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 NMFC’s ties to New Mountain Capital's ("NMC") $55 billion AUM, including a $12 billion credit platform that provides SEC exemptive relief to co-invest among affiliated NMC companies. The ratings also consider the company’s strong and experienced management team that has a sound track record within the private debt middle markets having one of the longest operating histories dating back to 1999. As of December 31, 2024, NMFC had a $3.1 billion diversified investment portfolio at fair value, comprised of 120 companies across 14 industries, exclusive of investments in JVs, mostly senior secured loans (79.5%, including ~9% senior loan fund and ~7% second lien loans), with a weighted average EBITDA of $184 million in predominantly less cyclical defensive industries. The top three portfolio sectors, exclusive of investments in JVs, are Software (30.1%), Healthcare (17.8%), and Business Services (17.7%).

Also supporting the ratings is the company's diversified funding mix comprised of secured bank facilities, unsecured senior debt, convertible notes, and SBA debentures and solid access to the capital markets. At 4Q24, the ratio of unsecured debt to total debt outstanding, including SBA debentures, was solid at approximately 83%. The high percentage of unsecured debt to total debt provides financial flexibility and less encumbered collateral for the benefit of the unsecured noteholders. As of December 31, 2024, the company’s gross and net leverage were 1.16x and 1.11x, respectively, which was within the company's target net leverage range of 1.0x to 1.25x. Asset coverage is solid at 186.7% when considering its 150% regulatory asset coverage, providing the company the ability to withstand additional market volatility in a less favorable economic environment. The company's liquidity is solid with available credit lines and cash of ~$1.2 billion compared with $460 million of unsecured debt due within two years and unfunded commitments of $243.7 million. A portion of the unfunded commitments are tied to covenants and transactions and are not expected to be drawn.

These strengths are counterbalanced by potential risks related to NMFC’s business as a BDC with illiquid investments and retained earnings constraints as a regulated investment company (“RIC”) 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 traditional senior secured debt which includes 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 and are leveraged about 2.5x. As of December 31, 2024, NMFC had adequate credit quality with six portfolio companies and one collateralized agreement to re-sell on non-accrual status, comprising 1.3% and 4.1% of total investments at fair value and cost, respectively. Elevated non-accruals are somewhat mitigated by ~56% of non-accruals at cost in a single portfolio company and management’s ability to work through its non-accruals over the long term to achieve greater returns. Moreover, the restructuring of a credit in 1Q25 reduces pro forma non-accruals at cost to 2.3%.

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 and as a RIC, 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 ~$1.27 billion as of end February 2025. 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 maintains solid asset quality. 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 significant change in senior management could also pressure the ratings.

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