KBRA Affirms Ratings for New Mountain Finance Corporation

KBRA affirms the BBB- issuer and senior unsecured debt ratings for New Mountain Finance Corporation (NASDAQ: NMFC) (“the company”). The rating Outlook is Stable.

Key Credit Considerations

The ratings and Stable Outlook are supported by New Mountain Finance Corporation’s ties to New Mountain Capital's ("NMC") ~$50 billion AUM, including an $11 billion credit platform that provides SEC exemptive relief to co-invest among affiliated NMC companies. As of December 31, 2023, NMFC had a $3.0 billion diversified investment portfolio at fair value, comprised of 110 companies across 14 industries, exclusive of investments in JVs, mostly first lien senior secured (56%, in addition to 8% senior loan fund) and second lien senior secured (14%) middle and upper-middle market loans, with a weighted average EBITDA of $155 million in predominantly non-cyclical defensive industries. The top three portfolio sectors are Software (26.9%), Business Services (17.9%), and Healthcare Services (15.9%). Also supporting the ratings is the company's solid access to the capital markets with a diversified funding mix of secured bank facilities, unsecured senior debt, convertible notes, and SBA debentures. At 4Q23, the ratio of unsecured debt to total debt outstanding was solid at approximately 59% (73% as of March 19, 2024). The high percentage of unsecured debt to total debt provides financial flexibility and solid unencumbered collateral for the benefit of the unsecured noteholders. As of December 31, 2023, the company’s gross and net leverage were 1.14x and 1.09x, respectively, which was within the company's target net leverage range of 1.0x to 1.25x. Asset coverage is sufficient at 188% when considering its 150% regulatory asset coverage, providing the company the ability to withstand additional market volatility in a less favorable economic environment. Moreover, the company's liquidity is strong with available credit lines and cash of $642.4 million compared with $376.5 million of unsecured debt due within two years of December 31, 2023, and unfunded commitments of $156.8 million. Subsequent to quarter-end, in January 2024, the company raised $300 million of senior unsecured notes in anticipation of the $116.5 million notes maturing in April 2024. The ratings also consider the company’s strong and experienced management team that has a sound track record within the private debt middle markets. The company has benefited from the rising interest rate environment due to its asset sensitive balance sheet with 89% floating rate investments.

These strengths are counterbalanced by potential risks related to NMFC’s business as a business development company (BDC), illiquid nature of the assets, retained earnings constraints as a Regulated Investment Company, and a lower proportion of first lien debt investments relative to the company’s higher-rated peers, as well as an uncertain macro environment. The company has a high percentage (~30%) of investments that fall outside of senior secured debt and include common and preferred equity, a real estate investment trust (REIT) that focuses on industrial real estate properties and NNN leases, subordinated debt, and two JVs which were comprised mainly of first lien, broadly syndicated senior secured loans. On December 31, 2023, NMFC had six companies on non-accrual status, comprising 1.7% and 4.5% of the total investments at fair value and cost, respectively, with more than 40% of non-accruals in a single portfolio company.

Incorporated in 2010 as a Delaware corporation, New Mountain Finance Corporation is a closed-end, publicly traded BDC, regulated under the Investment Company Act of 1940, which, among other things, must distribute to its shareholders at least 90% of the company’s income. The company's stock trades on the NASDAQ under the symbol NMFC with a market capitalization of ~$1.3 billion as of mid-March 2024. The company is headquartered in New York.

Rating Sensitivities

The ratings are unlikely to be upgraded in the intermediate term. The Outlook could be changed to Positive over time if the company maintains prudent leverage, increases first lien senior secured investments, and realizes lower non-accruals. The Outlook could be revised to Negative or the rating could be downgraded if there is a significant downturn in the U.S. economy that has a negative impact on earnings performance, asset quality, and leverage. Other unexpected asset quality deterioration, a rise in leverage metrics, or a significant change in senior management could also pressure the ratings.

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