — |
| 8,568 |
| |||
Net change in unrealized appreciation (depreciation) of investments |
| 5,708 |
| 282 |
| 5,990 |
| |||
(Provision) benefit for taxes on unrealized appreciation (depreciation) of investments |
| (386 | ) | — |
| (386 | ) | |||
Net change in unrealized (depreciation) appreciation of investments allocated from NMF Holdings |
| 940 |
| — |
| 940 |
| |||
Net increase in net assets resulting from operations |
| $ | 47,110 |
|
|
| $ | 47,110 |
| |
(1)(5) Includes investment incomenet change in unrealized (deprecation) appreciation of investments from non-controlled/non-affiliated investments and non-controlled/affiliated investments.
|
| Nine months ended |
| Adjustments |
| Adjusted |
| |||
Investment income |
|
|
|
|
|
|
| |||
Interest income (1) |
| $ | 51,141 |
| $ | (151 | ) | $ | 50,990 |
|
Dividend income |
| 1,483 |
| — |
| 1,483 |
| |||
Other income |
| 2,551 |
| — |
| 2,551 |
| |||
Investment income allocated from NMF Holdings |
|
|
|
|
|
|
| |||
Interest income (1) |
| 40,515 |
| — |
| 40,515 |
| |||
Dividend income |
| 2,368 |
| — |
| 2,368 |
| |||
Other income |
| 795 |
| — |
| 795 |
| |||
Total investment income (2) |
| 98,853 |
| (151 | ) | 98,702 |
| |||
Total net expenses pre-incentive fee (3) |
| 31,071 |
| — |
| 31,071 |
| |||
Pre-Incentive Fee Net Investment Income |
| 67,782 |
| (151 | ) | 67,631 |
| |||
Incentive fee (4) |
| 13,635 |
| — |
| 13,635 |
| |||
Post-Incentive Fee Net Investment Income |
| 54,147 |
| (151 | ) | 53,996 |
| |||
Net realized losses on investments |
| (299 | ) | (385 | ) | (684 | ) | |||
Net realized gains on investments allocated from NMF Holdings |
| 8,568 |
| — |
| 8,568 |
| |||
Net change in unrealized (depreciation) appreciation of investments (5) |
| (8,564 | ) | 536 |
| (8,028 | ) | |||
Net change in unrealized appreciation (depreciation) of investments allocated from NMF Holdings |
| 940 |
| — |
| 940 |
| |||
(Provision) benefit for taxes |
| (271 | ) | — |
| (271 | ) | |||
Net increase in net assets resulting from operations |
| $ | 54,521 |
|
|
| $ | 54,521 |
| |
(1)Includes $3,049 in payment-in-kind interest from investments.
(2) Includes $1,426 in payment-in-kind interestincome from non-controlled/non-affiliated investments and non-controlled/affiliated investments.
(3) Includes expense waivers and reimbursements of $823.$1,145.
(4) For the sixnine months ended JuneSeptember 30, 2014, the Company and Predecessor Operating Company incurred total incentive fees of $11,782,$13,635, of which $2,787$120 related to capital gains incentive fees on a hypothetical liquidation basis.
(5)Includes net change in unrealized (deprecation) appreciation of investments from non-controlled/non-affiliated investments and non-controlled/affiliated investments.
At JuneSeptember 30, 2013, NMFC’s only investment was its investment in the Predecessor Operating Company. The following StatementStatements of Operations of the Predecessor Operating Company for the three and sixnine months ended JuneSeptember 30, 2013 is adjusted to reflect the step-up to fair market value.
|
| Three months ended |
| Adjustments |
| Adjusted |
|
| Three months ended |
| Adjustments |
| Adjusted |
| ||||||
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest income (1) |
| $ | 27,321 |
| $ | (214 | ) | $ | 27,107 |
|
| $ | 27,175 |
| $ | (111 | ) | $ | 27,064 |
|
Dividend income |
| 6,436 |
| — |
| 6,436 |
|
| (1,631 | ) | — |
| (1,631 | ) | ||||||
Other income |
| 1,399 |
| — |
| 1,399 |
|
| 249 |
| — |
| 249 |
| ||||||
Total investment income |
| 35,156 |
| (214 | ) | 34,942 |
|
| 25,793 |
| (111 | ) | 25,682 |
| ||||||
Total net expenses pre-incentive fee (2) |
| 7,907 |
| — |
| 7,907 |
|
| 8,014 |
| — |
| 8,014 |
| ||||||
Pre-Incentive Fee Net Investment Income |
| 27,249 |
| (214 | ) | 27,035 |
|
| 17,779 |
| (111 | ) | 17,668 |
| ||||||
Incentive fee (3) |
| 3,706 |
| — |
| 3,706 |
|
| 5,120 |
| — |
| 5,120 |
| ||||||
Post-Incentive Fee Net Investment Income |
| 23,543 |
| (214 | ) | 23,329 |
|
| 12,659 |
| (111 | ) | 12,548 |
| ||||||
Net realized gains (losses) on investments |
| 3,312 |
| (2,689 | ) | 623 |
|
| 5,160 |
| (121 | ) | 5,039 |
| ||||||
Net change in unrealized appreciation of investments |
| (12,031 | ) | 2,903 |
| (9,128 | ) |
| 2,659 |
| 232 |
| 2,891 |
| ||||||
Net increase in members’ capital resulting from operations |
| $ | 14,824 |
|
|
| $ | 14,824 |
|
| $ | 20,478 |
|
|
| $ | 20,478 |
| ||
(1) Includes $904$841 in payment-in-kind interest from investments.
(2) Includes expense waivers and reimbursements of $836.$600.
(3) For the three months ended JuneSeptember 30, 2013, the Predecessor Operating Company incurred total incentive fees of $3,706,$5,120, of which $(1,701)$1,587 related to capital gains incentive fees on a hypothetical liquidation basis.
(4)Includes $1,722 of realized gains on investments resulting from the modification of terms on one debt investment that was accounted for as an extinguishment.
|
| Six months ended |
| Adjustments |
| Adjusted |
| |||
Investment income |
|
|
|
|
|
|
| |||
Interest income (1) |
| $ | 52,364 |
| $ | (693 | ) | $ | 51,671 |
|
Dividend income |
| 6,433 |
| — |
| 6,433 |
| |||
Other income |
| 1,677 |
| — |
| 1,677 |
| |||
Total investment income |
| 60,474 |
| (693 | ) | 59,781 |
| |||
Total net expenses pre-incentive fee (2) |
| 15,458 |
| — |
| 15,458 |
| |||
Pre-Incentive Fee Net Investment Income |
| 45,016 |
| (693 | ) | 44,323 |
| |||
Incentive fee (3) |
| 9,846 |
| — |
| 9,846 |
| |||
Post-Incentive Fee Net Investment Income |
| 35,170 |
| (693 | ) | 34,477 |
| |||
Net realized gains (losses) on investments |
| 4,356 |
| (3,149 | ) | 1,207 |
| |||
Net change in unrealized appreciation of investments |
| (141 | ) | 3,842 |
| 3,701 |
| |||
Net increase in members’ capital resulting from operations |
| $ | 39,385 |
|
|
| $ | 39,385 |
| |
|
| Nine months ended |
| Adjustments |
| Adjusted |
| |||
Investment income |
|
|
|
|
|
|
| |||
Interest income (1) |
| $ | 79,539 |
| $ | (804 | ) | $ | 78,735 |
|
Dividend income |
| 4,802 |
| — |
| 4,802 |
| |||
Other income |
| 1,926 |
| — |
| 1,926 |
| |||
Total investment income |
| 86,267 |
| (804 | ) | 85,463 |
| |||
Total net expenses pre-incentive fee (2) |
| 23,472 |
| — |
| 23,472 |
| |||
Pre-Incentive Fee Net Investment Income |
| 62,795 |
| (804 | ) | 61,991 |
| |||
Incentive fee (3) |
| 14,966 |
| — |
| 14,966 |
| |||
Post-Incentive Fee Net Investment Income |
| 47,829 |
| (804 | ) | 47,025 |
| |||
Net realized gains (losses) on investments |
| 9,516 |
| (3,270 | ) | 6,246 |
| |||
Net change in unrealized appreciation of investments |
| 2,518 |
| 4,074 |
| 6,592 |
| |||
Net increase in members’ capital resulting from operations |
| $ | 59,863 |
|
|
| $ | 59,863 |
| |
(1) Includes $1,546$2,387 in payment-in-kind interest from investments.
(2) Includes expense waivers and reimbursements of $1,665.$2,265.
(3) For the sixnine months ended JuneSeptember 30, 2013, the Predecessor Operating Company incurred total incentive fees of $9,846,$14,966, of which $981$2,568 related to capital gains incentive fees on a hypothetical liquidation basis.
(4)Includes $1,722 of realized gains on investments resulting from the modification of terms on one debt investment that was accounted for as an extinguishment.
The Company has entered into an Administration Agreement with the Administrator under which the Administrator provides administrative services. The Administrator performs, or oversees the performance of, the Company’s financial records, prepares
reports filed with the SEC, generally monitors the payment of the Company’s expenses and watches the performance of
administrative and professional services rendered by others. The Company will reimburse the Administrator for the Company’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to the Company under the Administration Agreement. Pursuant to the Administration Agreement and further restricted by the Company, expenses payable to the Administrator by the Company as well as other direct and indirect expenses (excluding interest, other financing expenses, trading expenses and management and incentive fees) had been capped at $3,500 for the time period from April 1, 2012 to March 31, 2013 and capped at $4,250 for the time period from April 1, 2013 to March 31, 2014. The expense cap expired on March 31, 2014. Thereafter, the Administrator may, in its own discretion, submit to the Company for reimbursement some or all of the expenses that the Administrator has incurred on behalf of the Company during any quarterly period. As a result, the amount of expenses for which the Company will have to reimburse the Administrator may fluctuate in future quarterly periods and there can be no assurance given as to when, or if, the Administrator may determine to limit the expenses that the Administrator submits to the Company for reimbursement in the future. However, it is expected that the Administrator will continue to support part of the expense burden of the Company in the near future and may decide to not calculate and charge through certain overhead related amounts as well as continue to cover some of the indirect costs. For the three and sixnine months ended JuneSeptember 30, 2014, approximately $0 and $299, respectively, of indirect administrative expenses were included in the Consolidated Statements of Operationstotal administrative expenses and were included in total payable to affiliates on the Consolidated Statements of Assets and Liabilities as the expenses were payable to the Administrator.
The Company incurred the following expenses, which were waived by the Administrator or were in excess of the expense cap, for the three and sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013:
|
| Three months ended |
| Six months ended |
|
| Three months ended |
| Nine months ended |
| ||||||||||||||||
|
| June 30, 2014 |
| June 30, 2013 |
| June 30, 2014 |
| June 30, 2013 |
|
| September 30, 2014 |
| September 30, 2013 |
| September 30, 2014 |
| September 30, 2013 |
| ||||||||
Administrative expenses |
| $ | 58 |
| $ | — |
| $ | 58 |
| $ | — |
|
| $ | 322 |
| $ | — |
| $ | 380 |
| $ | — |
|
Administrative expenses allocated from NMF Holdings |
| — |
| 228 |
| 390 |
| 434 |
|
| — |
| 241 |
| 390 |
| 675 |
| ||||||||
Professional fees |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| ||||||||
Professional fees allocated from NMF Holdings |
| — |
| 381 |
| 375 |
| 690 |
|
| — |
| 271 |
| 375 |
| 961 |
| ||||||||
Other general and administrative expenses |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| ||||||||
Other general and administrative expenses allocated from NMF Holdings |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| ||||||||
Total expense reimbursement |
| $ | 58 |
| $ | 609 |
| $ | 823 |
| $ | 1,124 |
|
| $ | 322 |
| $ | 512 |
| $ | 1,145 |
| $ | 1,636 |
|
As of JuneSeptember 30, 2014, no expense waivers and reimbursements were receivable from an affiliate. As of JuneSeptember 30, 2013, $381$271 of the expense waivers and reimbursements were allocated from NMF Holdings and were receivable by NMF Holdings from an affiliate.
The Company, the Investment Adviser and the Administrator have also entered into a Trademark License Agreement, as amended, with New Mountain Capital, L.L.C., pursuant to which New Mountain Capital L.L.C. has agreed to grant the Company, the Investment Adviser and the Administrator, a non-exclusive, royalty-free license to use the “New Mountain” and the “New Mountain Finance” names. Under the Trademark License Agreement, as amended, subject to certain conditions, the Company, the Investment Adviser and the Administrator will have a right to use the “New Mountain” and “New Mountain Finance” names, for so long as the Investment Adviser or one of its affiliates remains the investment adviser of the Company. Other than with respect to this limited license, the Company, the Investment Adviser and the Administrator will have no legal right to the “New Mountain” or the “New Mountain Finance” names.
NMFC entered into a Registration Rights Agreement with Steven B. Klinsky (the Chairman of the Companies’Company’s board of directors), an entity related to Steven B. Klinsky and the Investment Adviser. Subject to several exceptions, the Investment Adviser has the right to require NMFC to register for public resale under the Securities Act of 1933, as amended (the “Securities Act of 1933”), all registerable securities that are held by any of them and that they request to be registered. Registerable securities subject to the Registration Rights Agreement are shares of NMFC’s common stock issued or issuable in exchange for units and any other shares of NMFC’s common stock held by the Investment Adviser and any of their transferees. The rights under the Registration Rights Agreement can be conditionally exercised by the Investment Adviser, meaning that prior to the effectiveness of the registration statement related to the shares, the Investment Adviser can withdraw its request to have the shares registered. Investment Adviser may assign its rights to any person that acquires registerable securities subject to the Registration Rights Agreement and who agrees to be bound by the terms of the Registration Rights Agreement. Steven B. Klinsky and a related entity will have the right to “piggyback”, or include their own registerable securities in such a registration. Shares held by Steven B. Klinsky were registered on a shelf registration statement on Form N-2.
The Investment Adviser may require NMFC to use its reasonable best efforts to register under the Securities Act of 1933 all or any portion of these registerable securities upon a “demand request”. The demand registration rights are subject to certain limitations.
The Registration Rights Agreement includes limited blackout and suspension periods. In addition, the Investment Adviser may also require NMFC to file a shelf registration statement on Form N-2 for the resale of their registerable securities if NMFC is
eligible to use Form N-2 at that time. Holders of registerable securities have “piggyback” registration rights, which means that these holders may include their respective shares in any future registrations of NMFC’s equity securities, whether or not that registration relates to a primary offering by NMFC or a secondary offering by or on behalf of any of NMFC’s stockholders. The Investment Adviser and Steven B. Klinsky (and a related entity) have priority over NMFC in any registration that is an underwritten offering.
The Investment Adviser and Steven B. Klinsky (and a related entity) will be responsible for the expenses of any demand registration (including underwriters’ discounts or commissions) and their pro-rata share of any “piggyback” registration. NMFC has agreed to indemnify the Investment Adviser and Steven B. Klinsky (and a related entity) with respect to liabilities resulting from untrue statements or omissions in any registration statement filed pursuant to the Registration Rights Agreement, other than untrue statements or omissions resulting from information furnished to NMFC by such parties. The Investment Adviser and Steven B. Klinsky (and a related entity) have also agreed to indemnify NMFC with respect to liabilities resulting from untrue statements or omissions furnished by them to NMFC relating to them in any registration statement.
Note 6. Related Parties
The Company has entered into a number of business relationships with affiliated or related parties.
The Company has entered into the Investment Management Agreement with the Investment Adviser, a wholly-owned subsidiary of New Mountain Capital. Therefore, New Mountain Capital is entitled to any profits earned by the Investment Adviser, which includes any fees payable to the Investment Adviser under the terms of the Investment Management Agreement, less expenses incurred by the Investment Adviser in performing its services under the Investment Management Agreement.
The Company has entered into an Administration Agreement with the Administrator, a wholly-owned subsidiary of New Mountain Capital. The Administrator arranges office space for the Company and provides office equipment and administrative services necessary to conduct their respective day-to-day operations pursuant to the Administration Agreement. The Company reimburses the Administrator for the allocable portion of overhead and other expenses incurred by it in performing its obligations to the Company under the Administration Agreement including rent, the fees and expenses associated with performing administrative, finance and compliance functions, and the compensation of the Company’s chief financial officer and chief compliance officer and their respective staffs. Pursuant to the Administration Agreement and further restricted by the Company, expenses payable to the Administrator by the Company as well as other direct and indirect expenses (excluding interest, other financing expenses, trading expenses and management and incentive fees) had been capped at $3,500 for the time period from April 1, 2012 to March 31, 2013 and capped at $4,250 for the time period from April 1, 2013 to March 31, 2014. The expense cap expired on March 31, 2014. Thereafter, the Administrator may, in its own discretion, submit to the Company for reimbursement some or all of the expenses that the Administrator has incurred on behalf of the Company during any quarterly period. As a result, the amount of expenses for which the Company will have to reimburse the Administrator may fluctuate in future quarterly periods and there can be no assurance given as to when, or if, the Administrator may determine to limit the expenses that the Administrator submits to the Company for reimbursement in the future. However, it is expected that the Administrator will continue to support part of the expense burden of the Company in the near future and may decide to not calculate and charge through certain overhead related amounts as well as continue to cover some of the indirect costs. For the three and sixnine months ended JuneSeptember 30, 2014, approximately $0 and $299, respectively, of indirect administrative expenses were included in the Consolidated Statements of Operationstotal administrative expenses and were included in total payable to affiliates on the Consolidated Statements of Assets and Liabilities as the expenses were payable to the Administrator.
The Company, the Investment Adviser and the Administrator have entered into a royalty-free Trademark License Agreement, as amended, with New Mountain Capital, L.L.C., pursuant to which New Mountain Capital L.L.C. has agreed to grant the Company, the Investment Adviser and the Administrator, a non-exclusive, royalty-free license to use the name “New Mountain” and “New Mountain Finance”.
The Company has adopted a formal code of ethics that governs the conduct of their respective officers and directors. These officers and directors also remain subject to the duties imposed by the 1940 Act, the Delaware General Corporation Law and the Delaware Limited Liability Company Act.
The Investment Adviser and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with the Company’Company’s investment mandates. The Investment Adviser and its affiliates may determine
that an investment is appropriate for the Company andor for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Adviser or its affiliates may determine that the Company should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff and consistent with the Investment Adviser’s allocation procedures.
Concurrently with the IPO, NMFC sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital in the Concurrent Private Placement.
Note 7. Borrowings
Holdings Credit Facility—The Loan and Security Agreement, as amended and restated, dated May 19, 2011 (the “Holdings Credit Facility”) among NMF Holdings as the Borrower and Collateral Administrator, Wells Fargo Securities, L.L.C. as the Administrative Agent, and Wells Fargo Bank, National Association, as the Collateral Custodian, is structured as a revolving credit facility and matures on October 27, 2016. NMF Holdings became a party to the Holdings Credit Facility upon the IPO of NMFC. The Holdings Credit Facility amends and restates the credit facility of the Predecessor Entities (the “Predecessor Credit Facility”).
The maximum amount of revolving borrowings available under the Holdings Credit Facility is $280,000. As of JuneSeptember 30, 2014, NMF Holdings was permitted to borrow up to 45.0% or 25.0% of the purchase price of pledged first lien or non-first lien debt securities, and up to 70.0% and 45.0% of the purchase price of specified first lien debt securities and specified non-first lien debt securities, respectively, subject to approval by Wells Fargo Bank, National Association. The Holdings Credit Facility was amended and restated on May 6, 2014 and as a result, it is non-recourse to the Company and is collateralized by all of the investments of NMF Holdings on an investment by investment basis. All fees associated with the origination or upsizing of the Holdings Credit Facility are capitalized on the Company’s Consolidated Statement of Assets and Liabilities and charged against income as other financing expenses over the life of the Holdings Credit Facility. The Holdings Credit Facility contains certain customary affirmative and negative covenants and events of default, including the occurrence of a change in control. In addition, the Holdings Credit Facility requires the Company to maintain a minimum asset coverage ratio. However, the covenants are generally not tied to mark to market fluctuations in the prices of the Company’sNMF Holdings’ investments, but rather to the performance of the underlying portfolio companies.
The Holdings Credit Facility bears interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 2.75% per annum and charges a non-usage fee, based on the unused facility amount multiplied by the Non-Usage Fee Rate (as defined in the Loan and Security Agreement).
The following table summarizes the interest expense and non-usage fees incurred on the Holdings Credit Facility for the three and sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013.
|
| Three months ended |
| Six months ended |
|
| Three months ended |
| Nine months ended |
| ||||||||||||||||
|
| June 30, 2014 |
| June 30, 2013 |
| June 30, 2014 |
| June 30, 2013 |
|
| September 30, 2014 |
| September 30, 2013 |
| September 30, 2014 |
| September 30, 2013 |
| ||||||||
Interest expense |
| $ | 1,648 |
| $ | 1,408 |
| $ | 3,340 |
| $ | 2,877 |
|
| $ | 1,747 |
| $ | 1,430 |
| $ | 5,087 |
| $ | 4,307 |
|
Non-usage fee |
| 92 |
| 54 |
| 151 |
| 69 |
|
| 57 |
| 75 |
| 208 |
| 144 |
| ||||||||
Weighted average interest rate |
| 2.9 | % | 2.9 | % | 2.9 | % | 3.0 | % |
| 2.9 | % | 2.9 | % | 2.9 | % | 2.9 | % | ||||||||
Average debt outstanding |
| $ | 224,660 |
| $ | 189,027 |
| $ | 228,728 |
| $ | 193,936 |
|
| $ | 235,348 |
| $ | 190,692 |
| $ | 230,959 |
| $ | 192,843 |
|
As of JuneSeptember 30, 2014 and December 31, 2013, the outstanding balance on the Holdings Credit Facility was $238,101$258,962 and $221,849, respectively, and the CompanyNMF Holdings was not aware of any instances of non-compliance related to the Holdings Credit Facility on such dates.
SLF Credit Facility—NMF SLF’s Loan and Security Agreement, as amended and restated, dated October 27, 2010 (the “SLF Credit Facility”) among NMF SLF as the Borrower, NMF Holdings as the Collateral Administrator, Wells Fargo Securities, L.L.C. as the Administrative Agent, and Wells Fargo Bank, National Association, as the Collateral Custodian, is structured as a revolving credit facility and matures on October 27, 2016. The maximum amount of revolving borrowings available under the SLF Credit Facility is $215,000. The SLF Credit Facility is non-recourse to the Company and secured by all assets of NMF SLF on an investment by investment basis. All fees associated with the origination or upsizing of the SLF Credit Facility are capitalized on the Company’s Consolidated Statement of Assets and Liabilities and charged against income as other financing expenses over the life of the SLF Credit Facility. The SLF Credit Facility contains certain customary affirmative and negative covenants and events of default, including the occurrence of a change in control. The covenants are generally not tied to mark to market fluctuations in the prices of the Company’sNMF SLF’s investments, but rather to the performance of the underlying portfolio companies. NMF SLF is not restricted from the purchase or sale of loans with an affiliate. Therefore, specified loans can be moved as collateral between the Holdings Credit Facility and the SLF Credit Facility.
As of JuneSeptember 30, 2014, the SLF Credit Facility permits borrowings of up to 70.0% of the purchase price of pledged first lien debt securities and up to 25.0% of the purchase price of specified second lien loans, of which, up to 25.0% of the aggregate outstanding loan balance of all pledged debt securities in the SLF Credit Facility is allowed to be derived from second lien loans, subject to approval by Wells Fargo Bank, National Association.
The SLF Credit Facility bears interest at a rate of LIBOR plus 2.00% per annum for first lien loans and LIBOR plus 2.75% per annum for second lien loans, respectively. A non-usage fee is paid, based on the unused facility amount multiplied by the Non-Usage Fee Rate (as defined in the Loan and Security Agreement).
The following table summarizes the interest expense and non-usage fees incurred on the SLF Credit Facility for the three and sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013.
|
| Three months ended |
| Six months ended |
|
| Three months ended |
| Nine months ended |
| ||||||||||||||||
|
| June 30, 2014 |
| June 30, 2013 |
| June 30, 2014 |
| June 30, 2013 |
|
| September 30, 2014 |
| September 30, 2013 |
| September 30, 2014 |
| September 30, 2013 |
| ||||||||
Interest expense |
| $ | 1,212 |
| $ | 1,234 |
| $ | 2,413 |
| $ | 2,420 |
|
| $ | 1,149 |
| $ | 1,243 |
| $ | 3,562 |
| $ | 3,663 |
|
Non-usage fee |
| — | (1) | 1 |
| — | (1) | 2 |
|
| 16 |
| — | (1) | 16 |
| 2 |
| ||||||||
Weighted average interest rate |
| 2.2 | % | 2.3 | % | 2.2 | % | 2.2 | % |
| 2.2 | % | 2.3 | % | 2.2 | % | 2.3 | % | ||||||||
Average debt outstanding |
| $ | 215,000 |
| $ | 214,479 |
| $ | 214,996 |
| $ | 214,405 |
|
| $ | 202,218 |
| $ | 214,828 |
| $ | 210,690 |
| $ | 214,547 |
|
(1) For the three and six months ended JuneSeptember 30, 2014,2013, the total non-usage fee was less than $1 thousand.
As of JuneSeptember 30, 2014 and December 31, 2013, the outstanding balance on the SLF Credit Facility was $215,000$204,867 and $214,668, respectively, and NMF SLF was not aware of any instances of non-compliance related to the SLF Credit Facility on such dates.
NMFC Credit Facility—The Senior Secured Revolving Credit Agreement, dated June 4, 2014 (together with the related guarantee and security agreement, the “NMFC Credit Facility”), among the Company as the Borrower and Goldman Sachs Bank USA as the Administrative Agent and Collateral Agent, and Goldman Sachs Bank USA and Morgan Stanley, N.A. as Lenders, is structured as a senior secured revolving credit facility and matures on June 4, 2019. The NMFC Credit Facility is guaranteed by certain domestic subsidiaries of the Company and proceeds offrom the NMFC Credit Facility may be used for general corporate purposes, including the funding of portfolio investments.
The maximum amount of revolving borrowings available under the NMFC Credit Facility is $50,000. The Company is permitted to borrow at various advance rates depending on the type of portfolio investment as outlined in the Senior Secured Revolving Credit Agreement. All fees associated with the origination of the NMFC Credit Facility are capitalized on the Company’s Consolidated Statement of Assets and Liabilities and charged against income as other financing expenses over the life of the NMFC Credit Facility. The NMFC Credit Facility contains certain customary affirmative and negative covenants and events of default, including certain financial covenants related to asset coverage and liquidity and other maintenance covenants.
The NMFC Credit Facility will generally bear interest at a rate of LIBOR plus 2.50% per annum or the prime rate plus 1.50% per annum, and charges a commitment fee, based on the unused facility amount multiplied by 0.375% (as defined in the Senior Secured Revolving Credit Agreement).
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| September 30, 2014 |
| September 30, 2013 (1) |
| September 30, 2014 |
| September 30, 2013 (1) |
| ||||
Interest expense |
| $ | 41 |
| $ | — |
| $ | 41 |
| $ | — |
|
Non-usage fee |
| 42 |
| — |
| 56 |
| — |
| ||||
Weighted average interest rate |
| 2.7 | % | — | % | 2.7 | % | — | % | ||||
Average debt outstanding |
| $ | 5,978 |
| $ | — |
| $ | 2,015 |
| $ | — |
|
Non-usage fees incurred
(1) Not applicable, as the NMFC Credit Facility commenced on June 4, 2014.
As of September 30, 2014, the outstanding balance on the NMFC Credit Facility were $14 forwas $22,000, and NMFC was not aware of any instances of non-compliance related to the three and six months ended June 30, 2014. The Company did not incur any interest expense as the Company did not drawNMFC Credit Facility on the facility during the three and six months ended June 30, 2014.such dates.
Convertible Notes—On June 3, 2014, the Company closed a private offering of $115,000 aggregate principal amount of senior unsecured convertible notes (the “Convertible Notes”), pursuant to an indenture, dated June 3, 2014 (the “Indenture”). The Convertible Notes were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.1933. The Convertible Notes bear interest at an annual rate of 5.0%, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2014. The Convertible Notes will mature on June 15, 2019 unless earlier converted or repurchased at the holder’s option. The Convertible Notes will be convertible by the holders into shares of
common stock, initially at a conversion rate of 62.7746 shares of the Company’s common stock per $1 principal amount of Convertible Notes (7,219,083 common shares) corresponding to an initial conversion price per share of approximately $15.93, which represents a premium of 12.5% to the $14.16 per share closing price of the Company’s common stock on May 28, 2014. The conversion rate will be subject to adjustment upon certain events, such as stock splits and combinations, mergers, spin-offs, increases in dividends in excess of $0.34 per share per quarter and certain changes in control. Certain of these adjustments, including adjustments for increases in dividends, are subject to a conversion price floor of $14.16 per share. In no event will the total number of shares of common stock issuable upon conversion exceed 70.6214 per $1 principal amount of the Convertible Notes. The Company has determined that the embedded conversion option in the Convertible Notes is not required to be separately accounted for as a derivative under GAAP.
The Convertible Notes are senior unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including existing unsecured indebtedness that wethe Company later secure)secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries and financing
vehicles. As more reflected in Note 11, Earnings Per Share, the issuance is to be considered as part of the if-converted method for calculation of diluted earnings per share.
The Company may not redeem the Convertible Notes prior to maturity. No sinking fund is provided for the Convertible Notes. In addition, if certain corporate events occur in respect of the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100.0% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the repurchase date.
The Indenture contains certain covenants, including covenants requiring the Company to provide financial information to the holders of the Convertible Note and the Trustee if the Company ceases to be subject to the reporting requirements of the Exchange Act. These covenants are subject to limitations and exceptions that are described in the Indenture. As of JuneSeptember 30, 2014, the Company was in compliance with the terms of the Indenture.
Interest expense incurred on the Convertible Notes was $447 for the three and sixnine months ended JuneSeptember 30, 2014.2014 was $1,438 and $1,885, respectively.
Leverage risk factors—The Company utilizes and may utilize leverage to the maximum extent permitted by the law for investment and other general business purposes. The Company’s lenders will have fixed dollar claims on certain assets that are superior to the claims of the Company’s common stockholders, and the Company would expect such lenders to seek recovery against these assets in the event of a default. The use of leverage also magnifies the potential for gain or loss on amounts invested. Leverage may magnify interest rate risk (particularly on the Company’s fixed-rate investments), which is the risk that the prices of portfolio investments will fall or rise if market interest rates for those types of securities rise or fall. As a result, leverage may cause greater changes in the Company’s net asset value. Similarly, leverage may cause a sharper decline in the Company’s income than if the Company had not borrowed. Such a decline could negatively affect the Company’s ability to make dividend payments to its stockholders. Leverage is generally considered a speculative investment technique. The Company’s ability to service any debt incurred will depend largely on financial performance and will be subject to prevailing economic conditions and competitive pressures.
Note 8. Regulation
The Company has elected to be treated, and intends to comply with the requirements to continue to qualify annually, as a RIC under Subchapter M of the Code. In order to continue to qualify as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90.0% of investment company taxable income, as defined by the Code, for each year. The Company, among other things, intends to make and continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal, state, and local income taxes (excluding excise taxes which may be imposed under the Code).
Additionally as a BDC, the Company must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70.0% of its total assets are qualifying assets (with certain limited exceptions).
Note 9. Commitments and Contingencies
In the normal course of business, the Company may enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Company may also enter into future funding commitments such as revolving credit facilities, bridge financing commitments or delayed draw commitments. As of JuneSeptember 30, 2014, the Company had unfunded commitments on revolving credit facilities of $6,900, no outstanding bridge financing commitments and other future funding commitments of $39,325.$17,245. The unfunded commitments on revolving credit facilities and a delayed draw are disclosed on the Company’s Consolidated Schedule of Investments. As of December 31, 2013, NMF Holdingsthe Company's only investment was its investment in the Predecessor Operating Company. As of December 31, 2013, the Predecessor Operating Company had unfunded commitments on revolving credit facilities of $15,500 and no outstanding bridge financing commitments or other future funding commitments, all of which are disclosed on NMF Holdings’ Consolidated Schedule of Investments.
The Company also has revolving borrowings available under the Holdings Credit Facility, the SLF Credit Facility and the NMFC Credit Facility as of JuneSeptember 30, 2014. See Note 7, Borrowings, for details.
The Company may from time to time enter into financing commitment letters. As of JuneSeptember 30, 2014, the Company signed a commitment letter to fund $18,500 in the future, which is included in the other future funding commitments. As of December 31, 2013, NMF Holdings did not enter into any commitment letters to purchase debt investments, which could require funding in the future.
Table As of ContentsDecember 31, 2013, the Company's only investment was its investment in the Predecessor Operating Company. As of December 31, 2013, the Predecessor Operating Company did not enter into any commitment letters to purchase debt investments, which could require funding in the future.
Note 10. Net Assets
The table below illustrates the effect of certain transactions on the net asset accounts of the Company:
|
|
|
|
|
|
|
|
|
| Accumulated |
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|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||||||||||||
|
|
|
|
|
| Paid in Capital |
| Undistributed |
| Undistributed Net |
| Net Unrealized |
| Total |
|
|
|
|
|
| Paid in Capital |
| Undistributed |
| Undistributed Net |
| Net Unrealized |
| Total |
| ||||||||||||
|
| Common Stock |
| in Excess |
| Net Investment |
| Realized Gains |
| Appreciation |
| Net |
|
| Common Stock |
| in Excess |
| Net Investment |
| Realized Gains |
| Appreciation |
| Net |
| ||||||||||||||||
|
| Shares |
| Par Amount |
| of Par |
| Income |
| (Losses) |
| (Depreciation) |
| Assets |
|
| Shares |
| Par Amount |
| of Par |
| Income |
| (Losses) |
| (Depreciation) |
| Assets |
| ||||||||||||
Balance at December 31, 2013 |
| 45,224,755 |
| $ | 452 |
| $ | 633,383 |
| $ | — |
| $ | 5,056 |
| $ | 11,216 |
| $ | 650,107 |
|
| 45,224,755 |
| $ | 452 |
| $ | 633,383 |
| $ | — |
| $ | 5,056 |
| $ | 11,216 |
| $ | 650,107 |
|
Issuances of common stock |
| 6,837,482 |
| 69 |
| 99,481 |
| — |
| — |
| — |
| 99,550 |
|
| 6,943,565 |
| 70 |
| 101,055 |
| — |
| — |
| — |
| 101,125 |
| ||||||||||||
Deferred offering costs allocated from New Mountain Finance Holdings, L.L.C. |
| — |
| — |
| (250 | ) | — |
| — |
| — |
| (250 | ) |
| — |
| — |
| (250 | ) | — |
| — |
| — |
| (250 | ) | ||||||||||||
Deferred offering costs |
| — |
| — |
| (126 | ) | — |
| — |
| — |
| (126 | ) | |||||||||||||||||||||||||||
Dividends declared |
| — |
| — |
| — |
| (33,347 | ) | (615 | ) | — |
| (33,962 | ) |
| — |
| — |
| — |
| (51,673 | ) | (6,247 | ) | — |
| (57,920 | ) | ||||||||||||
Net increase in net assets resulting from operations |
| — |
| — |
| — |
| 33,347 |
| 7,501 |
| 6,262 |
| 47,110 |
|
| — |
| — |
| — |
| 54,147 |
| 8,269 |
| (7,895 | ) | 54,521 |
| ||||||||||||
Balance at June 30, 2014 |
| 52,062,237 |
| $ | 521 |
| $ | 732,614 |
| $ | — |
| $ | 11,942 |
| $ | 17,478 |
| $ | 762,555 |
| |||||||||||||||||||||
Balance at September 30, 2014 |
| 52,168,320 |
| $ | 522 |
| $ | 734,062 |
| $ | 2,474 |
| $ | 7,078 |
| $ | 3,321 |
| $ | 747,457 |
| |||||||||||||||||||||
Note 11. Earnings Per Share
The following information sets forth the computation of basic and diluted net increase in the Company’s net assets per share resulting from operations for the three and sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013:
|
| Three months ended |
| Six months ended |
| ||||||||
|
| June 30, 2014 |
| June 30, 2013 |
| June 30, 2014 |
| June 30, 2013 |
| ||||
Earnings per share — basic |
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|
|
|
|
|
|
|
| ||||
Numerator for increase in net assets per share: |
| $ | 23,662 |
| $ | 10,992 |
| $ | 47,110 |
| $ | 26,508 |
|
Denominator for basic weighted average share: |
| 51,595,684 |
| 32,289,758 |
| 49,343,462 |
| 28,797,837 |
| ||||
Basic earnings per share: |
| $ | 0.46 |
| $ | 0.34 |
| $ | 0.95 |
| $ | 0.92 |
|
Earnings per share — diluted(1) |
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|
|
|
|
|
|
|
| ||||
Numerator for increase in net assets per share: |
| $ | 23,662 |
| $ | 10,992 |
| $ | 47,110 |
| $ | 26,508 |
|
Adjustment for full income at NMF Holdings: |
| — |
| 3,832 |
| — |
| 12,877 |
| ||||
Adjustment for interest on Convertible Notes and incentive fees, net |
| 358 |
| — |
| 358 |
| — |
| ||||
Numerator for diluted earnings per share: |
| $ | 24,020 |
| $ | 14,824 |
| $ | 47,468 |
| $ | 39,385 |
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|
|
|
|
|
|
|
|
|
| ||||
Denominator for basic weighted average share: |
| 51,595,684 |
| 32,289,758 |
| 49,343,462 |
| 28,797,837 |
| ||||
Adjustment to assume all AIV Holdings units in NMF Holdings were exchanged for shares of NMFC |
| — |
| 10,643,366 |
| — |
| 13,092,380 |
| ||||
Adjustment for dilutive effect of Convertible Notes |
| 2,697,240 |
| — |
| 1,356,071 |
| — |
| ||||
Denominator for diluted weighted average share: |
| 54,292,924 |
| 42,933,124 |
| 50,699,533 |
| 41,890,217 |
| ||||
Diluted earnings per share: |
| $ | 0.44 |
| $ | 0.35 |
| $ | 0.94 |
| $ | 0.94 |
|
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| September 30, 2014 |
| September 30, 2013 |
| September 30, 2014 |
| September 30, 2013 |
| ||||
Earnings per share — basic |
|
|
|
|
|
|
|
|
| ||||
Numerator for increase in net assets per share |
| $ | 7,411 |
| $ | 17,467 |
| $ | 54,521 |
| $ | 43,975 |
|
Denominator for basic weighted average share |
| 52,071,071 |
| 38,159,320 |
| 50,262,656 |
| 31,952,623 |
| ||||
Basic earnings per share |
| $ | 0.14 |
| $ | 0.46 |
| $ | 1.09 |
| $ | 1.38 |
|
Earnings per share — diluted(1) |
|
|
|
|
|
|
|
|
| ||||
Numerator for increase in net assets per share |
| $ | 7,411 |
| $ | 17,467 |
| $ | 54,521 |
| $ | 43,975 |
|
Adjustment for full income at NMF Holdings |
| — |
| 3,011 |
| — |
| 15,888 |
| ||||
Adjustment for interest on Convertible Notes and incentive fees, net |
| 1,150 |
| — |
| 1,508 |
| — |
| ||||
Numerator for diluted earnings per share |
| $ | 8,561 |
| $ | 20,478 |
| $ | 56,029 |
| $ | 59,863 |
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|
|
|
|
|
|
|
|
|
| ||||
Denominator for basic weighted average share |
| 52,071,071 |
| 38,159,320 |
| 50,262,656 |
| 31,952,623 |
| ||||
Adjustment assuming all AIV Holdings units in NMF Holdings were exchanged for shares of NMFC |
| — |
| 6,571,938 |
| — |
| 10,895,015 |
| ||||
Adjustment for dilutive effect of Convertible Notes |
| 7,219,083 |
| — |
| 3,331,885 |
| — |
| ||||
Denominator for diluted weighted average share |
| 59,290,154 |
| 44,731,258 |
| 53,594,541 |
| 42,847,638 |
| ||||
Diluted earnings per share |
| $ | 0.14 |
| $ | 0.46 |
| $ | 1.05 |
| $ | 1.40 |
|
(1) In applying the if-converted method, conversion is not assumed for purposes of computing diluted EPS if the effect would be anti-dilutive.
Note 12. Financial Highlights
The following information sets forth the financial highlights for the Company for the sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013. The ratios to average net assets have been annualized.
|
| Six months ended |
|
| Nine months ended |
| ||||||||
|
| June 30, 2014 |
| June 30, 2013 |
|
| September 30, 2014 |
| September 30, 2013 |
| ||||
Per share data (1): |
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|
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| |||||||||
Per share data: |
|
|
|
|
| |||||||||
Net asset value, January 1, 2014 and January 1, 2013, respectively |
| $ | 14.38 |
| $ | 14.06 |
|
| $ | 14.38 |
| $ | 14.06 |
|
Net investment income |
| 0.21 |
| — |
|
| 0.62 |
| — |
| ||||
Net realized and unrealized gains (losses) |
| 0.09 |
| — |
|
| (0.18 | ) | — |
| ||||
Net increase (decrease) in net assets resulting from operations allocated from NMF Holdings: |
|
|
|
|
|
|
|
|
|
| ||||
Net investment income |
| 0.46 |
| 0.84 |
|
| 0.46 |
| 1.12 |
| ||||
Net realized and unrealized gains (losses) |
| 0.19 |
| 0.10 |
|
| 0.19 |
| 0.28 |
| ||||
Total net increase |
| 0.95 |
| 0.94 |
|
| 1.09 |
| 1.40 |
| ||||
Dividends declared to stockholders from net investment income |
| (0.67 | ) | (0.68 | ) |
| (1.02 | ) | (1.12 | ) | ||||
Dividends declared to stockholders from net realized gains |
| (0.01 | ) | — |
|
| (0.12 | ) | (0.02 | ) | ||||
Net asset value, June 30, 2014 and June 30, 2013, respectively |
| $ | 14.65 |
| 14.32 |
| ||||||||
Per share market value, June 30, 2014 and June 30, 2013, respectively |
| $ | 14.86 |
| 14.16 |
| ||||||||
Net asset value, September 30, 2014 and September 30, 2013, respectively |
| $ | 14.33 |
| 14.32 |
| ||||||||
Per share market value, September 30, 2014 and September 30, 2013, respectively |
| $ | 14.69 |
| 14.41 |
| ||||||||
Total return based on market value (2) |
| 3.43 | % | (0.42 | )% |
| 5.43 | % | 4.58 | % | ||||
Total return based on net asset value (3) |
| 5.87 | % | 6.76 | % |
| 7.74 | % | 10.20 | % | ||||
Shares outstanding at end of period |
| 52,062,237 |
| 38,148,548 |
|
| 52,168,320 |
| 38,259,921 |
| ||||
Average weighted shares outstanding for the period |
| 49,343,462 |
| 28,797,837 |
|
| 50,262,656 |
| 31,952,623 |
| ||||
Average net assets for the period |
| $ | 724,234 |
| $ | 410,769 |
|
| $ | 732,060 |
| $ | 456,922 |
|
Ratio to average net assets (4): |
|
|
|
|
|
|
|
|
|
| ||||
Net investment income |
| 9.29 | % | 11.88 | % |
| 9.89 | % | 10.45 | % | ||||
Total expenses, before waivers/reimbursements |
| 8.81 | % | 8.99 | % |
| 8.37 | % | 8.79 | % | ||||
Total expenses, net of waivers/reimbursements |
| 8.58 | % | 8.55 | % |
| 8.16 | % | 8.39 | % | ||||
(1) PerFor the nine months ended September 30, 2013, per share data is based on the summation of the per share results of operations items over the outstanding shares for the period in which the respective line items were realized or earned.
(2) Total return is calculated assuming a purchase of common stock at the opening of the first day of the year and a sale on the closing of the last business day of the period. Dividends and distributions, if any, are assumed for purposes of this calculation, to be reinvested at prices obtained under the Company’s dividend reinvestment plan.
(3) Total return is calculated assuming a purchase at net asset value on the opening of the first day of the period and a sale at net asset value on the last day of the period. Dividends and distributions, if any, are assumed for purposes of this calculation, to be reinvested at the net asset value on the last day of the respective quarter.
(4) Ratio to average net assets for the sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013 is based on the summation of the results of operations items over the net assets for the period in which the respective line items were realized or earned. For the sixnine months ended JuneSeptember 30, 2014, the Company is reflecting its net investment income and expenses as well as its proportionate share of the Predecessor Operating Company’s net investment income and expenses as well as its net investment income and expenses. For the sixnine months ended JuneSeptember 30, 2013, the Company is reflecting its proportionate share of the Predecessor Operating Company’s net investment income and expenses.
The following information sets forth the financial highlights for the Company for the sixnine months ended JuneSeptember 30, 2014 and NMF Holdings for the sixnine months ended JuneSeptember 30, 2013.
|
| NMFC |
| NMF Holdings |
|
| NMFC |
| NMF Holdings |
| ||||
|
| Six months ended |
| Six months ended |
|
| Nine months ended |
| Nine months ended |
| ||||
|
| June 30, 2014 |
| June 30, 2013 |
|
| September 30, 2014 |
| September 30, 2013 |
| ||||
Average debt outstanding—Holdings Credit Facility (1) |
| $ | 226,905 |
| $ | 193,936 |
|
| $ | 229,750 |
| $ | 192,843 |
|
Average debt outstanding—SLF Credit Facility (1) |
| $ | 213,141 |
| $ | 214,405 |
|
| $ | 209,460 |
| $ | 214,547 |
|
Average debt outstanding—Convertible Notes |
| $ | 17,790 |
| $ | — |
|
| $ | 50,549 |
| $ | — |
|
Average debt outstanding—NMFC Credit Facility |
| $ | 2,015 |
| $ | — |
| |||||||
Asset coverage ratio |
| 234.23 | % | 253.72 | % |
| 224.40 | % | 271.56 | % | ||||
Portfolio turnover (2) |
| 11.39 | % | 19.53 | % |
| 22.39 | % | 30.46 | % | ||||
(1) For the sixnine months ended JuneSeptember 30, 2014, average debt outstanding represents the Company’s proportionate share of the Predecessor Operating Company’s average debt outstanding as well as the Company's proportionate share of the Predecessor Operating Company’s average debt outstanding. The average debt outstanding for the sixnine months ended JuneSeptember 30, 2014 at the Holdings Credit Facility and SLF Credit Facility was $228,728$230,959 and $214,996,$210,690, respectively.
(2) For the sixnine months ended JuneSeptember 30, 2014, portfolio turnover represents the investment activity of the Predecessor Operating Company and the Company.
Note 13. Recent Accounting Standards Updates
In June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-08, Financial Services—Investment Companies (Topic 946)—Amendments to the Scope, Measurement and Disclosure Requirements (“ASU 2013-08”), which contains new guidance on assessing whether an entity is an investment company, requiring non-controlling ownership interests in investment companies to be measured at fair value and requiring certain additional disclosures. ASU 2013-08 is effective for interim and annual periods beginning after December 15, 2013. The Company is an investment company that is applying the specialized guidance in Topic 946 as of January 1, 2014.
Note 14. Subsequent Events
On July 30,October 28, 2014, the Company completed a public offering of 5,000,000 shares of its common stock at a public offering price of $14.53 per share, which resulted in net proceeds of $71,750. In connection with the public offering, the underwriters purchased an additional 750,000 shares of the Company’s common stock with the exercise of the overallotment option to purchase up to an additional 750,000 shares of the Company’s common stock, which resulted in additional net proceeds of $10,763.
On November 4, 2014, the Company’s board of directors declared a special distribution of $0.12 per share payable on September 3, 2014 to holders of record as of August 20, 2014.
On August 1, 2014, the Company’s wholly-owned subsidiary, SBIC LP received approval for a license from the United States Small Business Administration to operate a Small Business Investment Company.
On August 5, 2014, the Company’s board of directors declared a thirdfourth quarter 2014 distribution of $0.34 per share payable on SeptemberDecember 30, 2014 to holders of record as of SeptemberDecember 16, 2014.
| Deloitte & Touche LLP | |
|
| |
| 30 Rockefeller Plaza | |
| New York, NY 10112 | |
| USA | |
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| |
| Tel: | 212 436 2000 |
| Fax: | 212 436 5000 |
| www.deloitte.com | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Boards of Directors of
New Mountain Finance Corporation
New York, New York
We have reviewed the accompanying consolidated statement of assets and liabilities of New Mountain Finance Corporation as of JuneSeptember 30, 2014, including the consolidated schedule of investments, and the related consolidated statements of operations for the three and sixnine month periods ended JuneSeptember 30, 2014 and 2013, and the consolidated statements of changes in net assets, and cash flows for the sixnine month periods ended JuneSeptember 30, 2014 and 2013. These interim financial statements are the responsibility of the management of New Mountain Finance Corporation.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the interim financial statements, the Company completed a restructuring during the threenine month period ended JuneSeptember 30, 2014.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statement of assets and liabilities of New Mountain Finance Corporation as of December 31, 2013, the related statements of operations, changes in net assets, and cash flows for the year then ended (not presented herein); and in our report dated March 5, 2014, we expressed an unqualified opinion on those financial statements.
In our opinion, the information set forth in the statement of assets and liabilities of New Mountain Finance Corporation as of December 31, 2013, is fairly stated, in all material respects, in relation to the statement of assets and liabilities of New Mountain Finance Corporation as of December 31, 2013, from which they haveit has been derived.
/s/ DELOITTE & TOUCHE LLP
August 6,November 5, 2014
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in management’s discussion and analysis of financial condition and results of operations relates to New Mountain Finance Corporation, including its wholly-owned direct and indirect subsidiaries (collectively, “we”, “us”, “our”, “NMFC” or the “Company”).
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto contained elsewhere in this report.
Forward-Looking Statements
The information contained in this section should be read in conjunction with the financial data and consolidated financial statements and notes thereto appearing elsewhere in this report. Some of the statements in this report (including in the following discussion) constitute forward-looking statements, which relate to future events or the future performance or financial condition of the Company. The forward-looking statements contained in this section involve a number of risks and uncertainties, including:
· statements concerning the impact of a protracted decline in the liquidity of credit markets;
· the general economy, including interest and inflation rates, and its impact on the industries in which the Company invests;
· the ability of the Company’s portfolio companies to achieve their objectives;
· the Company’s ability to make investments consistent with its investment objectives, including with respect to the size, nature and terms of its investments;
· the ability of New Mountain Finance Advisers BDC, L.L.C. (the “Investment Adviser”) or its affiliates to attract and retain highly talented professionals;
· actual and potential conflicts of interest with the Investment Adviser and other affiliates of New Mountain Capital Group, L.L.C.; and
· the risk factors set forth in Item 1A.—Risk Factors contained in our annual report on Form 10-K for the year ended December 31, 2013.
Forward-looking statements are identified by their use of such terms and phrases such as “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “potential”, “project”, “seek”, “should”, “target”, “will”, “would” or similar expressions. Actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in Item 1A.—Risk Factors contained in our annual report on Form 10-K for the year ended December 31, 2013.
We have based the forward-looking statements included in this report on information available to us on the date of this report. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Although we undertake no obligation to revise or update any forward-looking statements, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the United States Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
NMFC is a Delaware corporation that was originally incorporated on June 29, 2010. NMFC is a closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). As such, NMFC is obligated to comply with certain regulatory requirements. NMFC has elected to be treated, and intends to comply with the requirements to continue to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended, (the “Code”). NMFC is also registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).
On May 19, 2011, NMFC priced its initial public offering (the “IPO”) of 7,272,727 shares of common stock at a public offering price of $13.75 per share. Concurrently with the closing of the IPO and at the public offering price of $13.75 per share, NMFC sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital (defined as New Mountain Capital Group, L.L.C. and its affiliates) in a concurrent private placement (the “Concurrent Private Placement”). Additionally, 1,252,964 shares were issued to the partners of New Mountain Guardian Partners, L.P. at that time for their ownership interest in the Predecessor Entities (as defined below). In connection with NMFC’s IPO and through a series of transactions, New Mountain Finance Holdings, L.L.C. (“NMF Holdings” or the “Predecessor Operating Company”) acquired all of the operations of the Predecessor Entities, including all of the assets and liabilities related to such operations.
NMF Holdings is a Delaware limited liability company. Until May 8, 2014, NMF Holdings was externally managed and was regulated as a BDC under the 1940 Act. As such, NMF Holdings was obligated to comply with certain regulatory requirements. NMF Holdings was treated as a partnership for United States (“U.S.”) federal income tax purposes for so long as it had at least two members. With the completion of the underwritten secondary offering on February 3, 2014, NMF Holdings’ existence as a partnership for U.S. federal income tax purposes terminated and NMF Holdings became an entity that is disregarded as a separate entity from its owner for U.S. federal tax purposes. For additional information on our organizational structure prior to May 8, 2014, see “—Restructuring”.
Until May 8, 2014, NMF Holdings was externally managed by the Investment Adviser. As of May 8, 2014, the Investment Adviser now serves as the external investment adviser to NMFC. New Mountain Finance Administration, L.L.C. (the “Administrator”) provides the administrative services necessary for operations. The Investment Adviser and Administrator are wholly-
ownedwholly-owned subsidiaries of New Mountain Capital (defined as New Mountain Capital Group, L.L.C. and its affiliates).Capital. New Mountain Capital is a firm with a track record of investing in the middle market and with assets under management (which includes amounts committed, not all of which have been drawn down and invested to date) totaling more than $12.0 billion as of June 30, 2014,$15.0 billion(1), which includes total assets held by the the Company. New Mountain Capital focuses on investing in defensive growth companies across its private equity, public equity and credit investment vehicles. NMF Holdings, formerly known as New Mountain Guardian (Leveraged), L.L.C., was originally formed as a subsidiary of New Mountain Guardian AIV, L.P. (“Guardian AIV”) by New Mountain Capital in October 2008. Guardian AIV was formed through an allocation of approximately $300.0 million of the $5.1 billion of commitments supporting New Mountain Partners III, L.P., a private equity fund managed by New Mountain Capital. In February 2009, New Mountain Capital formed a co-investment vehicle, New Mountain Guardian Partners, L.P., comprising $20.4 million of commitments. New Mountain Guardian (Leveraged), L.L.C. and New Mountain Guardian Partners, L.P., together with their respective direct and indirect wholly-owned subsidiaries, are defined as the “Predecessor Entities”.
Until April 25, 2014, New Mountain Finance AIV Holdings Corporation (“AIV Holdings”) was a Delaware corporation that was originally incorporated on March 11, 2011. AIV Holdings was dissolved on April 25, 2014. Guardian AIV, a Delaware limited partnership, was AIV Holdings’ sole stockholder. AIV Holdings was a closed-end, non-diversified management investment company that had elected to be regulated as a BDC under the 1940 Act. As such, AIV Holdings was obligated to comply with certain regulatory requirements. AIV Holdings had elected to be treated, and complied with the requirements to continue to qualify annually, as a RIC under the Code.
On May 19, 2011, NMFC priced its initial public offering (the “IPO”) of 7,272,727 shares of common stock at a public offering price of $13.75 per share. Concurrently with the closing of the IPO and at the public offering price of $13.75 per share, NMFC sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital in a concurrent private placement (the “Concurrent Private Placement”). Additionally, 1,252,964 shares were issued to the partners of New Mountain Guardian Partners, L.P. at that time for their ownership interest in the Predecessor Entities. In connection with NMFC’s IPO and through a series of transactions, NMF Holdings acquired all of the operations of the Predecessor Entities, including all of the assets and liabilities related to such operations.
Restructuring
Prior to the Restructuring (as defined below), NMFC and AIV Holdings were holding companies with no direct operations of their own, and their sole asset was its ownership in NMF Holdings. In connection with the IPO, NMFC and AIV Holdings each entered into a joinder agreement with respect to the Limited Liability Company Agreement, as amended and restated (the “Operating Agreement”), of NMF Holdings, pursuant to which NMFC and AIV Holdings were admitted as members of NMF Holdings. NMFC acquired from NMF Holdings, with the gross proceeds of the IPO and the Concurrent Private Placement, common membership units (“units”) of NMF Holdings (the number of units were equal to the number of shares of NMFC’s common stock sold in the IPO and the Concurrent Private Placement). Additionally, NMFC received units of NMF Holdings equal to the number of shares of common stock of NMFC issued to the partners of New Mountain Guardian Partners, L.P. Guardian AIV was the parent of NMF Holdings prior to the IPO and, as a result of the transactions completed in connection with the IPO, obtained units in NMF Holdings. Guardian AIV contributed its units in NMF Holdings to its newly formed subsidiary, AIV Holdings, in exchange for common stock of AIV Holdings. AIV Holdings had the right to exchange all or any portion of its units in NMF Holdings for shares of NMFC’s common stock on a one-for-one basis at any time.
The original structure was designed to generally prevent NMFC from being allocated taxable income with respect to unrecognized gains that existed at the time of the IPO in the Predecessor Entities’ assets, and rather such amounts would be allocated generally to AIV Holdings. The result was that any distributions made to NMFC’s stockholders that were attributable to such gains generally were not treated as taxable dividends but rather as return of capital.
Since NMFC’s IPO, and through JuneSeptember 30, 2014, NMFC raised approximately $292.1 million in net proceeds from additional offerings of common stock and issued shares of its common stock valued at approximately $288.4 million on behalf of AIV Holdings for exchanged units. NMFC acquired from NMF Holdings units of NMF Holdings equal to the number of shares of NMFC’s common stock sold in additional offerings. With the completion of the final secondary offering on February 3, 2014, NMFC now ownsowned 100.0% of the units of NMF Holdings, which is nowbecame a wholly-owned subsidiary of NMFC.
(1)Includes amounts committed, not all of which have been drawn down and invested to date, as of September 30, 2014.
Restructuring
As a BDC, AIV Holdings had been subject to the 1940 Act, including certain provisions applicable only to BDCs. Accordingly, and after careful consideration of the 1940 Act requirements applicable to BDCs, the cost of 1940 Act compliance and a thorough assessment of AIV Holdings’ business model, AIV Holdings’ board of directors had determined that continuation as a BDC was not in the best interests of AIV Holdings and Guardian AIV at the present time. Specifically, given that AIV Holdings was formed for the sole purpose of holding units of NMF Holdings and AIV Holdings had disposed of all of the units of NMF Holdings that it was holding as of February 3, 2014, the board of
directors of AIV Holdings approved and declared advisable at an in-person meeting held on March 25, 2014 the withdrawal of AIV Holdings’ election to be regulated as a BDC under the 1940 Act. In addition, the board of directors of AIV Holdings approved and declared advisable for AIV Holdings to terminate its registration under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and to dissolve AIV Holdings under the laws of the State of Delaware.
Upon receipt of necessary stockholder consent to authorize the board of directors of AIV Holdings to withdraw AIV Holdings’ election to be regulated as a BDC, the withdrawal was filed and became effective upon receipt by the U.S. Securities and Exchange Commission (“SEC”) of AIV Holdings’ notification of withdrawal on Form N-54C on April 15, 2014. The board of directors of AIV Holdings believed that AIV Holdings met the requirements for filing the notification to withdraw its election to be regulated as a BDC, upon the receipt of the necessary stockholder consent. After the notification of withdrawal of AIV Holdings’ BDC election was filed with the SEC, AIV Holdings was no longer subject to the regulatory provisions of the 1940 Act applicable to BDCs generally, including regulations related to insurance, custody, composition of its board of directors, affiliated transactions and any compensation arrangements.
In addition, on April 15, 2014, AIV Holdings filed a Form 15 with the SEC to terminate AIV Holdings’ registration under Section 12(g) of the Exchange Act. After these SEC filings and any other federal or state regulatory or tax filings were made, AIV Holdings proceeded to dissolve under Delaware law by filing a certificate of dissolution in Delaware on April 25, 2014.
Until May 8, 2014, as a BDC, NMF Holdings had been subject to the 1940 Act, including certain provisions applicable only to BDCs. Accordingly, and after careful consideration of the 1940 Act requirements applicable to BDCs, the cost of 1940 Act compliance and a thorough assessment of NMF Holdings’ current business model, NMF Holdings’ board of directors determined at an in-person meeting held on March 25, 2014 that continuation as a BDC was not in the best interests of NMF Holdings at the present time.
At the 2014 joint annual meeting of the stockholders of NMFC and the sole unit holder of NMF Holdings which was held on May 6, 2014, the stockholders of NMFC and the sole unit holder of NMF Holdings approved a proposal which authorized the board of directors of NMF Holdings to withdraw NMF Holdings’ election to be regulated as a BDC. Additionally, the stockholders of NMFC approved ana new investment advisory and management agreement between NMFC and the Investment Adviser. Upon receipt of the necessary stockholder/unit holder approval to authorize the board of directors of NMF Holdings to withdraw NMF Holdings’ election to be regulated as a BDC, the withdrawal was filed and became effective upon receipt by the SEC of NMF Holdings’ notification of withdrawal on Form N-54C on May 8, 2014.
In addition, effectiveEffective May 8, 2014, NMF Holdings amended and restated its Limited Liability CompanyOperating Agreement (as amended and restated, the “Operating Agreement”) such that the board of directors of NMF Holdings was dissolved and NMF Holdings remained a wholly-owned subsidiary of NMFC with the sole purpose of serving as a special purpose vehicle for NMF Holdings’ existing credit facility, and NMFC assumed all other operating activities previously undertaken by NMF Holdings under the management of the Investment Adviser (collectively, the “Restructuring”). After the Restructuring, all wholly-owned subsidiaries of NMFC are consolidated with NMFC for both 1940 Act and financial statement reporting purposes, subject to any financial statement adjustments required in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Also, on May 8, 2014, NMF Holdings filed Form 15 with the SEC to terminate NMF Holdings’ registration under Section 12(g) of the Exchange Act. As a special purpose entity, NMF Holdings is bankruptcy-remote and non-recourse to NMFC. In addition, the assets remaining at NMF Holdings will continue to be used to secure NMF Holdings’ currentexisting credit facility.
Current Organization
New Mountain Finance SPV Funding, L.L.C. (“NMF SLF”) is a Delaware limited liability company. NMF SLF is a wholly ownedwholly-owned subsidiary of the Company and is bankruptcy-remote and non-recourse to NMFC. During the nine months ended September 30, 2014, the Company has established wholly ownedwholly-owned subsidiaries, NMF Ancora Holdings Inc. (“NMF Ancora”) and NMF YP Holdings Inc. (“NMF YP”), which are structured as Delaware entities that serve as tax blockers thatblocker corporations which hold equity or equity-like investments in portfolio companies organized as limited liability companies (or other forms of pass-through entities). Tax blockersblocker corporations are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of portfolio companies. TheAdditionally, the Company has a wholly ownedwholly-owned subsidiary, New Mountain Finance Servicing, L.L.C. (“NMF Servicing”) that serves as the administrative agent on certain investment transactions. New Mountain Finance SBIC, L.P. (“SBIC LP”), and its general partner, New Mountain Finance SBIC G.P., LLC (“SBIC GP”), were organized in Delaware as a limited partnership and limited liability company, respectively. SBIC LP and SBIC GP are consolidated wholly ownedwholly-owned subsidiaries of the Company.
The diagram below depicts the Company’s organizational structure as of JuneSeptember 30, 2014.
* Includes partners of New Mountain Guardian Partners, L.P.
** NMFC owns 100.0% of SBIC GP which owns 1.0% of SBIC LP.
The Company’s investment objective is to generate current income and capital appreciation through the sourcing and origination of debt securities at all levels of the capital structure, including first and second lien debt, notes, bonds and mezzanine securities. In some cases, the Company’s investments may also include equity interests. The primary focus is in the debt of defensive growth companies, which are defined as generally exhibiting the following characteristics: (i) sustainable secular growth drivers, (ii) high barriers to competitive entry, (iii) high free cash flow after capital expenditure and working capital needs, (iv) high returns on assets and (v) niche market dominance. Our portfolio may be concentrated in a limited number of industries. As of JuneSeptember 30, 2014, our top five industry concentrations were education, software, business services, software, healthcare services and distribution & logistics and energy.logistics.
As of JuneSeptember 30, 2014, the Company’s net asset value was $762.6$747.5 million and its portfolio had a fair value of approximately $1,310.9$1,353.7 million in 6770 portfolio companies, with a weighted average Yield to Maturity at Cost of approximately 10.7%. This Yield to Maturity at Cost (“Yield to Maturity at Cost”) calculation assumes that all investments not on non-accrual are purchased at the adjusted cost on the quarter end date and held until their respective maturities with no prepayments or losses and exited at par at maturity. Adjusted cost reflects the GAAP cost for post-IPO investments and a stepped up cost basis of pre-IPO investments (assuming a step-up to fair market value occurred on the IPO date). This calculation excludes the impact of existing leverage. Yield to Maturity at Cost uses the London Interbank Offered Rate (“LIBOR”) curves at each quarter’s end date. The actual yield to maturity may be higher or lower due to the future selection of the LIBOR contracts by the individual companies in the Company’s portfolio or other factors.
Recent Developments
On July 30,October 28, 2014, the Company completed a public offering of 5,000,000 shares of its common stock at a public offering price of $14.53 per share, which resulted in net proceeds of $71.8 million. In connection with the public offering, the underwriters purchased an additional 750,000 shares of the Company’s common stock with the exercise of the overallotment option to purchase up to an additional 750,000 shares of the Company’s common stock, which resulted in additional net proceeds of $10.8 million.
On November 4, 2014, the Company’s board of directors declared a special distribution of $0.12 per share payable on September 3, 2014 to holders of record as of August 20, 2014.
On August 1, 2014, the Company’s wholly-owned subsidiary, SBIC LP received approval for a license from the United States Small Business Administration to operate a Small Business Investment Company.
On August 5, 2014, the Company’s board of directors declared a thirdfourth quarter 2014 distribution of $0.34 per share payable on SeptemberDecember 30, 2014 to holders of record as of SeptemberDecember 16, 2014.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States (“GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.
Basis of Accounting
The Company consolidates its wholly-owned subsidiaries,subsidiaries: NMF Holdings, NMF SLF, NMF Servicing, SBIC LP, SBIC GP, NMF Ancora and NMF YP. Prior to the Restructuring, the Predecessor Operating Company consolidated its wholly-owned subsidiary, NMF SLF. NMFC and AIV Holdings did not consolidate the Predecessor Operating Company. Prior to the Restructuring, NMFC and AIV Holdings applied investment company master-feeder financial statement presentation, as described in Accounting Standards Codification 946, Financial Services—Investment Companies, (“ASC 946”) to their interest in the Predecessor Operating Company. NMFC and AIV Holdings observed that it is also industry practice to follow the presentation prescribed for a master fund-feeder fund structure in ASC 946 in instances in which a master fund is owned by more than one feeder fund and that such presentation provided stockholders of NMFC and AIV Holdings with a clearer depiction of their investment in the master fund.
Valuation and Leveling of Portfolio Investments
At all times consistent with GAAP and the 1940 Act, the Company conducts a valuation of assets, which impacts its net asset value.
The Company values its assets on a quarterly basis, or more frequently if required under the 1940 Act. In all cases, the Company’s board of directors is ultimately and solely responsible for determining the fair value of its portfolio investments on a quarterly basis in good faith, including investments that are not publicly traded, those whose market prices are not readily available
and any other situation where its portfolio investments require a fair value determination. Security transactions are accounted for on a trade date basis. The Company’s quarterly valuation procedures are set forth in more detail below:
(1) Investments for which market quotations are readily available on an exchange are valued at such market quotations based on the closing price indicated from independent pricing services.
(2) Investments for which indicative prices are obtained from various pricing services and/or brokers or dealers are valued through a multi-step valuation process, as described below, to determine whether the quote(s) obtained is representative of fair value in accordance with GAAP.
a. Bond quotes are obtained through independent pricing services. Internal reviews are performed by the investment professionals of the Investment Adviser to ensure that the quote obtained is representative of fair value in accordance with GAAP and if so, the quote is used. If the Investment Adviser is unable to sufficiently validate the quote(s) internally and if the investment’s par value or its fair value exceeds the materiality threshold, the investment is valued similarly to those assets with no readily available quotes (see (3) below); and
b. For investments other than bonds, the Company looks at the number of quotes readily available and performs the following:
i. Investments for which two or more quotes are received from a pricing service are valued using the mean of the mean of the bid and ask of the quotes obtained;
ii. Investments for which one quote is received from a pricing service are validated internally. The investment professionals of the Investment Adviser analyze the market quotes obtained using an array of valuation methods (further described below) to validate the fair value. If the Investment Adviser is unable to sufficiently validate the quote internally and if the investment’s par value or its fair value exceeds the materiality threshold, the investment is valued similarly to those assets with no readily available quotes (see (3) below).
(3) Investments for which quotations are not readily available through exchanges, pricing services, brokers, or dealers are valued through a multi-step valuation process:
a. Each portfolio company or investment is initially valued by the investment professionals of the Investment Adviser responsible for the credit monitoring;
b. Preliminary valuation conclusions will then be documented and discussed with the Company’s senior management;
c. If an investment falls into (3) above for four consecutive quarters and if the investment’s par value or its fair value exceeds the materiality threshold, then at least once each fiscal year, the valuation for each portfolio investment for which the Company does not have a readily available market quotation will be reviewed by an independent valuation firm engaged by the Company’s board of directors; and
d. When deemed appropriate by the Company’s management, an independent valuation firm may be engaged to review and value investment(s) of a portfolio company, without any preliminary valuation being performed by the Investment Adviser. The investment professionals of the Investment Adviser will review and validate the value provided.
For investments in revolving credit facilities and delayed draw commitments, the cost basis of the funded investments purchased is offset by any costs/netbacks received for any unfunded portion on the total balance committed. The fair value is also adjusted for the price appreciation or depreciation on the unfunded portion. As a result, the purchase of commitments not completely funded may result in a negative fair value until it is called and funded.
The values assigned to investments are based upon available information and do not necessarily represent amounts which might ultimately be realized, since such amounts depend on future circumstances and cannot be reasonably determined until the individual positions are liquidated. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period and the fluctuations could be material.
GAAP fair value measurement guidance classifies the inputs used in measuring fair value into three levels as follows:
Level I—Quoted prices (unadjusted) are available in active markets for identical investments and the Company has the ability to access such quotes as of the reporting date. The type of investments which would generally be included in Level I include active exchange-traded equity securities and exchange-traded derivatives. As required by Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Level II—Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level I. Level II inputs include the following:
· Quoted prices for similar assets or liabilities in active markets;
· Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
· Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including foreign exchange forward contracts); and
· Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
Level III—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment.
The inputs used to measure fair value may fall into different levels. In all instances when the inputs fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level of input that is significant to the fair value measurement in its entirety. As such, a Level III fair value measurement may include inputs that are both observable (Levels I and II) and unobservable (Level III). Gains and losses for such assets categorized within the Level III table below may include changes in fair value that are attributable to both observable inputs (Levels II and III) and unobservable inputs (Level III).
The inputs into the determination of fair value require significant judgment or estimation by management and consideration of factors specific to each investment. A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in the transfer of certain investments within the fair value hierarchy from period to period. Reclassifications impacting the fair value hierarchy are reported as transfers in/out of the respective leveling categories as of the beginning of the quarter in which the reclassifications occur.
The following table summarizes the levels in the fair value hierarchy that the Company’s portfolio investments fall into as of JuneSeptember 30, 2014:
(in thousands) |
| Total |
| Level I |
| Level II |
| Level III |
|
| Total |
| Level I |
| Level II |
| Level III |
| ||||||||
First lien |
| $ | 639,882 |
| $ | — |
| $ | 533,375 |
| $ | 106,507 |
|
| $ | 641,115 |
| $ | — |
| $ | 497,176 |
| $ | 143,939 |
|
Second lien |
| 568,723 |
| — |
| 455,562 |
| 113,161 |
|
| 598,937 |
| — |
| 508,314 |
| 90,623 |
| ||||||||
Subordinated |
| 24,108 |
| — |
| 9,258 |
| 14,850 |
|
| 45,963 |
| — |
| 10,977 |
| 34,986 |
| ||||||||
Equity and other |
| 78,159 |
| 416 |
| — |
| 77,743 |
|
| 67,654 |
| — |
| — |
| 67,654 |
| ||||||||
Total investments |
| $ | 1,310,872 |
| $ | 416 |
| $ | 998,195 |
| $ | 312,261 |
|
| $ | 1,353,669 |
| $ | — |
| $ | 1,016,467 |
| $ | 337,202 |
|
The Company generally uses the following framework when determining the fair value of investments where there are little, if any, market activity or observable pricing inputs.
Company Performance, Financial Review, and Analysis: Prior to investment, as part of its due diligence process, the Company evaluates the overall performance and financial stability of the portfolio company. Post investment, the Company analyzes each portfolio company’s current operating performance and relevant financial trends versus prior year and budgeted results, including, but not limited to, factors affecting its revenue and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) growth, margin trends, liquidity position, covenant compliance and changes to its capital structure. The Company also attempts to identify and subsequently track any developments at the portfolio company, within its customer or vendor base or within the industry or the macroeconomic environment, generally, that may alter any material element of its original investment thesis. This analysis is specific to each portfolio company. The Company leverages the knowledge gained from its original due diligence process,
augmented by this subsequent monitoring, to continually refine its outlook for each of its portfolio companies and ultimately form the valuation of its investment in each portfolio company. When an external event such as a purchase transaction, public offering or subsequent sale occurs, the Company will consider the pricing indicated by the external event to corroborate the private valuation.
Market Based Approach: The Company may estimate the total enterprise value of each portfolio company by utilizing market value cash flow (EBITDA) multiples of publicly traded comparable companies. The Company considers numerous factors when selecting the appropriate companies whose trading multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. The Company may apply an average of various relevant comparable company EBITDA multiples to the portfolio company’s latest twelve month (“LTM”) EBITDA or projected EBITDA to calculate portfolio company enterprise value. Significant increases or decreases in the multiple will result in an increase or decrease in enterprise value, resulting in an increase or decrease in the fair value estimate of the investment. In applying the market based approach as of JuneSeptember 30, 2014, the Company used the relevant EBITDA ranges set forth in the table below to determine the enterprise value of investments in eighteleven of its portfolio companies. The Company believes this was a reasonable range in light of current comparable company trading levels and the specific companies involved.
Income Based Approach: The Company also may use a discounted cash flow analysis to estimate the fair value of the investment. Projected cash flows represent the relevant security’s contractual interest, fee and principal payments plus the assumption of full principal recovery at the investment’s expected maturity date. These cash flows are discounted at a rate established utilizing a yield calibration approach, which incorporates changes in the credit quality (as measured by relevant statistics) of the portfolio company, as compared to changes in the yield associated with comparable credit quality market indices, between the date of origination and the valuation date. Significant increases or decreases in the discount rate would result in a decrease or increase in the fair value measurement. In applying the income based approach as of JuneSeptember 30, 2014, the Company used the discount ranges set forth in the table below to value investments in ninefourteen of its portfolio companies.
(in thousands)
|
|
|
|
|
|
|
| Range |
| |||||
Type |
| Fair Value |
| Approach |
| Unobservable Input |
| Low |
| High |
| Weighted |
| |
First lien |
| $ | 106,507 |
| Market approach |
| EBITDA multiple |
| 7.5 | x | 10.0 | x | 8.8 | x |
|
|
|
| Income approach |
| Discount rate |
| 7.7 | % | 13.1 | % | 10.0 | % | |
Second lien |
| 113,161 |
| Market approach |
| EBITDA multiple |
| 6.0 | x | 10.5 | x | 7.6 | x | |
|
|
|
| Income approach |
| Discount rate |
| 10.4 | % | 13.4 | % | 11.6 | % | |
Subordinated |
| 14,850 |
| Other (1) |
| N/A (1) |
| N/A | (1) | N/A | (1) | N/A | (1) | |
Equity and other |
| 77,743 |
| Market approach |
| EBITDA multiple |
| 1.6 | x | 9.5 | x | 7.6 | x | |
|
|
|
| Income approach |
| Discount rate |
| 8.0 | % | 18.0 | % | 14.0 | % | |
|
| $ | 312,261 |
| Black Scholes analysis |
| Expected life in years |
| 2 |
| 11.9 |
| 5.8 |
|
|
|
|
|
|
| Volatility |
| 27.3 | % | 41.0 | % | 31.7 | % | |
|
|
|
|
|
| Discount rate |
| 1.7 | % | 4.1 | % | 3.0 | % | |
(1)Fair value was determined based on transaction pricing or recent acquisition as the best measure of fair value with no material changes in operations of the related portfolio company since the transaction date.
|
|
|
|
|
|
|
| Range |
| |||||
Type |
| Fair Value |
| Approach |
| Unobservable Input |
| Low |
| High |
| Weighted |
| |
First lien |
| $ | 143,939 |
| Market approach |
| EBITDA multiple |
| 7.0 | x | 10.0 | x | 8.3 | x |
|
|
|
| Income approach |
| Discount rate |
| 8.1 | % | 16.0 | % | 11.7 | % | |
Second lien |
| 90,623 |
| Market approach |
| EBITDA multiple |
| 6.0 | x | 13.0 | x | 8.8 | x | |
|
|
|
| Income approach |
| Discount rate |
| 10.6 | % | 13.6 | % | 11.9 | % | |
Subordinated |
| 34,986 |
| Market approach |
| EBITDA multiple |
| 7.5 | x | 9.0 | x | 8.3 | x | |
|
|
|
| Income approach |
| Discount rate |
| 10.4 | % | 16.0 | % | 13.3 | % | |
Equity and other |
| 67,654 |
| Market approach |
| EBITDA multiple |
| 1.5 | x | 10.0 | x | 8.0 | x | |
|
|
|
| Income approach |
| Discount rate |
| 8.0 | % | 13.2 | % | 12.5 | % | |
|
| $ | 337,202 |
| Black Scholes analysis |
| Expected life in years |
| 0.5 |
| 11.7 |
| 3.2 |
|
|
|
|
|
|
| Volatility |
| 26.8 | % | 41.0 | % | 29.4 | % | |
|
|
|
|
|
| Discount rate |
| 2.5 | % | 4.1 | % | 2.8 | % | |
NMFC Senior Loan Program I, LLC
On June 10, 2014, NMFC Senior Loan Program I, LLC (“SLP I”) was formed as a Delaware limited liability company. SLP I is a portfolio company ofheld by the Company. SLP I is structured as a private investment fund, in which all of the investors in which are qualified purchasers, as such term is defined under the 1940 Act. Transfer of interests in SLP I is subject to restrictions, and as a result, such interests are not readily marketable. SLP I operates under a limited liability company agreement (the “Agreement”) and will continue in existence until June 10, 2019, subject to earlier termination pursuant to certain terms of the Agreement. The term may be extended for up to one year pursuant to certain terms of the Agreement. SLP I has a three year re-investment period.
SLP I is capitalized with $93.0 million of capital commitments, $275.0 million of debt from a revolving credit facility and is managed by the Company. The Company’s capital commitment is $23.0 million, representing less than 25%25.0% ownership, with third party investors representing the remaining capital commitment. As of JuneSeptember 30, 2014, $46.5SLP I had total investments with an aggregate fair value of approximately $302.0 million, debt outstanding of the$165.3 million and capital that had been called and funded and there was no debt outstanding.of $61.5 million. The Company’s investment in SLP I is reflected indisclosed on the JuneSeptember 30, 2014 Consolidated Schedule of Investments.
The Company, as an investment adviser registered under the Advisers Act, acts as the collateral manager to SLP I and is entitled to receive a management fee for its investment management services provided.provided to SLP I. As a result, SLP I is classified as an affiliate of the Company. For the three and nine months ended JuneSeptember 30, 2014, the Company earned approximately $4 thousand$0.2 million and $0.2 million, respectively in management fees related to SLP I which are included in total other income
from non-controlled, affiliated investment in the Consolidated Statements of Operations.income. As of JuneSeptember 30, 2014, approximately $4 thousand$0.2 million of management fees related to SLP I werewas included in total receivable from affiliates onaffiliates. For the Consolidated Statementsthree and nine months ended September 30, 2014, the Company earned approximately $0.3 million and $0.3 million, respectively, of Assetsdividend income related to SLP I, which is included in total dividend income. As of September 30, 2014, approximately $0.3 million of dividend income related to SLP I was included in total interest and Liabilities.dividend receivable.
SLP I invests in senior secured loans issued by companies within the Company’s core industry verticals. These investments are typically broadly syndicated first lien loans.
Revenue Recognition
The Company’s revenue recognition policies are as follows:
Sales and paydowns of investments: Realized gains and losses on investments are determined on the specific identification method.
Interest income: Interest income, including amortization of premium and discount using the effective interest method, is recorded on the accrual basis and periodically assessed for collectability. Interest income also includes interest earned from cash on hand. Upon the prepayment of a loan or debt security, any prepayment penalties are recorded as part of interest income. The Company has loans in the portfolio that contain a payment-in-kind (“PIK”) provision. PIK represents interest that is accrued and recorded as interest income at the contractual rates, if deemed collectible, added to the loan principal on the respective capitalization dates, and generally due at maturity.
Non-accrual income: Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and when there is reasonable doubt that principal or interest will be collected. Accrued cash and un-capitalized PIK interest is reversed when a loan is placed on non-accrual status. Previously capitalized PIK interest is not reversed when
an investment is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment of the ultimate outcome. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.
Dividend income: Dividend income is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.
Other income: Other income represents delayed compensation, consent or amendment fees, revolver fees, structuring fees and other miscellaneous fees received. Delayed compensation is income earned from counterparties on trades that do not settle within a set number of business days after trade date. Other income may also include fees from bridge loans. The Company may from time to time enter into bridge financing commitments, an obligation to provide interim financing to a counterparty until permanent credit can be obtained. These commitments are short-term in nature and may expire unfunded. A fee is received by the Company for providing such commitments. Structuring fees are recognized as income when earned, usually when paid at the closing of the investment.
Prior to the Restructuring, NMFC’s revenue recognition policies were as follows:
Revenue, expenses, and capital gains (losses): At each quarterly valuation date, the Predecessor Operating Company’s investment income, expenses, net realized gains (losses), and net increase (decrease) in unrealized appreciation (depreciation) were allocated to NMFC based on its pro-rata interest in the net assets of the Predecessor Operating Company. This was recorded on NMFC’s Statements of Operations. Realized gains and losses are recorded upon sales of NMFC’s investments in the Predecessor Operating Company. Net change in unrealized appreciation (depreciation) of investment in New Mountain Finance Holdings, L.L.C. is the difference between the net asset value per share and the closing price per share for shares issued as part of the dividend reinvestment plan on the dividend payment date. This net change in unrealized appreciation (depreciation) of investment in New Mountain Finance Holdings, L.L.C. includes the unrealized appreciation (depreciation) from the IPO. NMFC used the proceeds from its IPO and Concurrent Private Placement to purchase units in the Predecessor Operating Company at $13.75 per unit (its IPO price per share). At the IPO date, $13.75 per unit represented a discount to the actual net asset value per unit of the Predecessor Operating Company. As a result, NMFC experienced immediate unrealized appreciation on its investment.
All expenses, including those of NMFC, were paid and recorded by the Predecessor Operating Company. Expenses were allocated to NMFC based on pro-rata ownership interest. In addition, the Predecessor Operating Company paid all of the offering costs related to the IPO and subsequent offerings. NMFC recorded its portion of the offering costs as a direct reduction to net assets and the cost of their investment in the Predecessor Operating Company.
Monitoring of Portfolio Investments
The Company monitors the performance and financial trends of its portfolio companies on at least a quarterly basis. The Company attempts to identify any developments within the portfolio company, the industry or the macroeconomic environment that may alter any material element of its original investment strategy.
The Company uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in the portfolio. The Company uses a four-level numeric rating scale as follows:
· Investment Rating 1—Investment is performing materially above expectations;
· Investment Rating 2—Investment is performing materially in-line with expectations. All new loans are rated 2 at initial purchase;
· Investment Rating 3—Investment is performing materially below expectations and risk has increased materially since the original investment; and
· Investment Rating 4—Investment is performing substantially below expectations and risks have increased substantially since the original investment. Payments may be delinquent. There is meaningful possibility that the Company will not recoup its original cost basis in the investment and may realize a substantial loss upon exit.
As of JuneSeptember 30, 2014, all investments in the Company’s portfolio had an Investment Rating of 1 or 2 with the exception of threefour portfolio company names; twothree with an Investment Rating of 3 and the othertwo with an Investment Rating of 4. As of JuneSeptember 30, 2014, one portfolio company had a portion of its investment with an Investment Rating of 3 and a portion of its investment with an Investment Rating of 4. As of September 30, 2014, the Company’s two super priority first lien positions in ATI Acquisition Company and related equity positions in Ancora Acquisition LLC had an Investment Rating of 4 due to the underlying business encountering significant regulatory constraints which have led to the portfolio company’s underperformance. As of JuneSeptember 30, 2014, the Company’s two super priority first lien positions in ATI Acquisition Company remained on non-accrual status due to the inability of the portfolio company to service its interest payments for the quarter then ended and uncertainty about its ability to pay such amounts in the future. During the third quarter of 2013, the Company received preferred shares and warrants in Ancora Acquisition LLC, in relation to the two super priority first lien positions in ATI Acquisition Company. As of JuneSeptember 30, 2014, the Company’s investment in ATI Acquisition Company and Ancora Acquisition LLC had an aggregate cost basis of $1.6 million, an aggregate fair value of $0.4 million and total unearned interest income of $0.1 million and $0.2 million for the three and sixnine months then ended. Unrealized gains (losses) include a fee that the Company would receive upon maturity of the two super priority first lien debt investments.
As of September 30, 2014, the Company placed a portion of its first lien position in UniTek Global Services, Inc. (“UniTek”) on non-accrual status in anticipation of a voluntary petition for a “Pre-Packaged” Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the District of Delaware which was filed on November 3, 2014. As of September 30, 2014, the portion of the UniTek first lien position placed on non-accrual status represented an aggregate cost basis of $11.2 million, an aggregate fair value of $8.2 million and total unearned interest income of $0.5 million and $0.5 million, respectively for the three and nine months then ended.
Portfolio and Investment Activity
The fair value of the Company’s investments was approximately $1,310.9$1,353.7 million in 6770 portfolio companies at JuneSeptember 30, 2014. At December 31, 2013, the Company’s only investment was its investment in the Predecessor Operating Company. The fair value of the Predecessor Operating Company’s investments was approximately $1,115.7 million in 59 portfolio companies at December 31, 2013.
The following table shows the Company’s portfolio and investment activity for the sixnine months ended JuneSeptember 30, 2014 and the portfolio and investment activity for the sixnine months ended JuneSeptember 30, 2013 for the Predecessor Operating Company:
|
| Six months ended |
| ||||
(in millions) |
| June 30, 2014 |
| June 30, 2013 |
| ||
New investments in 23 and 17 portfolio companies, respectively |
| $ | 317.0 |
| $ | 262.3 |
|
Debt repayments in existing portfolio companies |
| 62.7 |
| 176.5 |
| ||
Sales of securities in 8 and 9 portfolio companies, respectively |
| 75.8 |
| 24.9 |
| ||
Change in unrealized appreciation on 36 and 41 portfolio companies, respectively |
| 17.3 |
| 16.5 |
| ||
Change in unrealized depreciation 32 and 24 portfolio companies, respectively |
| (10.5 | ) | (16.6 | ) | ||
|
| Nine months ended |
| ||||
(in millions) |
| September 30, 2014 (1) |
| September 30, 2013 |
| ||
New investments in 36 and 21 portfolio companies, respectively |
| $ | 516.2 |
| $ | 349.3 |
|
Investment repayments in existing portfolio companies |
| 197.9 |
| 288.4 |
| ||
Sales of investments in 10 and 9 portfolio companies, respectively |
| 84.7 |
| 26.7 |
| ||
Change in unrealized appreciation on 30 and 42 portfolio companies, respectively |
| 20.4 |
| 19.4 |
| ||
Change in unrealized depreciation 45 and 25 portfolio companies, respectively |
| (27.9 | ) | (16.9 | ) | ||
(1)For the nine months ended September 30, 2014, amounts represent the investment activity of the Predecessor Operating Company and the Company.
At JuneSeptember 30, 2014, the Company’s weighted average Yield to Maturity at Cost was approximately 10.7%. At JuneSeptember 30, 2013, the Predecessor Operating Company’s weighted average Yield to Maturity at Cost was approximately 10.7%10.8%.
Recent Accounting Standards Updates
In June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-08, Financial Services—Investment Companies (Topic 946)—Amendments to the Scope, Measurement and Disclosure Requirements
(“ (“ASU 2013-08”), which contains new guidance on assessing whether an entity is an investment company, requiring non-controlling ownership interests in investment companies to be measured at fair value and requiring certain additional disclosures. ASU 2013-08 is effective for interim and annual periods beginning after December 15, 2013. The Company is an investment company that is applying the specialized guidance in Topic 946 as of January 1, 2014.
Results of Operations
Under GAAP, NMFC’s IPO did not step-up the cost basis of the Predecessor Operating Company’s existing investments to fair market value at the IPO date. Since the total value of the Predecessor Operating Company’s investments at the time of the IPO was greater than the investments’ cost basis, a larger amount of amortization of purchase or original issue discount, and different amounts in realized gain and unrealized appreciation, may be recognized under GAAP in each period than if the step-up had occurred. This will remain until such predecessor investments are sold, repaid or mature in the future. The Company tracks the transferred (or fair market) value of each of the Predecessor Operating Company’s investments as of the time of the IPO and, for purposes of the incentive fee calculation, adjusts income as if each investment was purchased at the date of the IPO (or stepped up to fair market value). The respective “Adjusted Net Investment Income” (defined as net investment income adjusted to reflect income as if the cost basis of investments held at the IPO date had stepped-up to fair market value as of the IPO date) is used in calculating both the incentive fee and dividend payments. See Item 1.—Financial Statements—Note 5, Agreements for additional details.
The following table for the Company for the three months ended JuneSeptember 30, 2014 is adjusted to reflect the step-up to fair market value and the allocation of the incentive fees related to hypothetical capital gains out of the adjusted post-incentive fee net investment income.
(in thousands) |
| Three months ended |
| Stepped-up Cost |
| Incentive Fee |
| Adjusted three |
|
| Three months ended |
| Stepped-up Cost |
| Incentive Fee |
| Adjusted three |
| ||||||||
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest income |
| $ | 18,788 |
| $ | (56 | ) | $ | — |
| $ | 18,732 |
|
| $ | 32,353 |
| $ | (53 | ) | $ | — |
| $ | 32,300 |
|
Dividend income |
| 972 |
| — |
| — |
| 972 |
|
| 511 |
| — |
| — |
| 511 |
| ||||||||
Other income |
| 709 |
| — |
| — |
| 709 |
|
| 1,842 |
| — |
| — |
| 1,842 |
| ||||||||
Investment income allocated from NMF Holdings |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Interest income |
| 12,847 |
| — |
| — |
| 12,847 |
| |||||||||||||||||
Dividend income |
| 279 |
| — |
| — |
| 279 |
| |||||||||||||||||
Other income |
| 113 |
| — |
| — |
| 113 |
| |||||||||||||||||
Total investment income |
| 33,708 |
| (56 | ) | — |
| 33,652 |
| |||||||||||||||||
Total investment income (2) |
| 34,706 |
| (53 | ) | — |
| 34,653 |
| |||||||||||||||||
Total expenses pre-incentive fee (3) |
| 10,504 |
| — |
| — |
| 10,504 |
|
| 12,053 |
| — |
| — |
| 12,053 |
| ||||||||
Pre-Incentive Fee Net Investment Income |
| 23,204 |
| (56 | ) | — |
| 23,148 |
|
| 22,653 |
| (53 | ) | — |
| 22,600 |
| ||||||||
Incentive fee |
| 5,915 |
| — |
| (1,286 | ) | 4,629 |
|
| 1,853 |
| — |
| 2,667 |
| 4,520 |
| ||||||||
Post-Incentive Fee Net Investment Income |
| 17,289 |
| (56 | ) | 1,286 |
| 18,519 |
|
| 20,800 |
| (53 | ) | (2,667 | ) | 18,080 |
| ||||||||
Net realized losses on investments |
| (1,067 | ) | (46 | ) | — |
| (1,113 | ) | |||||||||||||||||
Net realized gains on investment allocated from NMF Holdings |
| 5,860 |
| — |
| — |
| 5,860 |
| |||||||||||||||||
Net change in unrealized appreciation (depreciation) of investments |
| 5,708 |
| 102 |
| — |
| 5,810 |
| |||||||||||||||||
Provision for taxes on unrealized appreciation (depreciation) of investments |
| (386 | ) | — |
| — |
| (386 | ) | |||||||||||||||||
Net change in unrealized (depreciation) appreciation of investments allocated from NMF Holdings |
| (3,742 | ) | — |
| — |
| (3,742 | ) | |||||||||||||||||
Net realized gains on investments |
| 768 |
| (201 | ) | — |
| 567 |
| |||||||||||||||||
Net change in unrealized (depreciation) appreciation of investments (4) |
| (14,272 | ) | 254 |
| — |
| (14,018 | ) | |||||||||||||||||
Benefit (provision) for taxes |
| 115 |
| — |
| — |
| 115 |
| |||||||||||||||||
Capital gains incentive fees |
| — |
| — |
| (1,286 | ) | (1,286 | ) |
| — |
| — |
| 2,667 |
| 2,667 |
| ||||||||
Net increase in net assets resulting from operations |
| $ | 23,662 |
|
|
|
|
| $ | 23,662 |
|
| $ | 7,411 |
|
|
|
|
| $ | 7,411 |
| ||||
(1) For the three months ended JuneSeptember 30, 2014, the Company incurred total incentive fees of $5.9$1.9 million, of which $1.3$(2.7) million related to capital gains incentive fees on a hypothetical liquidation basis.
(2)Includes investment income from non-controlled/non-affiliated investments and non-controlled/affiliated investments.
(3) Includes expense waivers and reimbursements of $0.1$0.3 million.
TableIncludes net change in unrealized (depreciation) appreciation of Contentsinvestments from non-controlled/non-affiliated investments and non-controlled/affiliated investments.
For the three months ended JuneSeptember 30, 2014, the Company had a $0.1 million adjustment to interest income for amortization, a decrease of less than $0.1$0.2 million to net realized lossesgains and an increase of $0.1$0.3 million to net change in unrealized appreciationdepreciation to adjust for the stepped-up cost basis of the transferred investments as discussed above. For the three months ended JuneSeptember 30, 2014, total adjusted investment income of $33.7$34.7 million consisted of approximately $28.4$29.1 million in cash interest from investments, approximately $0.7$1.6 million in PIK interest from investments, approximately $1.9$1.0 million in prepayment fees, net amortization of purchase premiums and discounts and origination fees of approximately $0.6 million, approximately $1.3$0.5 million in dividend income and approximately $0.8$1.9 million in other income. The Company’s Adjusted Net Investment Income was $18.5$18.1 million for the three months ended JuneSeptember 30, 2014.
The following table for the Company for the sixnine months ended JuneSeptember 30, 2014 is adjusted to reflect the Company’s pro-rata share of the step-up to fair market value and the allocation of the incentive fees related to hypothetical capital gains out of the adjusted post-incentive fee net investment income.
(in thousands) |
| Six months ended |
| Stepped-up Cost |
| Incentive Fee |
| Adjusted six |
|
| Nine months ended |
| Stepped-up Cost |
| Incentive Fee |
| Adjusted nine |
| ||||||||
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest income |
| $ | 18,788 |
| $ | (98 | ) | $ | — |
| $ | 18,690 |
|
| $ | 51,141 |
| $ | (151 | ) | $ | — |
| $ | 50,990 |
|
Dividend income |
| 972 |
| — |
| — |
| 972 |
|
| 1,483 |
| — |
| — |
| 1,483 |
| ||||||||
Other income |
| 709 |
| — |
| — |
| 709 |
|
| 2,551 |
| — |
| — |
| 2,551 |
| ||||||||
Investment income allocated from NMF Holdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest income |
| 40,515 |
| — |
| — |
| 40,515 |
|
| 40,515 |
| — |
| — |
| 40,515 |
| ||||||||
Dividend income |
| 2,368 |
| — |
| — |
| 2,368 |
|
| 2,368 |
| — |
| — |
| 2,368 |
| ||||||||
Other income |
| 795 |
| — |
| — |
| 795 |
|
| 795 |
| — |
| — |
| 795 |
| ||||||||
Total investment income |
| 64,147 |
| (98 | ) | — |
| 64,049 |
|
| 98,853 |
| (151 | ) | — |
| 98,702 |
| ||||||||
Total expenses pre-incentive fee (3) |
| 19,018 |
| — |
| — |
| 19,018 |
|
| 31,071 |
| — |
| — |
| 31,071 |
| ||||||||
Pre-Incentive Fee Net Investment Income |
| 45,129 |
| (98 | ) | — |
| 45,031 |
|
| 67,782 |
| (151 | ) | — |
| 67,631 |
| ||||||||
Incentive fee |
| 11,782 |
| — |
| (2,787 | ) | 8,995 |
|
| 13,635 |
| — |
| (120 | ) | 13,515 |
| ||||||||
Post-Incentive Fee Net Investment Income |
| 33,347 |
| (98 | ) | 2,787 |
| 36,036 |
|
| 54,147 |
| (151 | ) | 120 |
| 54,116 |
| ||||||||
Net realized losses on investments |
| (1,067 | ) | (184 | ) | — |
| (1,251 | ) |
| (299 | ) | (385 | ) |
|
| (684 | ) | ||||||||
Net realized gains on investment allocated from NMF Holdings |
| 8,568 |
| — |
| — |
| 8,568 |
| |||||||||||||||||
Net change in unrealized appreciation (depreciation) of investments |
| 5,708 |
| 282 |
| — |
| 5,990 |
| |||||||||||||||||
Provision for taxes on unrealized appreciation (depreciation) of investments |
| (386 | ) | — |
| — |
| (386 | ) | |||||||||||||||||
Net realized gains on investments allocated from NMF Holdings |
| 8,568 |
| — |
|
|
| 8,568 |
| |||||||||||||||||
Net change in unrealized (depreciation) appreciation of investments (4) |
| (8,564 | ) | 536 |
|
|
| (8,028 | ) | |||||||||||||||||
Net change in unrealized appreciation (depreciation) of investments allocated from NMF Holdings |
| 940 |
| — |
| — |
| 940 |
|
| 940 |
| — |
|
|
| 940 |
| ||||||||
Provision for taxes |
| (271 | ) | — |
|
|
| (271 | ) | |||||||||||||||||
Capital gains incentive fees |
| — |
| — |
| (2,787 | ) | (2,787 | ) |
| — |
| — |
| (120 | ) | (120 | ) | ||||||||
Net increase in net assets resulting from operations |
| $ | 47,110 |
|
|
|
|
| $ | 47,110 |
|
| $ | 54,521 |
|
|
|
|
| $ | 54,521 |
| ||||
(1) For the sixnine months ended JuneSeptember 30, 2014, the Company incurred total incentive fees of $11.8$13.6 million, of which $2.8$0.1 million related to capital gains incentive fees on a hypothetical liquidation basis.
(2)Includes investment income from non-controlled/non-affiliated investments and non-controlled/affiliated investments.
(3) Includes expense waivers and reimbursements of $0.8$1.1 million.
(4)Includes net change in unrealized (depreciation) appreciation of investments from non-controlled/non-affiliated investments and non-controlled/affiliated investments.
For the sixnine months ended JuneSeptember 30, 2014, the Company had a $0.1 million adjustment to interest income for amortization, a decrease of $0.2$0.4 million to net realized losses and an increase of $0.3$0.5 million to net change in unrealized appreciationdepreciation to adjust for the stepped-up cost basis of the transferred investments as discussed above. For the sixnine months ended JuneSeptember 30, 2014, total adjusted investment income of $64.0$98.7 million consisted of approximately $54.3$83.4 million in cash interest from investments, approximately $1.4$3.0 million in PIK interest from investments, approximately $2.2$3.2 million in prepayment fees, net amortization of purchase premiums and discounts and origination fees of approximately $1.3$1.9 million, approximately $3.3$3.8 million in dividend income and approximately $1.5$3.4 million in other income. The Company’s Adjusted Net Investment Income was $36.0$54.1 million for the sixnine months ended JuneSeptember 30, 2014.
In accordance with GAAP, for the threenine months ended JuneSeptember 30, 2014, the Company accrued $1.3$0.1 million of hypothetical capital gains incentive fee based upon the cumulative net Adjusted Realized Capital Gains and Adjusted Realized Capital Losses and the cumulative net Adjusted Unrealized Capital Appreciation and Adjusted Unrealized Capital Depreciation on investments held at the end of the period. Actual amounts paid to the Investment Adviser are consistent with the Investment Management Agreement and are based only on actual Adjusted Realized Capital Gains computed net of all Adjusted Realized Capital Losses and Adjusted Unrealized Capital Depreciation on a cumulative basis from inception through the end of each calendar year as if the entire portfolio was sold at fair value. Approximately $2.0 millionAs of September 30, 2014, no actual capital gains incentive fees would befee was owed under the Investment Management Agreement, if the Company had ceased operations as of June 30, 2014, as cumulative net Adjusted Realized Gains exceededdid not exceed cumulative Adjusted Unrealized Depreciation.
Results of Operations for the Company for the Three Months Ended JuneSeptember 30, 2014 and the Predecessor Operating Company for the Three Months Ended JuneSeptember 30, 2013
Revenue
|
| Three months ended |
| Percent |
| ||||
(in thousands) |
| June 30, 2014 |
| June 30, 2013 |
| Change |
| ||
Interest income |
| $ | 18,788 |
| $ | 27,321 |
|
|
|
Interest income allocated from the Predecessor Operating Company |
| 12,847 |
| — |
|
|
| ||
Total interest income |
| 31,635 |
| 27,321 |
| 16 | % | ||
|
|
|
|
|
|
|
| ||
Dividend income |
| 972 |
| 6,436 |
|
|
| ||
Dividend income allocated from the Predecessor Operating Company |
| 279 |
| — |
|
|
| ||
Total dividend income |
| 1,251 |
| 6,436 |
| (81 | )% | ||
|
|
|
|
|
|
|
| ||
Other income |
| 709 |
| 1,399 |
|
|
| ||
Other income allocated from the Predecessor Operating Company |
| 113 |
| — |
|
|
| ||
Total Other income |
| 822 |
| 1,399 |
| (41 | )% | ||
Total investment income |
| $ | 33,708 |
| $ | 35,156 |
| (4 | )% |
|
| Three months ended |
| Percent |
| ||||
(in thousands) |
| September 30, 2014 |
| September 30, 2013 |
| Change |
| ||
Interest income |
| 32,353 |
| 27,175 |
| 19 | % | ||
Dividend income |
| 511 |
| (1,631 | ) | NM | * | ||
Other income |
| 1,842 |
| 249 |
| NM | * | ||
Total investment income |
| $ | 34,706 |
| $ | 25,793 |
| 35 | % |
* Not meaningful.
The Company’s total investment income decreasedincreased by $1.4$8.9 million for the three months ended JuneSeptember 30, 2014 as compared to the Predecessor Operating Company’s total investment income for the three months ended JuneSeptember 30, 2013. The 4% decrease35% increase in investment income results from a decreasean increase in dividend and otherinterest income during the three months ended JuneSeptember 30, 2014 as compared to the three months ended JuneSeptember 30, 2013, primarily attributable to a large distribution from one of the Predecessor Operating Company’s warrant investments in the prior year and lower amendment and forbearance fees received in the current year. The decrease in dividend and other income was offset by the increase in interest income from the three months ended June 30, 2013 to the three months ended June 30, 2014, which was primarily attributable to larger invested balances, driven by the proceeds from the October 2013 and April 2014 primary offeringsoffering of NMFC’sthe Company’s common stock and June 2014 offering of NMFC’sthe Company’s convertible notes, the Company’s use of leverage from its revolving credit facilities to originate new investments and prepayment fees received associated with the early repayments or partial repayments of twofive different portfolio companies held by the Company as of March 31,June 30, 2014.
Table Additionally, the Company’s other income increased due to structuring, amendment and consent fees received from eight different portfolio companies held by the Company as of ContentsJune 30, 2014 and management fees from a non-controlled affiliated portfolio company. The increase in dividend income during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 was primarily attributable to distributions from two of the Company’s equity investments. For the three months ended September 30, 2013, a change in an accounting estimate related to the classification of dividend income for a distribution recorded in the prior quarter resulted in a reduction in the cost basis of a warrant investment by approximately $0.5 million, a reduction to dividend income of approximately $1.8 million, a realized gain of approximately $1.3 million and an unrealized gain of approximately $0.5 million. As a result of the change in estimate, there was a reclass of total incentive fee of approximately $0.4 million from incentive fees attributable to Adjusted Net Investment Income to capital gains incentive fees for the three months ended September 30, 2013.
Operating Expenses
|
| Three months ended |
| Percent |
| ||||
(in thousands) |
| June 30, 2014 |
| June 30, 2013 |
| Change |
| ||
Management fee |
| $ | 2,742 |
| $ | 3,727 |
|
|
|
Management fee allocated from Predecessor Operating Company |
| 1,879 |
| — |
|
|
| ||
Total Management fee |
| 4,621 |
| 3,727 |
| 24 | % | ||
|
|
|
|
|
|
|
| ||
Incentive fee |
| 2,747 |
| 5,407 |
|
|
| ||
Incentive fee allocated from Predecessor Operating Company |
| 1,882 |
| — |
|
|
| ||
Total Incentive fee |
| 4,629 |
| 5,407 |
| (14 | )% | ||
|
|
|
|
|
|
|
| ||
Capital gains incentive fee (1) |
| 763 |
| (1,701 | ) |
|
| ||
Capital gains incentive fee allocated from Predecessor Operating Company(1) |
| 523 |
| — |
|
|
| ||
Total Capital gains incentive fee (1) |
| 1,286 |
| (1,701 | ) | 176 | % | ||
|
|
|
|
|
|
|
| ||
Interest and other financing expenses |
| 2,559 |
| 3,118 |
|
|
| ||
Interest and other financing expenses allocated from Predecessor Operating Company |
| 1,408 |
| — |
|
|
| ||
Total Interest and other financing expenses |
| 3,967 |
| 3,118 |
| 27 | % | ||
|
|
|
|
|
|
|
| ||
Professional fees |
| 640 |
| 563 |
|
|
| ||
Professional fees allocated from Predecessor Operating Company |
| 393 |
| — |
|
|
| ||
Total Professional fees |
| 1,033 |
| 563 |
| 83 | % | ||
|
|
|
|
|
|
|
| ||
Administrative expenses |
| 360 |
| 939 |
|
|
| ||
Administrative expenses allocated from Predecessor Operating Company |
| 176 |
| — |
|
|
| ||
Total Administrative expenses |
| 536 |
| 939 |
| (43 | )% | ||
|
|
|
|
|
|
|
| ||
Other general and administrative expenses |
| 239 |
| 396 |
|
|
| ||
Other general and administrative expenses allocated from Predecessor Operating Company |
| 166 |
| — |
|
|
| ||
Total Other general and administrative expenses |
| 405 |
| 396 |
| 2 | % | ||
Total expenses |
| 16,477 |
| 12,449 |
| 32 | % | ||
Less: expenses waived and reimbursed |
| (58 | ) | (836 | ) | (93 | )% | ||
Net expenses |
| $ | 16,419 |
| $ | 11,613 |
| 41 | % |
|
| Three months ended |
| Percent |
| ||||
(in thousands) |
| September 30, 2014 |
| September 30, 2013 |
| Change |
| ||
Management fee |
| 5,021 |
| 3,754 |
| 34 | % | ||
Incentive fee |
| 4,520 |
| 3,533 |
| 28 | % | ||
Capital gains incentive fee (1) |
| (2,667 | ) | 1,587 |
| (268 | )% | ||
Interest and other financing expenses |
| 5,237 |
| 3,190 |
| 64 | % | ||
Professional fees |
| 890 |
| 549 |
| 62 | % | ||
Administrative expenses |
| 549 |
| 743 |
| (26 | )% | ||
Other general and administrative expenses |
| 448 |
| 378 |
| 19 | % | ||
Income tax expense |
| 230 |
| — |
| 100 | % | ||
Total expenses |
| 14,228 |
| 13,734 |
| 4 | % | ||
Less: expenses waived and reimbursed |
| (322 | ) | (600 | ) | (46 | )% | ||
Net expenses |
| $ | 13,906 |
| $ | 13,134 |
| 6 | % |
(1) Capital gains incentive fee accrual assumes a hypothetical liquidation basis.
The Company’s total net operating expenses increased by $4.8$0.8 million for the three months ended JuneSeptember 30, 2014 as compared to the Predecessor Operating Company’s three months ended JuneSeptember 30, 2013. The Company’s management fees increased by $0.9$1.3 million and incentive fees decreasedincreased by $0.8$1.0 million for the three months ended JuneSeptember 30, 2014 as compared to the Predecessor Operating Company’s three months ended JuneSeptember 30, 2013. The increase in management fee and incentive fees from the Predecessor Operating Company’s three months ended JuneSeptember 30, 2013 to the Company’s three months ended JuneSeptember 30, 2014 was attributable to larger invested balances, driven by the proceeds from the October 2013 and April 2014 primary offerings of NMFC’sthe Company’s common stock, the June 2014 convertible notes offering and the Company’s use of leverage from its revolving credit facilities to originate new investments. The decrease in the incentive fee was primarily attributable to a large dividend distribution from one of the Predecessor Operating Company’s warrant investments in the prior year, which resulted in approximately $1.3 million of incentive fees for the three months ended June 30, 2013. After excluding this item, incentive fees increased $0.5 million from the prior comparable period due to higher net investment income from larger invested balances similar to the increase in management fee. The Company’s capital gains incentive fees increaseddecreased by $3.0$4.3 million for the three months ended JuneSeptember 30, 2014 as compared to the Predecessor Operating Company’s three months ended JuneSeptember 30, 2013, which was attributable to higherlower net Adjusted Realized Capital Gains (Losses) and Adjusted Unrealized Capital Appreciation (Depreciation) of investments during the period. Approximately $2.0 million of capital gains incentive fees would be owed under the Investment Management Agreement if the Company had ceased operations as of June 30, 2014, as cumulative net Adjusted Realized Gains exceeded cumulative Adjusted Unrealized Depreciation.
Interest and other financing expenses increased by $0.8$2.0 million during the three months ended JuneSeptember 30, 2014, primarily due to the increase of average debt outstanding from $189.0$190.7 million to $224.7$235.3 million for the Holdings Credit Facility (as defined below) and from $214.5$115.0 million to $215.0 million for the SLF Credit Facility (as defined below) for the Predecessor Operating Company’s three months ended June 30, 2013 compared to the Company’s three months ended June 30, 2014. In addition,of convertible notes outstanding during the three months ended JuneSeptember 30, 2014 the Companythat were issued convertible notes and closed the NMFC Credit Facility (as defined below).on June 4, 2014.
Net Realized Gains and Net Change in Unrealized Appreciation (Depreciation)
|
| Three months ended |
| Percent |
| ||||
(in thousands) |
| June 30, 2014 |
| June 30, 2013 |
| Change |
| ||
Net realized (losses) gains on investments |
| $ | (1,067 | ) | $ | 3,312 |
|
|
|
Net realized gains on investment allocated from Predecessor Operating Company |
| 5,860 |
| — |
|
|
| ||
Total realized gains on investments |
| 4,793 |
| 3,312 |
| 45 | % | ||
|
|
|
|
|
|
|
| ||
Net change in unrealized appreciation (depreciation) of investments |
| 5,708 |
| (12,031 | ) |
|
| ||
Net change in unrealized (depreciation) appreciation of investments allocated from Predecessor Operating Company |
| (3,742 | ) | — |
|
|
| ||
Total change in unrealized appreciation (depreciation) of investments |
| 1,966 |
| (12,031 | ) | NM | * | ||
|
|
|
|
|
|
|
|
|
|
Provision for taxes on unrealized appreciation of investments |
|
| (386 | ) |
| — |
| NM | * |
Total net realized gains and net change in unrealized appreciation (depreciation) of investments |
| $ | 6,373 |
| $ | (8,719 | ) | NM | * |
|
| Three months ended |
|
|
| ||||
(in thousands) |
| September 30, 2014 |
| September 30, 2013 |
| Percent Change |
| ||
Net realized gains on investments |
| 768 |
| 5,160 |
| (85 | )% | ||
Net change in unrealized appreciation (depreciation) of investments |
| (14,272 | ) | 2,659 |
| NM | * | ||
Benefit (provision) for taxes |
| 115 |
| — |
| NM | * | ||
Total net realized gains and net change in unrealized appreciation (depreciation) of investments |
| $ | (13,389 | ) | $ | 7,819 |
| NM | * |
* Not meaningful.
The Company’s net realized and unrealized gains or losses resulted in a net increaseloss of $6.4$13.4 million for the three months ended JuneSeptember 30, 2014 compared to the Predecessor Operating Company’s net realized and unrealized gains or losses resulting in a net lossgain of $8.7$7.8 million for the same period in 2013. We look at net realized and unrealized gains or losses together as movement in unrealized appreciation or depreciation can be the result of realizations. The net gain for the three months ended June 30, 2014 was primarily driven by the overall increase in the market prices of the Company’s investments during the period and driven by sales or repayments of investments with fair values in excess of March 31, 2014 valuations, resulting in net realized gains being greater than the reversal of the cumulative net unrealized gains for those investments. In addition, net realized gains were primarily attributable to a gain of $5.6 million from the sale of the Company’s warrant investments in one portfolio company which was offset by a trading loss of approximately $0.8 million. The net loss for the three months ended JuneSeptember 30, 20132014 was primarily driven by the overall decrease in the market prices of the Company’s investments during the period and the partial write-down related to one portfolio company. The net gain for the three months ended September 30, 2013 was driven by the overall increase in the market prices of the Predecessor Operating Company’s investments during the period. For the three months ended September 30, 2013, a change in accounting estimate related to the classification of dividend income for a distribution recorded in the prior quarter resulted in a realized gain of approximately $1.3 million and an unrealized gain of approximately $0.5 million. In addition, the modification of terms on one debt investment that was accounted for as an extinguishment resulted in a realized gain of $1.7 million for the three months ended September 30, 2013. The provision for income taxes on unrealized appreciation of investments was attributable to one warrant investment that is held as of September 30, 2014 in one of the Company’s corporate subsidiaries.
Results of Operations for the Company for the SixNine Months Ended JuneSeptember 30, 2014 and the Predecessor Operating Company for the SixNine Months Ended JuneSeptember 30, 2013
Revenue
|
| Six months ended |
| Percent |
|
| Nine months ended |
| Percent |
| ||||||||
(in thousands) |
| June 30, 2014 |
| June 30, 2013 |
| Change |
|
| September 30, 2014 |
| September 30, 2013 |
| Change |
| ||||
Interest income |
| $ | 18,788 |
| $ | 52,364 |
|
|
|
| $ | 51,141 |
| $ | 79,539 |
|
|
|
Interest income allocated from the Predecessor Operating Company |
| 40,515 |
| — |
|
|
|
| 40,515 |
| — |
|
|
| ||||
Total interest income |
| 59,303 |
| 52,364 |
| 13 | % |
| 91,656 |
| 79,539 |
| 15 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dividend income |
| 972 |
| 6,433 |
|
|
|
| 1,483 |
| 4,802 |
|
|
| ||||
Dividend income allocated from the Predecessor Operating Company |
| 2,368 |
| — |
|
|
|
| 2,368 |
| — |
|
|
| ||||
Total dividend income |
| 3,340 |
| 6,433 |
| (48 | )% |
| 3,851 |
| 4,802 |
| (20 | )% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other income |
| 709 |
| 1,677 |
|
|
|
| 2,551 |
| 1,926 |
|
|
| ||||
Other income allocated from the Predecessor Operating Company |
| 795 |
| — |
|
|
|
| 795 |
| — |
|
|
| ||||
Total Other income |
| 1,504 |
| 1,677 |
| (10 | )% |
| 3,346 |
| 1,926 |
| 74 | % | ||||
Total investment income |
| $ | 64,147 |
| $ | 60,474 |
| 6 | % |
| $ | 98,853 |
| $ | 86,267 |
| 15 | % |
The Company’s total investment income increased by $3.7$12.6 million for the sixnine months ended JuneSeptember 30, 2014 as compared to the Predecessor Operating Company’s total investment income for the sixnine months ended JuneSeptember 30, 2013. The 6%15% increase in investment income results from an increase in interest income from the sixnine months ended JuneSeptember 30, 2013 to the sixnine months ended JuneSeptember 30, 2014 and was primarily attributable to larger invested balances, driven by the proceeds from the October 2013 and April 2014 primary offerings of NMFC’sthe Company’s common stock and the June 2014 offering of NMFC’sthe Company’s convertible notes, the Company’s use of leverage from its revolving credit facilities to originate new investments and prepayment fees received associated with the early repayments or partial repayments of fournine different portfolio companies held by the Predecessor Operating Company as of December 31, 2013. The decreaseincrease in dividend and other income during the sixnine months ended JuneSeptember 30, 2014 as compared to the sixnine months ended JuneSeptember 30, 2013 was primarily attributable to structuring, amendment and consent fees received from twelve different portfolio companies and management fees from a non-controlled affiliated portfolio company. The decrease in dividend income during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 was primarily attributable to a large distribution from one of the Predecessor Operating Company’s warrant investments in the prior year and lower amendment and forbearance fees received in the current year.
Operating Expenses
|
| Six months ended |
| Percent |
|
| Nine months ended |
| Percent |
| ||||||||
(in thousands) |
| June 30, 2014 |
| June 30, 2013 |
| Change |
|
| September 30, 2014 |
| September 30, 2013 |
| Change |
| ||||
Management fee |
| $ | 2,742 |
| $ | 7,295 |
|
|
|
| $ | 7,763 |
| $ | 11,049 |
|
|
|
Management fee allocated from Predecessor Operating Company |
| 5,983 |
| — |
|
|
|
| 5,983 |
| — |
|
|
| ||||
Total Management fee |
| 8,725 |
| 7,295 |
| 20 | % |
| 13,746 |
| 11,049 |
| 24 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Incentive fee |
| 2,747 |
| 8,865 |
|
|
|
| 7,267 |
| 12,398 |
|
|
| ||||
Incentive fee allocated from Predecessor Operating Company |
| 6,248 |
| — |
|
|
|
| 6,248 |
| — |
|
|
| ||||
Total Incentive fee |
| 8,995 |
| 8,865 |
| 1 | % |
| 13,515 |
| 12,398 |
| 9 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Capital gains incentive fee (1) |
| 763 |
| 981 |
|
|
|
| (1,904 | ) | 2,568 |
|
|
| ||||
Capital gains incentive fee allocated from Predecessor Operating Company(1) |
| 2,024 |
| — |
|
|
|
| 2,024 |
| — |
|
|
| ||||
Total Capital gains incentive fee (1) |
| 2,787 |
| 981 |
| 184 | % |
| 120 |
| 2,568 |
| (95 | )% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest and other financing expenses |
| 2,559 |
| 6,189 |
|
|
|
| 7,796 |
| 9,379 |
|
|
| ||||
Interest and other financing expenses allocated from Predecessor Operating Company |
| 4,764 |
| — |
|
|
|
| 4,764 |
| — |
|
|
| ||||
Total Interest and other financing expenses |
| 7,323 |
| 6,189 |
| 18 | % |
| 12,560 |
| 9,379 |
| 34 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Professional fees |
| 640 |
| 1,135 |
|
|
|
| 1,530 |
| 1,684 |
|
|
| ||||
Professional fees allocated from Predecessor Operating Company |
| 1,238 |
| — |
|
|
|
| 1,238 |
| — |
|
|
| ||||
Total Professional fees |
| 1,878 |
| 1,135 |
| 65 | % |
| 2,768 |
| 1,684 |
| 64 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Administrative expenses |
| 360 |
| 1,698 |
|
|
|
| 909 |
| 2,441 |
|
|
| ||||
Administrative expenses allocated from Predecessor Operating Company |
| 761 |
| — |
|
|
|
| 761 |
| — |
|
|
| ||||
Total Administrative expenses |
| 1,121 |
| 1,698 |
| (34 | )% |
| 1,670 |
| 2,441 |
| (32 | )% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other general and administrative expenses |
| 239 |
| 806 |
|
|
|
| 687 |
| 1,184 |
|
|
| ||||
Other general and administrative expenses allocated from Predecessor Operating Company |
| 555 |
| — |
|
|
|
| 555 |
| — |
|
|
| ||||
Total Other general and administrative expenses |
| 794 |
| 806 |
| (1 | )% | |||||||||||
Total other general and administrative expenses |
| 1,242 |
| 1,184 |
| 5 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||||
Income tax expense |
| 230 |
| — |
| NM | * | |||||||||||
Total expenses |
| 31,623 |
| 26,969 |
| 17 | % |
| 45,851 |
| 40,703 |
| 13 | % | ||||
Less: expenses waived and reimbursed |
| (823 | ) | (1,665 | ) | (51 | )% |
| (1,145 | ) | (2,265 | ) | 49 | % | ||||
Net expenses |
| $ | 30,800 |
| $ | 25,304 |
| 22 | % |
| $ | 44,706 |
| $ | 38,438 |
| 16 | % |
* Not meaningful.
(1) Capital gains incentive fee accrual assumes a hypothetical liquidation basis.
The Company’s total net operating expenses increased by $5.5$6.3 million for the sixnine months ended JuneSeptember 30, 2014 as compared to the Predecessor Operating Company’s sixnine months ended JuneSeptember 30, 2013. The Company’s management fee increased by $1.4$2.7 million and incentive fee increased by $0.1$1.1 million for the sixnine months ended JuneSeptember 30, 2014 as compared to the Predecessor Operating Company’s sixnine months ended JuneSeptember 30, 2013. The increase in management fee and incentive fee from the Predecessor Operating Company’s sixnine months ended JuneSeptember 30, 2013 to the Company’s sixnine months ended JuneSeptember 30, 2014 was attributable to larger invested balances, driven by the proceeds from the October 2013 and April 2014 primary offerings of NMFC’s common stock, June 2014 offering of NMFC’s convertible notes and the Company’s use of leverage from its revolving credit facilities to originate new investments. The slight increase in the incentive fee was primarily attributable to a large distribution from one of the Predecessor Operating Company’s warrant investments in the prior year, which resulted in approximately $1.3 million of incentive fees for the six months ended June 30, 2013. After excluding this item, incentive fees increased $1.4 million from the prior comparable period due to higher net investment income from larger invested balances similar to the increase in management fee. The Company’s capital gains incentive fees increased $1.8decreased $2.4 million for the sixnine months ended JuneSeptember 30, 2014 as compared to the Predecessor Operating Company’s sixnine months ended JuneSeptember 30, 2013, which was attributable to higherlower net Adjusted Realized Capital Gains (Losses) and Adjusted Unrealized Capital Appreciation (Depreciation) of investments during the period. Approximately $2.0 millionAs of September 30, 2014, no actual capital gains incentive fees would be fee was
owed under the Investment Management Agreement, if the Company had ceased operations as of June 30, 2014, as cumulative net Adjusted Realized Gains exceededdid not exceed cumulative Adjusted Unrealized Depreciation.
Interest and other financing expenses increased by $1.1$3.2 million during the sixnine months ended JuneSeptember 30, 2014, primarily due to the increase of average debt outstanding from $193.9$192.8 million to $228.7$231.0 million for the Holdings Credit Facility (as defined below) and from $214.4 million to $215.0 million for the SLF Credit Facility (as defined below) for the sixnine months ended JuneSeptember 30, 2013 compared to JuneSeptember 30, 2014. In addition, during the threenine months ended JuneSeptember 30, 2014, the Company issued $115.0 million of convertible notes and closed the NMFC Credit Facility (as defined below). During the sixnine months ended JuneSeptember 30, 2014, the Company incurred $10.9 thousand in other expenses that were not subject to the expense cap pursuant to the administration agreement, as amended and restated (the “Administration Agreement”), with the Administrator, and further restricted by the Company. The expense cap expired on March 31, 2014, resulting in a decrease of expenses waived and reimbursed for the sixnine months ended JuneSeptember 30, 2014 as compared to the sixnine months ended JuneSeptember 30, 2013. For the sixnine months ended JuneSeptember 30, 2014, approximately $0.3 million of reimbursable expenses were included in administrative expenses on the Consolidated Statement of Operations and included in payable to affiliates on the Consolidated Statements of Assets and Liabilities as the expenses were payablepaid to the Administrator.
Net Realized Gains and Net Change in Unrealized Appreciation (Depreciation)
|
| Six months ended |
| Percent |
|
| Nine months ended |
| ||||||||||
(in thousands) |
| June 30, 2014 |
| June 30, 2013 |
| Change |
|
| September 30, |
| September 30, |
| Percent |
| ||||
Net realized (losses) gains on investments |
| $ | (1,067 | ) | $ | 4,356 |
|
|
|
| $ | (299 | ) | $ | 9,516 |
|
|
|
Net realized gains on investment allocated from Predecessor Operating Company |
| 8,568 |
| — |
|
|
| |||||||||||
Net realized gains on investments allocated from Predecessor Operating Company |
| 8,568 |
| — |
|
|
| |||||||||||
Total realized gains on investments |
| 7,501 |
| 4,356 |
| 72 | % |
| 8,269 |
| 9,516 |
| (13 | )% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net change in unrealized appreciation (depreciation) of investments |
| 5,708 |
| (141 | ) |
|
|
| (8,564 | ) | 2,518 |
|
|
| ||||
Net change in unrealized appreciation (depreciation) of investments allocated from Predecessor Operating Company |
| 940 |
| — |
|
|
|
| 940 |
| — |
|
|
| ||||
Total change in unrealized appreciation (depreciation) of investments |
| 6,648 |
| (141 | ) | NM | * |
| (7,624 | ) | 2,518 |
| NM | * | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Provision for taxes on unrealized appreciation of investments |
| (386 | ) | — |
| NM | * | |||||||||||
Provision for taxes |
| (271 | ) | — |
| NM | * | |||||||||||
Total net realized gains and net change in unrealized appreciation (depreciation) of investments |
| $ | 13,763 |
| $ | 4,215 |
| 227 | % |
| $ | 374 |
| $ | 12,034 |
| (97 | )% |
* Not meaningful.
The Company’s net realized and unrealized gains resulted in a net gain of $13.8$0.4 million for the sixnine months ended JuneSeptember 30, 2014 compared to the Predecessor Operating Company’s net realized and unrealized gains resulting in a net gain of $4.2$12.0 million for the same period in 2013. We look at net realized and unrealized gains or losses together as movement in unrealized appreciation or depreciation can be the result of realizations. The net gain for the sixnine months ended JuneSeptember 30, 2014 was primarily driven by the overall increase in the market prices of the Company’s investments during the period, a $5.6 million gain from the sale of the Company’s warrant investments in one portfolio company and driven by sales or repayments of investments with fair values in excess of December 31, 2013 valuations resulting in net realized gains being greater than the reversal of the cumulative net unrealized gains for those investments. These gains offset the overall decrease in the market prices of the Company’s investments during the period and the partial write-down related to one portfolio company. The net gain for the nine months ended September 30, 2013 was driven by sales or repayment of investments with fair values in excess of December 31, 2012 valuations, resulting in net realized gains being greater than the reversal of the cumulative net unrealized gains for those investments. Additionally, during the nine months ended September 30, 2013, a change in accounting estimate related to the classification of dividend income for a distribution recorded in the prior quarter resulted in a realized gain of approximately $1.3 million and an unrealized gain of approximately $0.5 million, as well as the modification of terms on one debt investment that was accounted for as an extinguishment, which resulted in a realized gain of $1.7 million for the nine months ended September 30, 2013. The provision for income taxes on unrealized appreciation of investments was attributable to one warrant investment that is held as of September 30, 2014 in one of the Company’s corporate subsidiaries.
Liquidity and Capital Resources
The primary use of existing funds and any funds raised in the future is expected to be for the Company’s repayment of indebtedness, the Company’s investments in portfolio companies, cash distributions to the Company’s stockholders or for other general corporate purposes.
Since NMFC’s IPO, and through JuneSeptember 30, 2014, NMFC raised approximately $292.1 million in net proceeds from additional offerings of common stock and issued shares valued at approximately $288.4 million on behalf of AIV Holdings for exchanged units. NMFC acquired from the Predecessor Operating Company units of the Predecessor Operating Company equal to the number of shares of NMFC’s common stock sold in the additional offerings.
On February 3, 2014, NMFC completed an underwritten secondary public offering of 2,325,000 shares of its common stock on behalf of a selling stockholder, AIV Holdings, at a public offering price of $14.70 per share. In connection with the underwritten secondary public offering, the underwriters purchased an additional 346,938 shares of NMFC’s common stock from AIV Holdings with the exercise of the overallotment option to purchase up to an additional 346,938 shares of common stock. NMFC did not receive any proceeds from the sale of shares of NMFC’s common stock by AIV Holdings. The Predecessor Operating Company and NMFC did not bear any expenses in connection with this offering. The offering expenses were borne by the selling stockholder, AIV Holdings. As of February 3, 2014, AIV Holdings no longer owns any units of the Predecessor Operating Company and NMFC owns 100.0% of the outstanding units of the Predecessor Operating Company, which is now a wholly-owned subsidiary of NMFC.
On April 15, 2014, NMFC completed a public offering of 3,500,000 shares of its common stock at a public offering price of $14.30 per share, which resulted in net proceeds of $51.0 million, or $14.57 per share. NMFC’s Investment Adviser agreed to pay the underwriting discounts and commissions in connection with this offering and an additional supplemental payment to the underwriters of $0.9 million, or $0.27 per share, which reflects the difference between the public offering price and the proceeds per share received by NMFC. In connection with the public offering, the underwriters purchased an additional 525,000 shares of NMFC’s common stock with the exercise of the overallotment option to purchase up to an additional 525,000 shares of NMFC’s common stock, resulting in additional net proceeds of $7.6 million. NMFC’s Investment Adviser agreed to pay the underwriting discounts and commissions in connection with this exercise of the overallotment option and an additional supplemental payment to the underwriters of $0.1 million, or $0.27 per share, which reflects the difference between the public offering price and the proceeds per share received by NMFC in this exercise of the overallotment option.
The Company’s liquidity is generated and generally available through advances from the revolving credit facilities, from cash flows from operations, and, we expect, through periodic follow-on equity offerings. In addition, we may from time to time enter into additional debt facilities, increase the size of existing facilities or issue additional debt securities, including unsecured debt and/or debt securities convertible into common stock. Any such incurrence or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, calculated pursuant to the 1940 Act, is at least 200.0% after such borrowing.
At JuneSeptember 30, 2014, the Company had cash and cash equivalents of approximately $21.7$17.9 million and at December 31, 2013, the Predecessor Operating Company had cash and cash equivalents of approximately $15.0 million. Cash used in operating activities for the Company during the sixnine months ended JuneSeptember 30, 2014 was approximately $(154.6)$(167.7) million, which includes the activity allocated from NMF Holdings, and cash used inprovided by operating activities for the Predecessor Operating Company during the sixnine months ended JuneSeptember 30, 2013 was approximately $(11.1)$52.1 million. We expect that all current liquidity needs by the Company will be met with cash flows from operations and other activities.
Credit Facilities
Holdings Credit Facility—The Loan and Security Agreement, as amended and restated, dated May 19, 2011 (the “Holdings Credit Facility”) among NMF Holdings as the Borrower and Collateral Administrator, Wells Fargo Securities, L.L.C. as the Administrative Agent, and Wells Fargo Bank, National Association, as the Collateral Custodian, is structured as a revolving credit facility and matures on October 27, 2016.
The maximum amount of revolving borrowings available under the Holdings Credit Facility is $280.0 million. As of JuneSeptember 30, 2014, NMF Holdings was permitted to borrow up to 45.0% or 25.0% of the purchase price of pledged first lien or non-first lien debt securities, and up to 70.0% and 45.0% of the purchase price of specified first lien debt securities and specified non-first lien debt securities, respectively, subject to approval by Wells Fargo Bank, National Association. The Holdings Credit Facility was amended and restated on May 6, 2014 and as a result, it is non-recourse to the Company and is collateralized by all of the investments of NMF Holdings on an investment by investment basis. All fees associated with the origination or upsizing of the Holdings Credit Facility are capitalized on the Company’s Consolidated Statement of Assets and Liabilities and charged against income as other financing expenses over the life of the Holdings Credit Facility. The Holdings Credit Facility contains certain customary affirmative and negative covenants and events of default, including the occurrence of a change in control. In addition, the Holdings Credit Facility requires the Company to maintain a minimum asset coverage ratio. However, the covenants are generally not tied to mark to market fluctuations in the prices of the Company’sNMF Holdings’ investments, but rather to the performance of the underlying portfolio companies.
The Holdings Credit Facility bears interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 2.75% per annum and charges a non-usage fee, based on the unused facility amount multiplied by the Non-Usage Fee Rate (as defined in the Loan and Security Agreement).
The following table summarizes the interest expense and non-usage fees incurred on the Holdings Credit Facility for the three and sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013:
|
| Three months ended |
| Six months ended |
|
| Three months ended |
| Nine months ended |
| ||||||||||||||||
(in millions) |
| June 30, 2014 |
| June 30, 2013 |
| June 30, 2014 |
| June 30, 2013 |
|
| September 30, 2014 |
| September 30, 2013 |
| September 30, 2014 |
| September 30, 2013 |
| ||||||||
Interest expense |
| $ | 1.6 |
| $ | 1.4 |
| $ | 3.3 |
| $ | 2.9 |
|
| $ | 1.7 |
| $ | 1.4 |
| $ | 5.1 |
| $ | 4.3 |
|
Non-usage fee |
| 0.1 |
| 0.1 |
| 0.2 |
| 0.1 |
|
| — | (1) | — | (1) | 0.2 |
| 0.1 |
| ||||||||
Weighted average interest rate |
| 2.9 | % | 2.9 | % | 2.9 | % | 3.0 | % |
| 2.9 | % | 2.9 | % | 2.9 | % | 2.9 | % | ||||||||
Average debt outstanding |
| $ | 224.7 |
| $ | 189.0 |
| $ | 228.7 |
| $ | 193.9 |
|
| $ | 235.3 |
| $ | 190.7 |
| $ | 231.0 |
| $ | 192.8 |
|
(1)For the three months ended September 30, 2014 and September 30, 2013, the total non-usage fee was less than $0.1 million.
As of JuneSeptember 30, 2014 and December 31, 2013, the outstanding balance on the Holdings Credit Facility was $238.1$259.0 million and $221.8 million, respectively, and NMF Holdings was not aware of any instances of non-compliance related to the Holdings Credit Facility on such dates.
SLF Credit Facility—NMF SLF’s Loan and Security Agreement, as amended and restated, dated October 27, 2010 (the “SLF Credit Facility”) among NMF SLF as the Borrower, NMF Holdings as the Collateral Administrator, Wells Fargo Securities, L.L.C. as the Administrative Agent, and Wells Fargo Bank, National Association, as the Collateral Custodian, is structured as a revolving credit facility and matures on October 27, 2016. The maximum amount of revolving borrowings available under the SLF Credit Facility is $215.0 million. The SLF Credit Facility is non-recourse to the Company and secured by all assets of NMF SLF on an
investment by investment basis. All fees associated with the origination or upsizing of the SLF Credit Facility are capitalized on the Company’s Consolidated Statement of Assets and Liabilities and charged against income as other financing expenses over the life of the SLF Credit Facility. The SLF Credit Facility contains certain customary affirmative and negative covenants and events of default, including the occurrence of a change in control. The covenants are generally not tied to mark to market fluctuations in the prices of the Company’sNMF SLF’s investments, but rather to the performance of the underlying portfolio companies. NMF SLF is not restricted from the purchase or sale of loans with an affiliate. Therefore, specified first lien loans can be moved as collateral between the Holdings Credit Facility and the SLF Credit Facility.
As of JuneSeptember 30, 2014, the SLF Credit Facility permits borrowings of up to 70.0% of the purchase price of pledged first lien debt securities and up to 25.0% of the purchase price of specified second lien loans, of which, up to 25.0% of the aggregate outstanding loan balance of all pledged debt securities in the SLF Credit Facility is allowed to be derived from second lien loans, subject to approval by Wells Fargo Bank, National Association.
The SLF Credit Facility bears interest at a rate of LIBOR plus 2.00% per annum for first lien loans and LIBOR plus 2.75% per annum for second lien loans, respectively, as amended on March 11, 2013. A non-usage fee is paid, based on the unused facility amount multiplied by the Non-Usage Fee Rate (as defined in the Loan and Security Agreement).
The following table summarizes the interest expense and non-usage fees incurred on the SLF Credit Facility for the three and sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013:
|
| Three months ended |
| Six months ended |
|
| Three months ended |
| Nine months ended |
| ||||||||||||||||
(in millions) |
| June 30, 2014 |
| June 30, 2013 |
| June 30, 2014 |
| June 30, 2013 |
|
| September 30, 2014 |
| September 30, 2013 |
| September 30, 2014 |
| September 30, 2013 |
| ||||||||
Interest expense |
| $ | 1.2 |
| $ | 1.2 |
| $ | 2.4 |
| $ | 2.4 |
|
| $ | 1.1 |
| $ | 1.2 |
| $ | 3.6 |
| $ | 3.7 |
|
Non-usage fee |
| — |
| — |
| — |
| — |
|
| — | (1) | — | (1) | — | (1) | — | (1) | ||||||||
Weighted average interest rate |
| 2.2 | % | 2.3 | % | 2.2 | % | 2.2 | % |
| 2.2 | % | 2.3 | % | 2.2 | % | 2.3 | % | ||||||||
Average debt outstanding |
| $ | 215.0 |
| $ | 214.5 |
| $ | 215.0 |
| $ | 214.4 |
|
| $ | 202.2 |
| $ | 214.8 |
| $ | 210.7 |
| $ | 214.5 |
|
(1) For the three and sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013, the total non-usage fee was less than $50 thousand.
As of JuneSeptember 30, 2014 and December 31, 2013, the outstanding balance on the SLF Credit Facility was $215.0$204.9 million and $214.7 million, respectively, and NMF SLF was not aware of any instances of non-compliance related to the SLF Credit Facility on such dates.
NMFC Credit Facility—The Senior Secured Revolving Credit Agreement, dated June 4, 2014 (together with the related guarantee and security agreement, the “NMFC Credit Facility”), among the Company as the Borrower and Goldman Sachs Bank USA as the Administrative Agent and Collateral Agent, and Goldman Sachs Bank USA and Morgan Stanley, N.A. as Lenders, is structured
as a senior secured revolving credit facility and matures on June 4, 2019. The NMFC Credit Facility is guaranteed by certain domestic subsidiaries of the Company and proceeds offrom the NMFC Credit Facility may be used for general corporate purposes, including the funding of portfolio investments.
The maximum amount of revolving borrowings available under the NMFC Credit Facility is $50.0 million. The Company is permitted to borrow at various advance rates depending on the type of portfolio investment as outlined in the Senior Secured Revolving Credit Agreement. All fees associated with the origination of the NMFC Credit Facility are capitalized on the Company’s Consolidated Statement of Assets and Liabilities and charged against income as other financing expenses over the life of the NMFC Credit Facility. The NMFC Credit Facility contains certain customary affirmative and negative covenants and events of default, including certain financial covenants related to asset coverage and liquidity and other maintenance covenants.
The NMFC Credit Facility will generally bear interest at a rate of LIBOR plus 2.50% per annum or the prime rate plus 1.50% per annum, and charges a commitment fee, based on the unused facility amount multiplied by 0.375% (as defined in the Senior Secured Revolving Credit Agreement).
|
| Three months ended |
| Nine months ended |
| ||||||||
(in millions) |
| September 30, 2014 |
| September 30, 2013 (2) |
| September 30, 2014 |
| September 30, 2013 (2) |
| ||||
Interest expense |
| $ | — | (1) | $ | — |
| $ | — | (1) | $ | — |
|
Non-usage fee |
| — | (1) | — |
| — | (1) | — |
| ||||
Weighted average interest rate |
| 2.7 | % | — | % | 2.7 | % | — | % | ||||
Average debt outstanding |
| $ | 6.0 |
| $ | — |
| $ | 2.0 |
| $ | — |
|
Non-usage fees incurred
(1)For the three and nine months ended September 30, 2014, the total interest expense and non-usage fee was less than $0.1 million.
(2)Not applicable, as the NMFC Credit Facility commenced on June 4, 2014.
As of September 30, 2014, the outstanding balance on the NMFC Credit Facility were less than $20 thousand forwas $22.0 million and NMFC was not aware of any instances of non-compliance related to the three and six months ended June 30, 2014. The Company did not incur any interest expense as the Company did not drawNMFC Credit Facility on the facility during the three and six months ended June 30, 2014.such dates.
Convertible Notes—On June 3, 2014, the Company closed a private offering of $115.0 million aggregate principal amount of senior unsecured convertible notes (the “Convertible Notes”), pursuant to an indenture, dated June 3, 2014 (the “Indenture”). The
Convertible Notes were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.1933. The Convertible Notes bear interest at an annual rate of 5.0%, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2014. The Convertible Notes will mature on June 15, 2019 unless earlier converted or repurchased at the holder’s option. The Convertible Notes will be convertible by the holders into shares of common stock, initially at a conversion rate of 62.7746 shares of the Company’s common stock per $1$1.0 thousand principal amount of Convertible Notes (7,219,083 common shares) corresponding to an initial conversion price per share of approximately $15.93, which represents a premium of 12.5% to the $14.16 per share closing price of the Company’s common stock on May 28, 2014. The conversion rate will be subject to adjustment upon certain events, such as stock splits and combinations, mergers, spin-offs, increases in dividends in excess of $0.34 per share per quarter and certain changes in control. Certain of these adjustments, including adjustments for increases in dividends, are subject to a conversion price floor of $14.16 per share. In no event will the total number of shares of common stock issuable upon conversion exceed 70.6214 per $1$1.0 thousand principal amount of the Convertible Notes. The Company has determined that the embedded conversion option in the Convertible Notes is not required to be separately accounted for as a derivative under GAAP.
The Convertible Notes are senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that wethe Company later secure)secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries and financing vehicles. The issuance is considered part of the if-converted method for calculation of diluted earnings per share.
The Company may not redeem the Convertible Notes prior to maturity. No sinking fund is provided for the Convertible Notes. In addition, if certain corporate events occur in respect of the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100.0% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the repurchase date.
The Indenture contains certain covenants, including covenants requiring the Company to provide financial information to the holders of the Convertible Note and the Trustee if the Company ceases to be subject to the reporting requirements of the Exchange Act. These covenants are subject to limitations and exceptions that are described in the Indenture. As of JuneSeptember 30, 2014, the Company was in compliance with the terms of the Indenture.
Interest expense incurred on the Convertible Notes was $0.4 million for the three and sixnine months ended JuneSeptember 30, 2014.2014 was $1.4 million and $1.9 million, respectively.
Off-Balance Sheet Arrangements
The Company may become a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As of JuneSeptember 30, 2014, the Company had outstanding commitments to third parties to fund investments totaling $39.3$24.1 million and as of December 31, 2013 the Predecessor Operating Company had outstanding commitments to third parties to fund investments totaling $15.5 million, under various undrawn revolving credit facilities, delayed draw commitments or other future funding commitments.
The Company may from time to time enter into financing commitment letters or bridge financing commitments, which could require funding in the future. As of JuneSeptember 30, 2014, the Company signed adid not enter into any commitment letterletters to fund $18.5 million in the future, which is included in the outstanding commitments.purchase debt investments. As of December 31, 2013, the Predecessor Operating Company did not enter into any commitment letters to purchase debt investments. As of JuneSeptember 30, 2014, the Company had not entered into any bridge financing commitments which could require funding in the future. As of December 31, 2013, the Predecessor Operating Company had not entered into any bridge financing commitments which could require funding in the future.
Borrowings
The Holdings Credit Facility had borrowings of $238.1$259.0 million and $221.8 million outstanding as of JuneSeptember 30, 2014 and December 31, 2013, respectively. The SLF Credit Facility had borrowings of $215.0$204.9 million and $214.7 million outstanding as of JuneSeptember 30, 2014 and December 31, 2013, respectively. The NMFC Credit Facility had $22.0 and no borrowings outstanding as of JuneSeptember 30, 2014 and December 31, 2013, respectively. The $115.0 million of Convertible Notes issued on June 3, 2014 were outstanding as of JuneSeptember 30, 2014.
Contractual Obligations
A summary of the Company’s significant contractual payment obligations as of JuneSeptember 30, 2014 is as follows:
|
|
|
| Contractual Obligations |
|
|
|
|
|
| Contractual Obligations |
|
|
| ||||||||||||||||||
|
| Total |
| Less than |
| 1 - 3 |
| 3 - 5 |
| More than |
|
| Total |
| Less than |
| 1 - 3 |
| 3 - 5 |
| More than |
| ||||||||||
Holdings Credit Facility(1) |
| $ | 238.1 |
| $ | — |
| $ | 238.1 |
| $ | — |
| $ | — |
|
| $ | 259.0 |
| $ | — |
| $ | 259.0 |
| $ | — |
| $ | — |
|
SLF Credit Facility(2) |
| 215.0 |
| — |
| 215.0 |
| — |
| — |
|
| 204.9 |
| — |
| 204.9 |
| — |
| — |
| ||||||||||
Convertible Notes(3) |
| 115.0 |
| — |
| — |
| 115.0 |
| — |
|
| 115.0 |
| — |
| — |
| 115.0 |
| — |
| ||||||||||
NMFC Credit Facility(4) |
| — |
| — |
| — |
| — |
| — |
|
| 22.0 |
| — |
| — |
| 22.0 |
| — |
| ||||||||||
Total Contractual Obligations |
| $ | 568.1 |
| $ | — |
| $ | 453.1 |
| $ | 115.0 |
| $ | — |
|
| $ | 600.9 |
| $ | — |
| $ | 463.9 |
| $ | 137.0 |
| $ | — |
|
(1) Under the terms of the $280.0 million Holdings Credit Facility, all outstanding borrowings under that facility ($238.1259.0 million as of JuneSeptember 30, 2014) must be repaid on or before October 27, 2016. As of JuneSeptember 30, 2014, there was approximately $41.9$21.0 million of possible capacity remaining under the Holdings Credit Facility.
(2) Under the terms of the $215.0 million SLF Credit Facility, all outstanding borrowings under that facility ($215.0204.9 million as of JuneSeptember 30, 2014) must be repaid on or before October 27, 2016. As of JuneSeptember 30, 2014, there was noapproximately $10.1 million of possible capacity remaining under the SLF Credit Facility.
(3) The $115.0 million Convertible Notes will mature on June 15, 2019 unless earlier converted or repurchased at the holder’s option.
(4) Under the terms of the $50.0 million NMFC Credit Facility, all outstanding borrowings under that facility (no outstanding borrowings($22.0 million as of JuneSeptember 30, 2014) must be repaid on or before June 4, 2019. As of JuneSeptember 30, 2014, there was approximately $50.0$28.0 million of possible capacity remaining under the NMFC Credit Facility.
The Company has certain contracts under which it has material future commitments. The Company has $39.3$24.1 million of undrawn funding commitments as of JuneSeptember 30, 2014 related to its participation as a lender in revolving credit facilities, delayed draw commitments or other future funding commitments of the Company’s portfolio companies. As of June 30, 2014, the Company signed a financing commitment letter to fund $18.5 million in the future, which is included in the other future funding commitments. As of JuneSeptember 30, 2014, the Company did not enter into any bridge financing commitments which could require funding in the future.
We have entered into the Investment Management Agreement with the Investment Adviser in accordance with the 1940 Act. Under the Investment Management Agreement, the Investment Adviser has agreed to provide the Company with investment advisory and management services. We have agreed to pay for these services (1) a management fee and (2) an incentive fee based on its performance.
We have also entered into an Administration Agreement with the Administrator. Under the Administration Agreement, the Administrator has agreed to arrange office space for us and provide office equipment and clerical, bookkeeping and record keeping services and other administrative services necessary to conduct our respective day-to-day operations. The Administrator has also agreed to perform, or oversee the performance of, our financial records, our reports to stockholders and reports filed with the SEC.
If any of the contractual obligations discussed above are terminated, our costs under any new agreements that are entered into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under the Investment Management Agreement and the Administration Agreement.
Distributions and Dividends
Dividends declared and paid to stockholders of the Company for the sixnine months ended JuneSeptember 30, 2014 totaled $34.0$57.9 million.
The following table summarizes the Company’s quarterly cash distributions, including dividends and returns of capital, if any, per share that have been declared by the Company’s board of directors since the Company’s IPO:
Fiscal Year Ended |
| Date Declared |
| Record Date |
| Payment Date |
| Per Share |
| |
December 31, 2014 |
|
|
|
|
|
|
|
|
| |
Third Quarter |
| August 5, 2014 |
| September 16, 2014 |
| September 30, 2014 |
| $ | 0.34 |
|
Third Quarter |
| July 30, 2014 |
| August 20, 2014 |
| September 3, 2014 |
| 0.12 | (1) | |
Second Quarter |
| May 6, 2014 |
| June 16, 2014 |
| June 30, 2014 |
| 0.34 |
| |
First Quarter |
| March 4, 2014 |
| March 17, 2014 |
| March 31, 2014 |
| 0.34 |
| |
|
|
|
|
|
|
|
| $ | 1.14 |
|
|
|
|
|
|
|
|
|
|
| |
December 31, 2013 |
|
|
|
|
|
|
|
|
| |
Fourth Quarter |
| November 8, 2013 |
| December 17, 2013 |
| December 31, 2013 |
| $ | 0.34 |
|
Third Quarter |
| August 7, 2013 |
| September 16, 2013 |
| September 30, 2013 |
| 0.34 |
| |
Third Quarter |
| August 7, 2013 |
| August 20, 2013 |
| August 30, 2013 |
| 0.12 | (2) | |
Second Quarter |
| May 6, 2013 |
| June 14, 2013 |
| June 28, 2013 |
| 0.34 |
| |
First Quarter |
| March 6, 2013 |
| March 15, 2013 |
| March 28, 2013 |
| 0.34 |
| |
|
|
|
|
|
|
|
| $ | 1.48 |
|
December 31, 2012 |
|
|
|
|
|
|
|
|
| |
Fourth Quarter |
| December 27, 2012 |
| December 31, 2012 |
| January 31, 2013 |
| $ | 0.14 | (3) |
Fourth Quarter |
| November 6, 2012 |
| December 14, 2012 |
| December 28, 2012 |
| 0.34 |
| |
Third Quarter |
| August 8, 2012 |
| September 14, 2012 |
| September 28, 2012 |
| 0.34 |
| |
Second Quarter |
| May 8, 2012 |
| June 15, 2012 |
| June 29, 2012 |
| 0.34 |
| |
Second Quarter |
| May 8, 2012 |
| May 21, 2012 |
| May 31, 2012 |
| 0.23 | (4) | |
First Quarter |
| March 7, 2012 |
| March 15, 2012 |
| March 30, 2012 |
| 0.32 |
| |
|
|
|
|
|
|
|
| $ | 1.71 |
|
December 31, 2011 |
|
|
|
|
|
|
|
|
| |
Fourth Quarter |
| November 8, 2011 |
| December 15, 2011 |
| December 30, 2011 |
| $ | 0.30 |
|
Third Quarter |
| August 10, 2011 |
| September 15, 2011 |
| September 30, 2011 |
| 0.29 |
| |
Second Quarter |
| August 10, 2011 |
| August 22, 2011 |
| August 31, 2011 |
| 0.27 |
| |
|
|
|
|
|
|
|
| $ | 0.86 |
|
Total |
|
|
|
|
|
|
| $ | 5.19 |
|
Fiscal Year Ended |
| Date Declared |
| Record Date |
| Payment Date |
| Per Share |
| |
December 31, 2014 |
|
|
|
|
|
|
|
|
| |
Second Quarter |
| May 6, 2014 |
| June 16, 2014 |
| June 30, 2014 |
| $ | 0.34 |
|
First Quarter |
| March 4, 2014 |
| March 17, 2014 |
| March 31, 2014 |
| 0.34 |
| |
|
|
|
|
|
|
|
| $ | 0.68 |
|
|
|
|
|
|
|
|
|
|
| |
December 31, 2013 |
|
|
|
|
|
|
|
|
| |
Fourth Quarter |
| November 8, 2013 |
| December 17, 2013 |
| December 31, 2013 |
| $ | 0.34 |
|
Third Quarter |
| August 7, 2013 |
| September 16, 2013 |
| September 30, 2013 |
| 0.34 |
| |
Third Quarter |
| August 7, 2013 |
| August 20, 2013 |
| August 30, 2013 |
| 0.12 | (1) | |
Second Quarter |
| May 6, 2013 |
| June 14, 2013 |
| June 28, 2013 |
| 0.34 |
| |
First Quarter |
| March 6, 2013 |
| March 15, 2013 |
| March 28, 2013 |
| 0.34 |
| |
|
|
|
|
|
|
|
| $ | 1.48 |
|
December 31, 2012 |
|
|
|
|
|
|
|
|
| |
Fourth Quarter |
| December 27, 2012 |
| December 31, 2012 |
| January 31, 2013 |
| $ | 0.14 | (2) |
Fourth Quarter |
| November 6, 2012 |
| December 14, 2012 |
| December 28, 2012 |
| 0.34 |
| |
Third Quarter |
| August 8, 2012 |
| September 14, 2012 |
| September 28, 2012 |
| 0.34 |
| |
Second Quarter |
| May 8, 2012 |
| June 15, 2012 |
| June 29, 2012 |
| 0.34 |
| |
Second Quarter |
| May 8, 2012 |
| May 21, 2012 |
| May 31, 2012 |
| 0.23 | (3) | |
First Quarter |
| March 7, 2012 |
| March 15, 2012 |
| March 30, 2012 |
| 0.32 |
| |
|
|
|
|
|
|
|
| $ | 1.71 |
|
December 31, 2011 |
|
|
|
|
|
|
|
|
| |
Fourth Quarter |
| November 8, 2011 |
| December 15, 2011 |
| December 30, 2011 |
| $ | 0.30 |
|
Third Quarter |
| August 10, 2011 |
| September 15, 2011 |
| September 30, 2011 |
| 0.29 |
| |
Second Quarter |
| August 10, 2011 |
| August 22, 2011 |
| August 31, 2011 |
| 0.27 |
| |
|
|
|
|
|
|
|
| $ | 0.86 |
|
Total |
|
|
|
|
|
|
| $ | 4.73 |
|
(1)Special dividend related to realized capital gains attributable to the Company’s warrant investments in Learning Care Group (US), Inc.
(2) Special dividend related to a distribution received attributable to the Company’s investment in YP Equity Investors LLC.
(2)(3) Special dividend intended to minimize to the greatest extent possible the Company’s federal income or excise tax liability.
(3)(4) Special dividend related to estimated realized capital gains attributable to the Predecessor Operating Company’s investments in Lawson Software, Inc. and Infor Lux Bond Company.
Tax characteristics of all dividends paid by the Company were reported to stockholders on Form 1099 after the end of the calendar year. Future quarterly dividends, if any, for the Company will be determined by the board of directors.
The Company intends to pay quarterly distributions to its stockholders and to maintain its status as a RIC. The Company intends to distribute approximately its entire portion of Adjusted Net Investment Income on a quarterly basis and substantially its entire taxable income on an annual basis, except that it may retain certain net capital gains for reinvestment.
The Company maintains an “opt out” dividend reinvestment plan for its common stockholders. As a result, the Company’s stockholders’ cash dividends will be automatically reinvested in additional shares of common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. See Item 1—Financial Statements—Note 2, Summary of Significant Accounting Policies for additional details regarding NMFC’s dividend reinvestment plan.
Related Parties
The Company has entered into a number of business relationships with affiliated or related parties, including the following:
· The Company has entered into the Investment Management Agreement with the Investment Adviser, a wholly-owned subsidiary of New Mountain Capital. Therefore, New Mountain Capital is entitled to any profits earned by the Investment Adviser, which includes any fees payable to the Investment Adviser under the terms of the Investment Management Agreement, less expenses incurred by the Investment Adviser in performing its services under the Investment Management Agreement.
· The Company has entered into an Administration Agreement, with the Administrator, a wholly-owned subsidiary of New Mountain Capital. The Administrator arranges office space for the Company and provides office equipment and administrative services necessary to conduct their respective day-to-day operations pursuant to the Administration Agreement. The Company reimburses the Administrator for the allocable portion of overhead and other expenses incurred by it in performing its obligations to the Company under the Administration Agreement, including rent, the fees and expenses associated with performing administrative, finance, and compliance functions, and the compensation of the Company’s chief financial officer and chief compliance officer and their respective staffs. Pursuant to the Administration Agreement and further restricted by the Company, expenses payable to the Administrator by the Company as well as
other direct and indirect expenses (excluding interest, other financing expense, trading expenses and management and incentive fees) had been capped at $3.5 million for the time period from April 1, 2012 to March 31, 2013 and capped at $4.25 million for the time period from April 1, 2013 to March 31, 2014. The expense cap expired on March 31, 2014. Thereafter, the Administrator may, in its own discretion, submit to the Company for reimbursement some or all of the expenses that the Administrator has incurred on behalf of the Company during any quarterly period. As a result, the amount of expenses for which the Company will have to reimburse the Administrator may fluctuate in future quarterly periods and there can be no assurance given as to when, or if, the Administrator may determine to limit the expenses that the Administrator submits to the Company for reimbursement in the future. However, it is expected that the Administrator will continue to support part of the expense burden of the Company in the near future and may decide to not calculate and charge through certain overhead related amounts as well as continue to cover some of the indirect costs. For the three and sixnine months ended JuneSeptember 30, 2014, approximately $0 million and $0.3 million, respectively, of indirect administrative expenses were included in the Consolidated Statements of Operationstotal administrative expenses and were included in total payable to affiliates on the Consolidated Statements of Assets and Liabilities as the expenses were payable to the Administrator.
· The Company, the Investment Adviser and the Administrator have entered into a royalty-free Trademark License Agreement, as amended, with New Mountain Capital, pursuant to which New Mountain Capital has agreed to grant the Company, the Investment Adviser and the Administrator, a non-exclusive, royalty-free license to use the name “New Mountain” and “New Mountain Finance”.
In addition, the Company has adopted a formal code of ethics that governs the conduct of their respective officers and directors. These officers and directors also remain subject to the duties imposed by the 1940 Act, the Delaware General Corporation Law and the Delaware Limited Liability Company Act.
The Investment Adviser and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with the Company’s investment mandates. The Investment Adviser and its affiliates may determine that an investment is appropriate for the Company and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Adviser or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Investment Adviser’s allocation procedures.
Concurrently with the IPO, NMFC sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital in the Concurrent Private Placement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to certain financial market risks, such as interest rate fluctuations. During the sixnine months ended JuneSeptember 30, 2014, certain of the loans held in the Company’s portfolio had floating interest rates. As of JuneSeptember 30, 2014, approximately 87.1% of investments at fair value (excluding investments on non-accrual, revolvers, and non-interest bearing equity investments) represent floating-rate investments with a LIBOR floor (includes investments bearing prime interest rate contracts) and approximately 12.9% of investments at fair value represent fixed-rate investments. Additionally, the Company’s senior secured revolving credit facilities are also subject to floating interest rates and are currently paid based on one-month floating LIBOR rates.
The following table estimates the potential changes in net cash flow generated from interest income and expenses, should interest rates increase by 100, 200 or 300 basis points, or decrease by 25 basis points. Interest income is calculated as revenue from interest generated from the Company’s portfolio of investments held on JuneSeptember 30, 2014. Interest expense is calculated based on the terms of the Company’s outstanding revolving credit facilities and convertible notes. For the Company’s floating rate credit facilities, the Company uses the outstanding balance as of JuneSeptember 30, 2014. Interest expense on the Company’s floating rate credit facilities are calculated using the interest rate as of JuneSeptember 30, 2014, adjusted for the hypothetical changes in rates, as shown below. The base interest rate case assumes the rates on the Company’s portfolio investments remain unchanged from the actual effective interest rates as of JuneSeptember 30, 2014. These hypothetical calculations are based on a model of the investments in our portfolio, held as of JuneSeptember 30, 2014, and are only adjusted for assumed changes in the underlying base interest rates.
Actual results could differ significantly from those estimated in the table.
Change in Interest Rates |
| Estimated |
|
| Estimated |
|
-25 Basis Points |
| 0.60 | %(1) |
| 0.63 | %(1) |
Base Interest Rate |
| — | % |
| — | % |
+100 Basis Points |
| (3.32 | )% |
| (3.38 | )% |
+200 Basis Points |
| 2.25 | % |
| 1.69 | % |
+300 Basis Points |
| 8.74 | % |
| 7.70 | % |
(1) Limited to the lesser of the JuneSeptember 30, 2014 LIBOR rates or a decrease of 25 basis points.
The Company was not exposed to any foreign currency exchange risks as of JuneSeptember 30, 2014.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of JuneSeptember 30, 2014 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic United States Securities and Exchange Commission filings is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
(b) Changes in Internal Controls Over Financial Reporting
Management has not identified any change in the Company’s internal control over financial reporting that occurred during the quarter ended JuneSeptember 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The terms “we”, “us”, “our” and the “Company” refers to New Mountain Finance Corporation.
The Company, the Investment Adviser and the Administrator are not currently subject to any material pending legal proceedings threatened against us as of JuneSeptember 30, 2014. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. ThereBesides the risk mentioned below, there have been no material changes during the sixnine months ended JuneSeptember 30, 2014 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013.
Our investments in securities rated below investment grade are speculative in nature and are subject to additional risk factors such as increased possibility of default, illiquidity of the security, and changes in value based on changes in interest rates.
The securities that we invest in are typically rated below investment grade. Securities rated below investment grade are often referred to as “leveraged loans,” “high yield” or “junk” securities, and may be considered “high risk” compared to debt instruments that are rated investment grade. High yield securities are regarded as having predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations and involve major risk exposure to adverse conditions. In addition, high yield securities generally offer a higher current yield than that available from higher grade issues, but typically involve greater risk. These securities are especially sensitive to adverse changes in general economic conditions, to changes in the financial condition of their issuers and to price fluctuation in response to changes in interest rates. During periods of economic downturn or rising interest rates, issuers of below investment grade instruments may experience financial stress that could adversely affect their ability to make payments of principal and interest and increase the possibility of default.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not engage in unregistered sales of securities during the quarter ended JuneSeptember 30, 2014.
Issuer Purchases of Equity Securities
For the quarter ended JuneSeptember 30, 2014, we did not purchase any of its common stock in the open market.
Item 3. Defaults Upon Senior Securities
None.
None.
(a) Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the United States Securities and Exchange Commission:
Exhibit |
| Description |
3.1(a) |
| Amended and Restated Certificate of Incorporation of New Mountain Finance Corporation(2) |
|
|
|
3.1(b) |
| Certificate of Change of Registered Agent and/or Registered Office of New Mountain Finance Corporation(3) |
|
|
|
3.2 |
| Amended and Restated Bylaws of New Mountain Finance Corporation(2) |
|
|
|
4.1 |
| Form of Stock Certificate of New Mountain Finance Corporation(1) |
|
|
|
4.2 |
| Indenture by and between New Mountain Finance Corporation, as Issuer, and U.S. Bank National Association, as Trustee, dated June 3, 2014(15) |
|
|
|
4.3 |
| Form of Global Note 5.00% Convertible Senior Note Due 2019 (included as part of Exhibit 4.2)(15) |
|
|
|
10.1 |
| Letter Agreement relating to entry into Amended and Restated Loan and Security Agreement by and among New Mountain Finance Holdings, L.L.C., as Borrower and Collateral Administrator, each of the lenders thereto, Wells Fargo Securities, LLC, as Administrative Agent and Wells Fargo Bank, National Association, as Collateral Custodian.(1) |
|
|
|
10.2 |
| Form of Variable Funding Note of New Mountain Finance Holdings, L.L.C., as the Borrower(1) |
|
|
|
10.3 |
| Form of Amended and Restated Account Control Agreement among New Mountain Finance Holdings, L.L.C., Wells Fargo Securities, LLC as the Administrative Agent and Wells Fargo Bank, National Association, as Securities Intermediary(1) |
|
|
|
10.4 |
| First Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent and Wells Fargo Bank, N.A., as Lender(4) |
|
|
|
10.5 |
| Second Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent and Wells Fargo Bank, N.A., as Lender(4) |
|
|
|
10.6 |
| Third Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities LLC, as Administrative Agent and Wells Fargo Bank, N.A., as Lender(4) |
|
|
|
10.7 |
| Sixth Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities LLC, as Administrative Agent and Wells Fargo Bank, N.A., as Lender(5) |
|
|
|
10.8 |
| Seventh Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(6) |
|
| |
10.9 |
| Eighth Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(7) |
|
|
|
10.10 |
| Ninth Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(9) |
Exhibit | Description | |
10.11 |
| Tenth Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(10) |
|
|
|
10.12 |
| Eleventh Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(11) |
|
|
|
10.13 |
| Twelfth Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(12) |
|
|
|
10.14 |
| Thirteenth Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(9) |
|
|
|
10.15 |
| Fourteenth Amendment to Amended and Restated Loan and Security Agreement between New Mountain Finance Holdings, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender |
10.16 | Loan and Security Agreement by and among New Mountain Guardian (Leveraged), L.L.C., as Collateral Administrator, New Mountain Guardian SPV Funding, L.L.C., as Borrower, each of the lenders party thereto, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(1) | |
|
|
|
|
| First Amendment to Loan and Security Agreement between New Mountain Guardian SPV Funding, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(1) |
|
|
|
|
| Second Amendment to Loan and Security Agreement between New Mountain Guardian SPV Funding, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(1) |
|
|
|
|
| Third Amendment to Loan and Security Agreement between New Mountain Guardian SPV Funding, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(4) |
|
|
|
|
| Fourth Amendment to Loan and Security Agreement between New Mountain Finance SPV Funding, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(4) |
|
|
|
|
| Fifth Amendment to Loan and Security Agreement between New Mountain SPV Funding, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(4) |
|
|
|
|
| Ninth Amendment to Loan and Security Agreement between New Mountain SPV Funding, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent and Wells Fargo Bank, N.A., as Lender(5) |
|
| |
|
| Tenth Amendment to Loan and Security Agreement between New Mountain SPV Funding, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(6) |
|
|
|
|
| Eleventh Amendment to Loan and Security Agreement between New Mountain SPV Funding, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(7) |
|
|
|
|
| Twelfth Amendment to Loan and Security Agreement between New Mountain SPV Funding, L.L.C. , as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(8) |
|
|
|
|
| Thirteenth Amendment to Loan and Security Agreement between New Mountain SPV Funding, L.L.C. , as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender(7) |
|
|
|
| Fourteenth Amendment to Loan and Security Agreement between New Mountain SPV Funding, L.L.C., as Borrower, Wells Fargo Securities, LLC, as Administrative Agent, and Wells Fargo Bank, N.A., as Lender | |
10.28 |
| Account Control Agreement by and between New Mountain Guardian SPV Funding, L.L.C., as Pledgor, Wells Fargo Securities, LLC, as Administrative Agent on behalf of the Secured Parties, and Wells Fargo Bank, N.A., as Securities Intermediary(1) |
|
|
|
|
| Variable Funding Note of New Mountain Guardian SPV Funding, L.L.C., as the Borrower(5) |
|
|
|
|
| Form of Senior Secured Revolving Credit Agreement, by and between New Mountain Finance Corporation, as |
Exhibit | Description | |
Borrower, and Goldman Sachs Bank USA, as Administrative Agent and Syndication Agent, dated June 4, 2014(16) | ||
|
|
|
|
| Form of Guarantee and Security Agreement dated June 4, 2014, among New Mountain Finance Corporation, as Borrower, and Goldman Sachs Bank USA, as Administrative Agent(16) |
|
|
|
|
| Investment Advisory and Management Agreement by and between New Mountain Finance Corporation and New Mountain Finance Advisers BDC, LLC(14) |
|
|
|
|
| Form of Safekeeping Agreement among New Mountain Finance Holdings, L.L.C., Wells Fargo Securities, LLC as the Administrative Agent and Wells Fargo Bank, National Association, as Safekeeping Agent(1) |
|
|
|
|
| Custody Agreement by and between New Mountain Finance Corporation and U.S. Bank National Association(13) |
|
|
|
|
| Amended and Restated Administration Agreement(4) |
|
|
|
|
| Form of Trademark License Agreement(1) |
|
|
|
|
| Amendment No. 1 to Trademark License Agreement(4) |
|
|
|
|
| Form of Registration Rights Agreement(1) |
|
|
|
|
| Form of Indemnification Agreement by and between New Mountain Finance Corporation and each director(1) |
|
|
|
|
| Dividend Reinvestment Plan(2) |
|
| |
11.1 |
| Computation of Per Share Earnings for New Mountain Finance Corporation (included in the notes to the financial statements contained in this report) |
|
|
|
31.1 |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended |
|
|
|
31.2 |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended |
|
|
|
32.1 |
| Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
|
|
|
32.2 |
| Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
|
|
|
99.1 |
| Supplemental Financial Information |
(1) Previously filed in connection with New Mountain Finance Holdings, L.L.C.’s registration statement on Form N-2 Pre-Effective Amendment No. 3 (File Nos. 333-168280 and 333-172503) filed on May 9, 2011.
(2) Previously filed in connection with New Mountain Finance Corporation’s quarterly report on Form 10-Q filed on August 11, 2011.
(3) Previously filed in connection with New Mountain Finance Corporation and New Mountain Finance AIV Holdings Corporation report on Form 8-K filed on August 25, 2011.
(4) Previously filed in connection with New Mountain Finance Corporation’s quarterly report on Form 10-Q filed on November 14, 2011.
(5) Previously filed in connection with New Mountain Finance Corporation’s quarterly report on Form 10-Q filed on May 8, 2012.
(6) Previously filed in connection with New Mountain Finance Corporation’s quarterly report on Form 10-Q filed on August 8, 2012.
(7) Previously filed in connection with New Mountain Finance Holdings, L.L.C.’s report on Form 8-K filed on December 21, 2012.
(8) Previously filed in connection with New Mountain Finance Holdings, L.L.C.’s report on Form 8-K filed on March 13, 2013.
(9) Previously filed in connection with New Mountain Finance Holdings, L.L.C.’s report on Form 8-K filed on April 1, 2013.
(10) Previously filed in connection with New Mountain Finance Holdings, L.L.C.’s report on Form 8-K filed on June 26, 2013.
(11) Previously filed in connection with New Mountain Finance Holdings, L.L.C.’s report on Form 8-K filed on October 29, 2013.
(12) Previously filed in connection with New Mountain Finance Holdings, L.L.C.’s report on Form 8-K filed on March 25, 2014.
(13) Previously filed in connection with New Mountain Finance Corporation’s registration statement on Form N-2 Post-Effective Amendment No. 2 (File Nos. 333-189706 and 333-189707) filed on April 11, 2014.
(14) Previously filed in connection with New Mountain Finance Corporation’s report on Form 8-K filed on May 8, 2014.
(15) Previously filed in connection with New Mountain Finance Corporation’s report on Form 8-K filed on June 4, 2014.
(16) Previously filed in connection with New Mountain Finance Corporation’s report on Form 8-K filed on June 10, 2014.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 6,November 5, 2014.
| NEW MOUNTAIN FINANCE CORPORATION | |
|
|
|
| By: | /s/ ROBERT A. HAMWEE |
|
| Robert A. Hamwee |
|
| Chief Executive Officer |
|
| (Principal Executive Officer) |
|
|
|
| By: | /s/ DAVID M. CORDOVA |
|
| David M. Cordova |
|
| Chief Financial Officer and Treasurer |
|
| (Principal Financial and Accounting Officer) |